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, 20222023
☐ 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 Incorporation or organization) | (I.R.S. Employer Identification No.) |
265 Turner Drive, Durango, CO 81303
(Address of principal executive offices, including zip code)
(970) 259-0554
(Registrant’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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards 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 ☒
As ofOn January 10, 2023, 6,250,29715, 2024, the registrant had outstanding 6,315259 shares of the registrant’sits common stock, $0.001 par value per share, were outstanding.share.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. | ||
Item 1. | ||
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”(this “Quarterly Report”) includes statements of our expectations, intentions, plans, and beliefs that constitute “forward-looking statements”“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”“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,"“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. Our Company undertakesWe 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 Company’s 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 impacts of the COVID-19 pandemic on our business, the outcome of legal proceedings, changes in the confectionery business environment, seasonality, consumer interest in our products, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, and the success of our co-branding strategy the success of international expansion efforts 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”“Risk Factors” and the risks described elsewhere in this reportQuarterly Report and the section entitled “Risk Factors”“Risk Factors” contained in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 28, 20222023, filed with the Securities and Exchange Commission (“SEC”) on May 27, 2022, as amended on June 28, 2022,30, 2023, as updated by this report.
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).Quarterly Report.
FINANCIAL INFORMATION |
Financial Statements |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended November 30, | Nine Months Ended November 30, | Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Sales | $ | 7,963,568 | $ | 7,012,429 | $ | 19,518,678 | $ | 18,786,654 | $ | 6,421,701 | $ | 7,586,534 | $ | 16,453,741 | $ | 18,065,947 | ||||||||||||||||
Franchise and royalty fees | 1,511,813 | 1,495,205 | 5,308,960 | 5,240,768 | 1,275,700 | 1,238,559 | 4,237,524 | 4,218,700 | ||||||||||||||||||||||||
Total Revenue | 9,475,381 | 8,507,634 | 24,827,638 | 24,027,422 | 7,697,401 | 8,825,093 | 20,691,265 | 22,284,647 | ||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||||||
Cost of sales | 5,869,566 | 5,200,749 | 14,672,015 | 13,819,428 | 5,768,598 | 5,727,348 | 15,159,483 | 14,143,256 | ||||||||||||||||||||||||
Franchise costs | 551,549 | 458,518 | 1,569,777 | 1,747,348 | 576,833 | 476,566 | 1,869,815 | 1,344,382 | ||||||||||||||||||||||||
Sales and marketing | 607,249 | 377,231 | �� | 1,617,135 | 1,195,823 | 571,910 | 572,961 | 1,487,046 | 1,481,870 | |||||||||||||||||||||||
General and administrative | 2,111,741 | 3,865,912 | 7,810,601 | 6,575,037 | 1,333,216 | 2,080,611 | 4,952,261 | 7,723,266 | ||||||||||||||||||||||||
Retail operating | 422,430 | 420,320 | 1,364,661 | 1,304,560 | 186,248 | 137,835 | 451,012 | 447,254 | ||||||||||||||||||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $160,006, $155,170, $480,479 and $464,767, respectively, included in cost of sales | 127,887 | 143,612 | 382,843 | 440,205 | ||||||||||||||||||||||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $187,523, $160,006, $541,110 and $480,479, respectively, included in cost of sales | 35,954 | 28,991 | 98,821 | 86,935 | ||||||||||||||||||||||||||||
Total costs and expenses | 9,690,422 | 10,466,342 | 27,417,032 | 25,082,401 | 8,472,759 | 9,024,312 | 24,018,438 | 25,226,963 | ||||||||||||||||||||||||
Loss from Operations | (215,041 | ) | (1,958,708 | ) | (2,589,394 | ) | (1,054,979 | ) | (775,358 | ) | (199,219 | ) | (3,327,173 | ) | (2,942,316 | ) | ||||||||||||||||
Other Income | ||||||||||||||||||||||||||||||||
Interest Expense | (4,172 | ) | - | (4,172 | ) | - | (11,386 | ) | (4,172 | ) | (23,903 | ) | (4,172 | ) | ||||||||||||||||||
Interest Income | 7,234 | 2,195 | 13,732 | 9,348 | 30,026 | 7,234 | 67,794 | 13,732 | ||||||||||||||||||||||||
Gain on insurance recovery | - | - | - | 167,123 | ||||||||||||||||||||||||||||
Other income, net | 3,062 | 2,195 | 9,560 | 176,471 | 18,640 | 3,062 | 43,891 | 9,560 | ||||||||||||||||||||||||
Loss Before Income Taxes | (211,979 | ) | (1,956,513 | ) | (2,579,834 | ) | (878,508 | ) | (756,718 | ) | (196,157 | ) | (3,283,282 | ) | (2,932,756 | ) | ||||||||||||||||
Income Tax Provision | - | (478,867 | ) | 1,388,272 | (177,600 | ) | - | - | - | 701,659 | ||||||||||||||||||||||
Net Income (Loss) from Continuing Operations | $ | (756,718 | ) | $ | (196,157 | ) | $ | (3,283,282 | ) | $ | (3,634,415 | ) | ||||||||||||||||||||
Discontinued Operations | ||||||||||||||||||||||||||||||||
Earnings (loss) from discontinued operations, net of tax | - | (15,822 | ) | 69,044 | (333,691 | ) | ||||||||||||||||||||||||||
Gain on disposal of discontinued operations, net of tax | - | - | 634,790 | - | ||||||||||||||||||||||||||||
Earnings (loss) from discontinued operations, net of tax | - | (15,822 | ) | 703,834 | (333,691 | ) | ||||||||||||||||||||||||||
Consolidated Net Loss | $ | (211,979 | ) | $ | (1,477,646 | ) | $ | (3,968,106 | ) | $ | (700,908 | ) | $ | (756,718 | ) | $ | (211,979 | ) | $ | (2,579,448 | ) | $ | (3,968,106 | ) | ||||||||
Basic Loss per Common Share | $ | (0.03 | ) | $ | (0.24 | ) | $ | (0.64 | ) | $ | (0.11 | ) | ||||||||||||||||||||
Diluted Loss per Common Share | $ | (0.03 | ) | $ | (0.24 | ) | $ | (0.64 | ) | $ | (0.11 | ) | ||||||||||||||||||||
Basic Earnings (Loss) per Common Share | ||||||||||||||||||||||||||||||||
Loss from continuing operations | $ | (0.12 | ) | $ | (0.03 | ) | $ | (0.51 | ) | $ | (0.58 | ) | ||||||||||||||||||||
Earnings (loss) from discontinued operations | - | (0.00 | ) | 0.11 | (0.05 | ) | ||||||||||||||||||||||||||
Net loss | $ | (0.12 | ) | $ | (0.03 | ) | $ | (0.40 | ) | $ | (0.63 | ) | ||||||||||||||||||||
Diluted Earnings (Loss) per Common Share | ||||||||||||||||||||||||||||||||
Loss from continuing operations | $ | (0.12 | ) | $ | (0.03 | ) | $ | (0.51 | ) | $ | (0.57 | ) | ||||||||||||||||||||
Earnings (loss) from discontinued operations | - | (0.00 | ) | 0.11 | (0.05 | ) | ||||||||||||||||||||||||||
Net loss | $ | (0.12 | ) | $ | (0.03 | ) | $ | (0.40 | ) | $ | (0.62 | ) | ||||||||||||||||||||
Weighted Average Common Shares Outstanding - Basic | 6,227,002 | 6,141,507 | 6,219,362 | 6,127,884 | ||||||||||||||||||||||||||||
Dilutive Effect of Employee Stock Awards | - | - | - | - | ||||||||||||||||||||||||||||
Weighted Average Common Shares Outstanding - Diluted | 6,227,002 | 6,141,507 | 6,219,362 | 6,127,884 | ||||||||||||||||||||||||||||
Weighted Average Common Shares | ||||||||||||||||||||||||||||||||
Outstanding - Basic | 6,302,159 | 6,227,002 | 6,290,575 | 6,219,362 | ||||||||||||||||||||||||||||
Dilutive Effect of Employee | ||||||||||||||||||||||||||||||||
Stock Awards | - | - | - | |||||||||||||||||||||||||||||
Weighted Average Common Shares | ||||||||||||||||||||||||||||||||
Outstanding - Diluted | 6,302,159 | 6,227,002 | 6,290,575 | 6,219,362 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, | February 28, | November 30, | February 28, | |||||||||||||
2022 | 2022 | 2023 | 2023 | |||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 3,216,132 | $ | 7,587,374 | $ | 2,082,128 | $ | 4,717,068 | ||||||||
Accounts receivable, less allowance for doubtful accounts of $837,568 and $870,735, respectively | 3,227,617 | 1,967,914 | ||||||||||||||
Notes receivable, current portion, less current portion of the valuation allowance of $34,704 and $47,228, respectively | 21,133 | 8,680 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $598,704 and $666,315, respectively | 3,355,044 | 2,055,694 | ||||||||||||||
Notes receivable, current portion, less current portion of the valuation allowance of $43,158 and $35,173, respectively | 298,700 | 23,698 | ||||||||||||||
Refundable income taxes | 432,749 | 736,528 | 45,990 | 344,885 | ||||||||||||
Inventories | 6,195,929 | 4,354,202 | 3,670,076 | 3,639,780 | ||||||||||||
Other | 451,929 | 343,268 | 628,040 | 340,847 | ||||||||||||
Current assets held for sale | - | 83,004 | ||||||||||||||
Total current assets | 13,545,489 | 14,997,966 | 10,079,978 | 11,204,976 | ||||||||||||
Property and Equipment, Net | 5,751,858 | 5,499,890 | 7,634,552 | 5,710,739 | ||||||||||||
Other Assets | ||||||||||||||||
Notes receivable, less current portion and valuation allowance of $47,247 and $65,059, respectively | 95,686 | - | ||||||||||||||
Notes receivable, less current portion and valuation allowance of $30,793 and $38,778, respectively | 862,827 | 94,076 | ||||||||||||||
Goodwill, net | 729,701 | 729,701 | 575,608 | 575,608 | ||||||||||||
Franchise rights, net | 1,800,769 | 2,078,066 | ||||||||||||||
Intangible assets, net | 323,937 | 353,685 | 244,748 | 265,927 | ||||||||||||
Deferred income taxes, net | - | 1,388,271 | ||||||||||||||
Lease right of use asset | 2,547,035 | 1,771,034 | 1,868,664 | 2,355,601 | ||||||||||||
Other | 48,115 | 62,148 | 14,006 | 14,054 | ||||||||||||
Long-term assets held for sale | - | 1,765,846 | ||||||||||||||
Total other assets | 5,545,243 | 6,382,905 | 3,565,853 | 5,071,112 | ||||||||||||
Total Assets | $ | 24,842,590 | $ | 26,880,761 | $ | 21,280,383 | $ | 21,986,827 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Line of credit | $ | 1,000,000 | $ | - | ||||||||||||
Accounts payable | $ | 3,501,983 | $ | 1,579,917 | 3,287,366 | 2,189,760 | ||||||||||
Accrued salaries and wages | 777,378 | 2,125,430 | 1,057,057 | 978,606 | ||||||||||||
Gift card liabilities | 546,475 | 574,883 | 380,145 | 592,932 | ||||||||||||
Other accrued expenses | 339,877 | 239,644 | 541,774 | 162,346 | ||||||||||||
Contract liabilities | 198,357 | 195,961 | 154,830 | 161,137 | ||||||||||||
Lease liability | 780,256 | 595,897 | 658,265 | 746,506 | ||||||||||||
Current liabilities held for sale | - | 178,939 | ||||||||||||||
Total current liabilities | 6,144,326 | 5,311,732 | 7,079,437 | 5,010,226 | ||||||||||||
Lease Liability, Less Current Portion | 1,801,795 | 1,218,256 | 1,212,291 | 1,640,017 | ||||||||||||
Contract Liabilities, Less Current Portion | 993,119 | 950,847 | 707,137 | 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 | - | - | ||||||||||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 6,238,776 shares and 6,186,356 shares issued and outstanding, respectively | 6,239 | 6,186 | ||||||||||||||
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, 6,303,769 shares and 6,257,137 shares issued and outstanding, respectively | 6,304 | 6,257 | ||||||||||||||
Additional paid-in capital | 9,278,407 | 8,806,930 | 9,948,630 | 9,457,875 | ||||||||||||
Retained earnings | 6,618,704 | 10,586,810 | 2,326,584 | 4,906,032 | ||||||||||||
Total stockholders' equity | 15,903,350 | 19,399,926 | 12,281,518 | 14,370,164 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 24,842,590 | $ | 26,880,761 | $ | 21,280,383 | $ | 21,986,827 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended | Nine Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net loss | $ | (3,968,106 | ) | $ | (700,908 | ) | ||||||||||
Net income (loss) | (2,579,448 | ) | (3,968,106 | ) | ||||||||||||
Less: Net Income (loss) from discontinued operations, net of tax | 703,834 | (333,691 | ) | |||||||||||||
Net Loss from continuing operations | (3,283,282 | ) | (3,634,415 | ) | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | 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 | 863,322 | 904,972 | 639,932 | 567,414 | ||||||||||||
Provision for obsolete inventory | 166,255 | 103,422 | 62,678 | 166,255 | ||||||||||||
Provision for loss on accounts and notes receivable | (119,000 | ) | - | - | (127,000 | ) | ||||||||||
Gain on sale or disposal of property and equipment | (14,403 | ) | (153,129 | ) | ||||||||||||
Loss (gain) on sale or disposal of property and equipment | (37,671 | ) | (14,403 | ) | ||||||||||||
Expense recorded for stock compensation | 471,530 | 709,210 | 490,802 | 471,530 | ||||||||||||
Deferred income taxes | 1,388,271 | (426,041 | ) | - | 722,163 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (1,171,146 | ) | (985,887 | ) | (1,338,521 | ) | (1,176,382 | ) | ||||||||
Refundable income taxes | 303,779 | 1,168 | 298,895 | 303,779 | ||||||||||||
Inventories | (2,091,099 | ) | (936,483 | ) | 230,135 | (2,102,468 | ) | |||||||||
Contract liabilities | 4,500 | 23,048 | ||||||||||||||
Contract Liabilities | (81,448 | ) | 5,281 | |||||||||||||
Other current assets | (109,860 | ) | (105,851 | ) | (286,170 | ) | (111,521 | ) | ||||||||
Accounts payable | 1,976,869 | 1,079,671 | 557,770 | 1,952,220 | ||||||||||||
Accrued liabilities | (1,284,330 | ) | 1,343,856 | 221,757 | (1,245,973 | ) | ||||||||||
Net cash (used in) provided by operating activities | (3,583,418 | ) | 857,048 | |||||||||||||
Net cash used in operating activities of continuing operations | (2,525,123 | ) | (4,223,520 | ) | ||||||||||||
Net cash (used in) provided by operating activities of discontinued operations | (39,242 | ) | 640,102 | |||||||||||||
Net cash used in operating activities | (2,564,365 | ) | (3,583,418 | ) | ||||||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Addition to notes receivable | (58,635 | ) | - | (49,476 | ) | (58,635 | ) | |||||||||
Proceeds received on notes receivable | 49,254 | 98,918 | 56,595 | 49,254 | ||||||||||||
Proceeds from sale or disposal of assets | 22,289 | 1,751 | ||||||||||||||
Proceeds from insurance recovery | - | 206,336 | ||||||||||||||
Proceeds from sale or distribution of assets | 112,131 | 22,289 | ||||||||||||||
Purchases of property and equipment | (810,732 | ) | (704,462 | ) | (2,617,026 | ) | (778,185 | ) | ||||||||
Decrease (Increase) in other assets | 10,000 | (10,000 | ) | |||||||||||||
Net cash used in investing activities | (787,824 | ) | (407,457 | ) | ||||||||||||
Decrease (increase) in other assets | 9,463 | 10,000 | ||||||||||||||
Net cash used in by investing activities of continuing operations | (2,488,313 | ) | (755,277 | ) | ||||||||||||
Net cash provided by (used in) investing activities of discontinued operations | 1,417,738 | (32,547 | ) | |||||||||||||
Net cash provided by (used in) investing activities | (1,070,575 | ) | (787,824 | ) | ||||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Dividends paid and redemption of outstanding preferred stock purchase rights | - | (61,276 | ) | |||||||||||||
Net cash used in financing activities | - | (61,276 | ) | |||||||||||||
Proceeds from the line of credit | 1,000,000 | - | ||||||||||||||
Net cash provided by financing activities | 1,000,000 | - | ||||||||||||||
Net (Decrease) Increase in Cash and Cash Equivalents | (4,371,242 | ) | 388,315 | |||||||||||||
Net Decrease in Cash and Cash Equivalents | (2,634,940 | ) | (4,371,242 | ) | ||||||||||||
Cash and Cash Equivalents, Beginning of Period | 7,587,374 | 5,633,279 | 4,717,068 | 7,587,374 | ||||||||||||
Cash and Cash Equivalents, End of Period | $ | 3,216,132 | $ | 6,021,594 | 2,082,128 | 3,216,132 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance as of August 31, 2021 | 6,124,288 | $ | 6,124 | $ | 8,241,286 | $ | 11,766,521 | $ | 20,013,931 | |||||||||||
Consolidated net (loss) income | (1,477,646 | ) | (1,477,646 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 52,409 | 53 | (53 | ) | - | |||||||||||||||
Equity compensation, restricted stock units | 439,586 | 439,586 | ||||||||||||||||||
Redemption of outstanding preferred stock purchase rights | (61,276 | ) | (61,276 | ) | ||||||||||||||||
Balance as of November 30, 2021 | 6,176,697 | $ | 6,177 | $ | 8,680,819 | $ | 10,227,599 | $ | 18,914,595 | |||||||||||
Balance as of February 28, 2021 | 6,074,293 | 6,074 | $ | 7,971,712 | $ | 10,989,783 | $ | 18,967,569 | ||||||||||||
Consolidated net (loss) income | (700,908 | ) | (700,908 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 102,404 | 103 | (103 | ) | - | |||||||||||||||
Equity compensation, restricted stock units | 709,210 | 709,210 | ||||||||||||||||||
Redemption of oustanding preferred stock purchase rights | (61,276 | ) | (61,276 | ) | ||||||||||||||||
Balance as of November 30, 2021 | 6,176,697 | $ | 6,177 | $ | 8,680,819 | $ | 10,227,599 | $ | 18,914,595 | |||||||||||
Balance as of August 31, 2022 | 6,223,234 | $ | 6,223 | $ | 9,087,530 | $ | 6,830,683 | $ | 15,924,436 | |||||||||||
Consolidated net (loss) income | (211,979 | ) | (211,979 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 15,542 | 16 | (16 | ) | - | |||||||||||||||
Equity compensation, restricted stock units | 190,893 | 190,893 | ||||||||||||||||||
Balance as of November 30, 2022 | 6,238,776 | $ | 6,239 | $ | 9,278,407 | $ | 6,618,704 | $ | 15,903,350 | |||||||||||
Balance as of February 28, 2022 | 6,186,356 | 6,186 | $ | 8,806,930 | $ | 10,586,810 | $ | 19,399,926 | ||||||||||||
Consolidated net (loss) income | (3,968,106 | ) | (3,968,106 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 52,420 | 53 | (53 | ) | - | |||||||||||||||
Equity compensation, restricted stock units | 471,530 | 471,530 | ||||||||||||||||||
Balance as of November 30, 2022 | 6,238,776 | $ | 6,239 | $ | 9,278,407 | $ | 6,618,704 | $ | 15,903,350 |
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance as of August 31, 2022 | 6,223,234 | $ | 6,223 | $ | 9,087,530 | $ | 6,830,683 | $ | 15,924,436 | |||||||||||
Consolidated net loss | - | - | - | (211,979 | ) | (211,979 | ) | |||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 15,542 | 16 | (16 | ) | - | - | ||||||||||||||
Equity compensation, restricted stock units and stock options | - | - | 190,893 | - | 190,893 | |||||||||||||||
Balance as of November 30, 2022 | 6,238,776 | $ | 6,239 | $ | 9,278,407 | $ | 6,618,704 | $ | 15,903,350 | |||||||||||
Balance as of February 28, 2022 | 6,186,356 | 6,186 | $ | 8,806,930 | $ | 10,586,810 | $ | 19,399,926 | ||||||||||||
Consolidated net loss | - | - | - | (3,968,106 | ) | (3,968,106 | ) | |||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 52,420 | 53 | (53 | ) | - | - | ||||||||||||||
Equity compensation, restricted stock units and stock options | - | - | 471,530 | - | 471,530 | |||||||||||||||
Balance as of November 30, 2022 | 6,238,776 | $ | 6,239 | $ | 9,278,407 | $ | 6,618,704 | $ | 15,903,350 | |||||||||||
Balance as of August 31, 2023 | 6,299,825 | $ | 6,300 | $ | 9,782,415 | $ | 3,083,302 | $ | 12,872,017 | |||||||||||
Consolidated net loss | - | - | - | (756,718 | ) | (756,718 | ) | |||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 3,944 | 4 | (4 | ) | - | - | ||||||||||||||
Equity compensation, restricted stock units and stock options | - | - | 166,219 | - | 166,219 | |||||||||||||||
Balance as of November 30, 2023 | 6,303,769 | $ | 6,304 | $ | 9,948,630 | $ | 2,326,584 | $ | 12,281,518 | |||||||||||
Balance as of February 28, 2023 | 6,257,137 | 6,257 | $ | 9,457,875 | $ | 4,906,032 | $ | 14,370,164 | ||||||||||||
Consolidated net loss | - | - | - | (2,579,448 | ) | (2,579,448 | ) | |||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 46,632 | 47 | (47 | ) | - | - | ||||||||||||||
Equity compensation, restricted stock units and stock options | - | - | 490,802 | - | 490,802 | |||||||||||||||
Balance as of November 30, 2023 | 6,303,769 | $ | 6,304 | $ | 9,948,630 | $ | 2,326,584 | $ | 12,281,518 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1 – NATURE OF OPERATIONS, AND BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation), Aspen Leaf Yogurt, LLC (“ALY”), U-Swirl International, Inc. (“(dissolved in October 2023) (“U-Swirl”), and U-Swirl, Inc. (“SWRL”) (collectively, the “Company”“Company,” “we,” “us” or “our”).
The Company is an international franchisor, confectionery manufacturer,producer, 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 through ecommerce channels.stores.
On February 24, 2023, the Company entered into an agreement to sell its three Company-owned U-Swirl operates self-serve frozen yogurt cafés underlocations. Separately, on May 1, 2023, after the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!”2023 fiscal year end, the Company entered into an agreement to sell its franchise rights and “Aspen Leaf Yogurt.”intangible assets related to U-Swirl and associated brands. As a result, the activities of the Company’s U-Swirl subsidiary that have historically been reported in the U-Swirl segment have been reported as discontinued operations. See Note 16 –Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding the Company's discontinued operations, including net sales, operating earnings, and total assets by segment. The Company’s financial statements reflect continuing operations only, unless otherwise noted.
The Company’s revenues are currently derived from three principal sources: (i) sales to franchisees and others of premium chocolates and other confectionery products manufactured by the Company; (ii) the collection of initial franchise fees and royalties from franchisees’ sales; and (iii) sales at Company-owned stores of premium chocolates frozen yogurt, and other confectionery products.products including gourmet caramel apples.
The Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be measured on a recurring basis at fair value. The Company is not a party to any material derivative financial instruments. The Company does not have a material amount of non-financial assets or non-financial liabilities that are required under U.S. GAAP to be measured at fair value on a recurring basis. The Company has not elected to use the fair value measurement option, as permitted under U.S. GAAP, for any assets or liabilities for which fair value measurement is not presently required. The Company believes the fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short duration.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés as ofat November 30, 2022:2023:
Sold, Not Yet Open | Open | Total | Stores Open at 2/28/2023 | Opened | Closed | Sold | Stores Open at 11/30/2023 | Sold, Not Yet Open | Total | |||||||||||||||||||||||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||||||||||||||||||||||||||||||
Company-owned stores | - | 1 | 1 | 1 | 1 | - | - | 2 | - | 2 | ||||||||||||||||||||||||||||||
Franchise stores - Domestic stores and kiosks | 7 | 158 | 165 | 153 | 5 | (7 | ) | (1 | ) | 150 | 3 | 152 | ||||||||||||||||||||||||||||
International license stores | 1 | 4 | 5 | 4 | - | - | - | 4 | - | 4 | ||||||||||||||||||||||||||||||
Cold Stone Creamery - co-branded | 4 | 101 | 105 | |||||||||||||||||||||||||||||||||||||
U-Swirl (Including all associated brands) | ||||||||||||||||||||||||||||||||||||||||
Company-owned stores - co-branded | - | 3 | 3 | |||||||||||||||||||||||||||||||||||||
Franchise stores - Domestic stores | 1 | 50 | 51 | |||||||||||||||||||||||||||||||||||||
Franchise stores - Domestic - co-branded | - | 7 | 7 | |||||||||||||||||||||||||||||||||||||
International license stores | - | 1 | 1 | |||||||||||||||||||||||||||||||||||||
Co-branded stores | 111 | 3 | (1 | ) | - | 113 | - | 113 | ||||||||||||||||||||||||||||||||
Total | 13 | 325 | 338 | 269 | 269 | 3 | 271 |
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 (the “SEC”(“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 three and nine months ended November 30, 2022,2023 are not necessarily indicative of the results to be expected for the entire fiscal year.
These 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-K for the fiscal year ended February 28, 2022,2023, as amended by Amendment No.1 on Form 10-K/A filed with the SEC on June 28, 2022.May 30, 2023. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.GAAP.
Subsequent Events
On December 14, 2022 (the "Effective Date"), 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 (“Berger”), 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 (each, a “Party” and together, the “Parties”), pertaining to, among other things, the dismissal of all pending lawsuits between the Parties and the appointment of one director to the Company’s Board of Directors (the “Board”).
Pursuant to the Settlement Agreement, the Company and ABV-Radoff agreed to a “Standstill Period” commencing on the Effective Date 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 to comply with certain customary standstill provisions, including an agreement by each member of ABV-Radoff, subject to certain exceptions, to vote their shares of common stock as recommended by the Board on any matter to be voted on at any meetings of stockholders during the Standstill Period, including with respect to the election of directors, and an agreement that at no time will AB Value beneficially own 10.0% or more of the Company’s common stock outstanding at such time and at no time will Radoff own 12.5% or more of the Company’s common stock outstanding at such time.
The Company also agreed that the Board shall take such action to appoint a female director candidate with at least five years of fast-moving consumer goods franchise operational experience and three years of prior public company board experience who qualifies as an independent director under Rule 5605 of the Nasdaq Listing Rules (the “Applicable Criteria”) designated by ABV-Radoff and subject to the Board’s reasonable approval (such approval not to be unreasonably withheld) (the “New Director”), to serve as a member of the Board with a term expiring at the 2023 annual meeting of stockholders (the “2023 Annual Meeting”). The Company agreed to nominate such New Director for election to the Board at the 2023 Annual Meeting and the Company’s 2024 annual meeting of stockholders and to appoint the New Director to the Nominating and Corporate Governance Committee and Audit Committee of the Board, subject to the Board’s reasonable approval (such approval not to be unreasonably withheld) and the New Director’s qualifications to serve on such committees under the Nasdaq Listing Rules and the applicable U.S. Securities and Exchange Commission rules and regulations. In addition, subject to certain conditions and requirements described in the Agreement, ABV-Radoff will have certain customary replacement rights during the Standstill Period. Any replacement New Director identified by ABV-Radoff must satisfy the Applicable Criteria and be reasonably acceptable to the Nominating and Corporate Governance Committee of the Board and the Board (such acceptance not to be unreasonably withheld).
Furthermore, pursuant to the Settlement Agreement, the Parties agreed to mutual releases and discharges of all claims by AB Value, Radoff, Bradley and Berger against the Company and by the Company against AB Value, Radoff, Bradley and Berger, in each case up to the date of the Agreement, except in connection with the claims, counterclaims, causes of action, defenses, or other rights or obligations relating to the demand for books and records pursuant to Section 220 of the Delaware General Corporation Law previously delivered by Radoff to the Company dated November 9, 2022. The Parties agreed to dismiss (i) the lawsuit filed by AB Value on September 23, 2021, in the Court of Chancery of the State of Delaware, against the Company and certain of its former and current directors captioned AB VALUE PARTNERS, LP, et al. v. Rocky Mountain Chocolate Factory, Inc., et al., C.A. No.2021-0819-LWW (Del. Ch.), and (ii) the lawsuit filed by the Company on September 28, 2022, in the Court of Chancery of the State of Delaware against ABV-Radoff, Berger and Mary Bradley captioned Rocky Mountain Chocolate Factory, Inc. v. Radoff, et al. C.A. No.2021-0819-LWW (Del. Ch.) (collectively, the “Lawsuits”). The Settlement Agreement includes customary mutual non-disparagement provisions during the Standstill Period. The Company agreed to reimburse ABV-Radoff for their fees and expenses in the preparation and execution of the Settlement Agreement and the related matters in the amount of one million and seventy-five thousand dollars ($1,075,000.00).
On December 16, 2022, the Parties filed a Stipulation of Dismissal with Prejudice for each of the Lawsuits with the Court of Chancery of the State of Delaware.Subsequent Events
Management evaluated all activity of the Company through the issue date of thethese consolidated financial statements and concluded that no subsequent events except for those described above, have occurred that would require recognition or disclosure in the consolidated 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 condensedinterim consolidated financial statements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 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 and affect the carrying value of accounts receivable.instruments. The Company adopted ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2023,2023. and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 willdid 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 receivable 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.
Liquidity
As of November 30, 2023, we were not in compliance with the requirement under a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”) to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was 1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of November 30.2023 and as of the date of this Quarterly Report, we had enough cash on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the future, however, we may not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or, amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities.
NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended | ||||||||||||||||
Nine Months Ended | November 30, | |||||||||||||||
November 30, | 2023 | 2022 | ||||||||||||||
Cash paid (received) for: | 2022 | 2021 | ||||||||||||||
Interest | $ | 25,000 | $ | 5,202 | $ | 25,127 | $ | 25,000 | ||||||||
Income taxes | $ | (303,777 | ) | $ | 247,273 | (298,895 | ) | (303,777 | ) | |||||||
Supplemental disclosure of non‑cash investing activities | ||||||||||||||||
Sale of assets in exchange for note receivable | $ | 1,000,000 | $ | - |
NOTE 3 –REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue from contracts with its customers in accordance with Accounting Standards Codification® (“ASC”) 606, which provides that revenues are recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. The Company generally receives a fee associated with the Franchise Agreement or License Agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These Customer Contracts have a term of up to 20 years,years; however, the majority of Customer Contracts have a term of 10 years. During the term of the Customer Contract, the Company is obligated to many performance obligations that the Company has determined are not distinct. The resulting treatment of revenue from Customer Contracts is that the revenue is recognized proportionately over the life of the Customer Contract.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and are treated as a single performance obligation. Initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10 years.
The following table summarizes contract liabilities as of November 30, 2022,2023 and November 30, 2021:2022:
Nine Months Ended | Nine Months Ended | |||||||||||||||
November 30: | November 30: | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Contract liabilities at the beginning of the year: | $ | 1,146,808 | $ | 1,119,646 | $ | 943,415 | $ | 962,571 | ||||||||
Revenue recognized | (180,000 | ) | (164,952 | ) | (126,948 | ) | (147,720 | ) | ||||||||
Contract fees received | 184,500 | 188,000 | 45,500 | 153,000 | ||||||||||||
Deferred (amortized) gain on the financed sale of equipment | 40,168 | (21,928 | ) | |||||||||||||
Contract liabilities at the end of the period: | $ | 1,191,476 | $ | 1,120,766 | $ | 861,967 | $ | 967,851 |
At November 30, 2022,2023, 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 23 | $ | 51,242 | ||||||
FYE 24 | 194,622 | $ | 81,725 | |||||
FYE 25 | 179,637 | 149,744 | ||||||
FYE 26 | 167,515 | 137,026 | ||||||
FYE 27 | 150,824 | 123,907 | ||||||
FYE 28 | 96,390 | |||||||
Thereafter | 447,636 | 273,175 | ||||||
Total | $ | 1,191,476 | $ | 861,967 |
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 Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based onupon Company-specific historical redemption patterns.
FactoryDurango 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 percent of our franchisees’ sales, are recognized at the time the sales occur.
NOTE 4 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
Three Months Ended November 30, 2022 | ||||||||||||||||||||||||||||||||||||
Three Months Ended November 30, 2023 | Three Months Ended November 30, 2023 | |||||||||||||||||||||||||||||||||||
Revenues recognized over time under ASC 606: | Revenues recognized over time under ASC 606: | Revenues recognized over time under ASC 606: | ||||||||||||||||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | Franchising | Production | Retail | Total | ||||||||||||||||||||||||||||
Franchise fees | $ | 48,965 | $ | - | $ | - | $ | 9,488 | $ | 58,453 | $ | 41,033 | $ | - | $ | - | $ | 41,033 |
Revenues recognized at a point in time: | Revenues recognized at a point in time: | Revenues recognized at a point in time: | ||||||||||||||||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | Franchising | Production | Retail | Total | ||||||||||||||||||||||||||||
Factory sales | - | 7,284,940 | - | - | 7,284,940 | |||||||||||||||||||||||||||||||
Durango Product sales | - | 6,058,117 | - | 6,058,117 | ||||||||||||||||||||||||||||||||
Retail sales | - | - | 301,594 | 377,034 | 678,628 | - | - | 363,584 | 363,584 | |||||||||||||||||||||||||||
Royalty and marketing fees | 1,189,594 | - | - | 263,766 | 1,453,360 | 1,234,667 | - | - | 1,234,667 | |||||||||||||||||||||||||||
Total | $ | 1,238,559 | $ | 7,284,940 | $ | 301,594 | $ | 650,288 | $ | 9,475,381 | $ | 1,275,700 | $ | 6,058,117 | $ | 363,584 | $ | 7,697,401 |
Three Months Ended November 30, 2021 | ||||||||||||||||||||||||||||||||||||
Three Months Ended November 30, 2022 | Three Months Ended November 30, 2022 | |||||||||||||||||||||||||||||||||||
Revenues recognized over time under ASC 606: | Revenues recognized over time under ASC 606: | Revenues recognized over time under ASC 606: | ||||||||||||||||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | Franchising | Production | Retail | Total | ||||||||||||||||||||||||||||
Franchise fees | $ | 53,944 | $ | - | $ | - | $ | 7,755 | $ | 61,699 | $ | 48,965 | $ | - | $ | - | $ | 48,965 |
Revenues recognized at a point in time: | Revenues recognized at a point in time: | Revenues recognized at a point in time: | ||||||||||||||||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | Franchising | Production | Retail | Total | ||||||||||||||||||||||||||||
Factory sales | - | 6,376,367 | - | - | 6,376,367 | |||||||||||||||||||||||||||||||
Durango Product sales | - | 7,284,940 | - | 7,284,940 | ||||||||||||||||||||||||||||||||
Retail sales | - | - | 275,530 | 360,532 | 636,062 | - | - | 301,594 | 301,594 | |||||||||||||||||||||||||||
Royalty and marketing fees | 1,196,192 | - | - | 237,314 | 1,433,506 | 1,189,594 | - | - | 1,189,594 | |||||||||||||||||||||||||||
Total | $ | 1,250,136 | $ | 6,376,367 | $ | 275,530 | $ | 605,601 | $ | 8,507,634 | $ | 1,238,559 | $ | 7,284,940 | $ | 301,594 | $ | 8,825,093 |
Nine Months Ended November 30, 2023 | ||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||
Franchising | Production | Retail | Total | |||||||||||||
Franchise fees | $ | 126,948 | $ | - | $ | - | $ | 126,948 |
Revenues recognized at a point in time: | ||||||||||||||||
Franchising | Production | Retail | Total | |||||||||||||
Durango Product sales | - | 15,589,341 | - | 15,589,341 | ||||||||||||
Retail sales | - | - | 864,400 | 864,400 | ||||||||||||
Royalty and marketing fees | 4,110,576 | - | - | 4,110,576 | ||||||||||||
Total | $ | 4,237,524 | $ | 15,589,341 | $ | 864,400 | $ | 20,691,265 |
Nine Months Ended November 30, 2022 | Nine Months Ended November 30, 2022 | Nine Months Ended November 30, 2022 | ||||||||||||||||||||||||||||||||||
Revenues recognized over time under ASC 606: | Revenues recognized over time under ASC 606: | Revenues recognized over time under ASC 606: | ||||||||||||||||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | Franchising | Production | Retail | Total | ||||||||||||||||||||||||||||
Franchise fees | $ | 147,720 | $ | - | $ | - | $ | 32,280 | $ | 180,000 | $ | 147,720 | $ | - | $ | - | $ | 147,720 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 17,250,750 | - | - | 17,250,750 | |||||||||||||||
Retail sales | - | - | 815,197 | 1,452,731 | 2,267,928 | |||||||||||||||
Royalty and marketing fees | 4,070,980 | - | - | 1,057,980 | 5,128,960 | |||||||||||||||
Total | $ | 4,218,700 | $ | 17,250,750 | $ | 815,197 | $ | 2,542,991 | $ | 24,827,638 |
Nine Months Ended November 30, 2021 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Franchise fees | $ | 136,907 | $ | - | $ | - | $ | 28,045 | $ | 164,952 |
Revenues recognized at a point in time: | Revenues recognized at a point in time: | Revenues recognized at a point in time: | ||||||||||||||||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | Franchising | Production | Retail | Total | ||||||||||||||||||||||||||||
Factory sales | - | 16,578,535 | - | - | 16,578,535 | |||||||||||||||||||||||||||||||
Durango Product sales | - | 17,250,750 | - | 17,250,750 | ||||||||||||||||||||||||||||||||
Retail sales | - | - | 829,542 | 1,378,577 | 2,208,119 | - | - | 815,197 | 815,197 | |||||||||||||||||||||||||||
Royalty and marketing fees | 4,147,951 | - | - | 927,865 | 5,075,816 | 4,070,980 | - | - | 4,070,980 | |||||||||||||||||||||||||||
Total | $ | 4,284,858 | $ | 16,578,535 | $ | 829,542 | $ | 2,334,487 | $ | 24,027,422 | $ | 4,218,700 | $ | 17,250,750 | $ | 815,197 | $ | 22,284,647 |
NOTE 5 – INVENTORIES
Inventories consist of the following:
November 30, 2022 | February 28, 2022 | November 30, 2023 | February 28, 2023 | |||||||||||||
Ingredients and supplies | $ | 3,600,464 | $ | 2,753,068 | $ | 2,330,450 | $ | 2,481,510 | ||||||||
Finished candy | 3,302,200 | 2,168,084 | 1,627,302 | 1,567,887 | ||||||||||||
U-Swirl food and packaging | 44,950 | 56,319 | ||||||||||||||
Reserve for slow moving inventory | (751,685 | ) | (623,269 | ) | (287,676 | ) | (409,617 | ) | ||||||||
Total inventories | $ | 6,195,929 | $ | 4,354,202 | $ | 3,670,076 | $ | 3,639,780 |
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
November 30, 2022 | February 28, 2022 | November 30, 2023 | February 28, 2023 | |||||||||||||
Land | $ | 513,618 | $ | 513,618 | $ | 513,618 | $ | 513,618 | ||||||||
Building | 5,150,355 | 5,148,854 | 5,108,950 | 5,151,886 | ||||||||||||
Machinery and equipment | 10,647,391 | 10,207,182 | 12,160,469 | 10,152,211 | ||||||||||||
Furniture and fixtures | 766,354 | 787,921 | 590,204 | 512,172 | ||||||||||||
Leasehold improvements | 950,242 | 985,914 | 132,027 | 134,010 | ||||||||||||
Transportation equipment | 445,489 | 479,701 | 322,067 | 476,376 | ||||||||||||
18,473,449 | 18,123,190 | 18,827,335 | 16,940,273 | |||||||||||||
Less accumulated depreciation | (12,721,591 | ) | (12,623,300 | ) | (11,192,783 | ) | (11,229,534 | ) | ||||||||
Property and equipment, net | $ | 5,751,858 | $ | 5,499,890 | $ | 7,634,552 | $ | 5,710,739 |
Depreciation expense related to property and equipment totaled $223,477 and $639,931 during the three and nine months ended November 30, 2023 compared to $188,997 and $567,414 during the three and nine months ended November 30, 2022, respectively.
Depreciation expense related to property and equipment totaled $185,545 and $556,277 during the three and nine months ended November 30, 2022, compared to $177,909 and $541,887 during the three and nine months ended November 30, 2021, respectively.
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
November 30, 2022 | February 28, 2022 | November 30, 2023 | February 28, 2023 | ||||||||||||||||||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||||||||||||||||||||
Store design | 10 | $ | 394,826 | $ | 254,588 | $ | 394,826 | $ | 240,409 | 10 | $ | 394,826 | $ | 272,993 | $ | 394,826 | $ | 259,314 | |||||||||||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||||||||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||||||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 556,339 | 372,640 | 556,339 | 357,071 | ||||||||||||||||||||||||||||||||
Franchise rights | 20 | 5,979,637 | 4,178,868 | 5,979,637 | 3,901,571 | ||||||||||||||||||||||||||||||||||
Trademarks | 5-20 | 259,339 | 136,424 | 259,339 | 128,924 | ||||||||||||||||||||||||||||||||||
Total | Total | 7,482,605 | 5,357,899 | 7,482,605 | 5,050,854 | 654,165 | 409,417 | 654,165 | 388,238 | ||||||||||||||||||||||||||||||
Goodwill and intangible assets not subject to amortization | Goodwill and intangible assets not subject to amortization | ||||||||||||||||||||||||||||||||||||||
Franchising segment- | |||||||||||||||||||||||||||||||||||||||
Company stores goodwill | Company stores goodwill | $ | 515,065 | $ | 515,065 | Company stores goodwill | $ | 360,972 | $ | 360,972 | |||||||||||||||||||||||||||||
Franchising goodwill | Franchising goodwill | 97,318 | 97,318 | Franchising goodwill | 97,318 | 97,318 | |||||||||||||||||||||||||||||||||
Manufacturing segment-goodwill | Manufacturing segment-goodwill | 97,318 | 97,318 | Manufacturing segment-goodwill | 97,318 | 97,318 | |||||||||||||||||||||||||||||||||
Trademark | 20,000 | 20,000 | |||||||||||||||||||||||||||||||||||||
Trademarks | Trademarks | 20,000 | 20,000 | ||||||||||||||||||||||||||||||||||||
Total | Total | 729,701 | 729,701 | 575,608 | 575,608 | ||||||||||||||||||||||||||||||||||
Total Goodwill and Intangible Assets | Total Goodwill and Intangible Assets | $ | 8,212,306 | $ | 5,357,899 | $ | 8,212,306 | $ | 5,050,854 | $ | 1,229,773 | $ | 409,417 | $ | 1,229,773 | $ | 388,238 |
Amortization expense related to intangible assets totaled $102,348$6,852 and $307,045$21,179 during the three and nine months ended November 30, 2023 compared to $7,226 and $21,678 during the three and nine months ended November 30, 2022, compared to $120,873 and $363,085 during the three and nine months ended November 30, 2021, respectively.
At November 30, 2022,2023, the annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:
FYE 23 | $ | 102,348 | ||||||
FYE 24 | 346,672 | $ | 6,850 | |||||
FYE 25 | 294,427 | 27,405 | ||||||
FYE 26 | 251,342 | 27,405 | ||||||
FYE 27 | 215,382 | 27,405 | ||||||
FYE 28 | 27,405 | |||||||
Thereafter | 914,535 | 128,278 | ||||||
Total | $ | 2,124,706 | $ | 244,748 |
NOTE 8 – LINE OF CREDIT
Revolving Credit Line
The Company hasPursuant to the Credit Agreement, we have a $5.0$4.0 million credit line (subject to certain borrowing base limitations) for general corporate and working capital purposes, of which $5.0$3.0 million was available for borrowing and no amount was outstanding(subject to certain borrowing-based limitations) as of November 30, 2022. 2023 (the “Credit Line”). The credit lineCredit Line is secured by substantially all of the Company’sour assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (6.19%(7.68% at November 30, 2022)2023 and 6.92% at February 28, 2023). Additionally, the line of creditCredit Line is subject to various financial ratiosratio and leverage covenants. At
As of November 30, 2022,2023 we were not in compliance with the Company requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was compliant1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all covenants.other aspects of the Credit Agreement. Refer to note 1 for further information.
NOTE 9 – STOCKHOLDERS’ EQUITY
Warrants
In considerationconnection with a terminated supplier agreement with a former customer of an Exclusive Supplier Operating Agreement, dated December 20, 2019 (“Exclusive Supplier Agreement”), by and between the Company, and Edible Arrangements, and the performance of specific obligations therein, on December 20, 2019, the Company issued a Common Stock Purchase Warrant, dated December 20, 2019 (thewarrant (the “Warrant”), to purchase up to 960,677 shares of the 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 exclusiveterminated supplier agreement, and was subject to, and only upon, the achievement of certain revenue thresholds on an annual or cumulative five-year basis in connection with its performance under the exclusiveterminated supplier agreement. The Warrant expireswas to expire six months after the final and conclusive determination of revenue thresholds for the fifth contract year and the cumulative revenue determination in accordance with the terms of the Warrant.
On November 1, 2022, the Company sent a formal notice to the customer terminating the agreement. As of November 30, 2022,2023, no warrants haveWarrant Shares had vested and, subsequent to the termination by the Company of the Exclusive Supplier Agreement on November 1, 2022, supplier agreement, the Company has no remaining material obligations under the Warrant.
The Company determined that the grant date fair value of the warrantsWarrant was de minimis and did not record any amount in consideration of the warrants. The Company utilized a Monte Carlo model to determinefor purposes of determining the grant date fair value.
Stock-Based Compensation
Under the Company’s 2007 Equity Incentive Plan, (asas amended and restated)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 $166,219 and $490,802 of stock-based compensation expense during the three and nine months ended November 30, 2023 compared with $190,892 and $471,530 during the three and nine months ended November 30, 2022, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.
The following table summarizes restricted stock unit activity during the nine months ended November 30, 2022,2023 and 2021:2022:
Nine Months Ended | Nine Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Outstanding non-vested restricted stock units as of February 28: | 105,978 | 209,450 | 154,131 | 105,978 | ||||||||||||
Granted | 94,892 | 26,058 | 157,145 | 94,892 | ||||||||||||
Vested | (52,421 | ) | (117,470 | ) | (46,632 | ) | (52,421 | ) | ||||||||
Cancelled/forfeited | (1,232 | ) | (2,400 | ) | (1,762 | ) | (1,232 | ) | ||||||||
Outstanding non-vested restricted stock units as of November 30: | 147,217 | 115,638 | 262,882 | 147,217 | ||||||||||||
Weighted average grant date fair value | $ | 5.28 | $ | 9.23 | $ | 4.92 | $ | 5.28 | ||||||||
Weighted average remaining vesting period (in years) | 2.05 | 2.40 | 1.88 | 2.05 |
The following table summarizes stock option activity during the nine months ended November 30, 2022,2023 and 2021:2022:
Nine Months Ended | Nine Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Outstanding stock options as of February 28: | - | - | 36,144 | - | ||||||||||||
Granted | 36,144 | - | - | 36,144 | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Cancelled/forfeited | - | - | - | - | ||||||||||||
Outstanding stock options as of November 30: | 36,144 | - | 36,144 | 36,144 | ||||||||||||
Weighted average exercise price | 6.49 | n/a | 6.49 | 6.49 | ||||||||||||
Weighted average remaining contractual term (in years) | 9.51 | n/a | 8.51 | 9.51 |
The Company did not issue any unrestricted shares of stock to non-employee directors during the three and nine months ended November 30, 2022, compared to 26,058 restricted shares issued during the three months ended November 30, 2021, and 9,000 unrestricted shares duringDuring the nine months ended November 30, 2021.2023, In connection with thesethe 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 issuances,unit award vests 25% on the Company recognized $0grant date and $110,747 during the three and nine months ended25% each quarter thereafter until November 30, 2022, 2024.respectively, compared to $55,373 of stock-based compensation expense during the three months ended November 30, 2021, and $101,983 during
During the nine months ended November 30, 2021.2023, the Company issued 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 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 nine months ended November 30, 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 Company’s new Chief Executive OfficerMessrs. Sarlls and Chief Financial OfficerArroyo as a part of theeach of their respective incentive compensation structure for Mr. Sarlls and Mr. Arroyo.structures. 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.shares of common stock. 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, 29,2024,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 the discretion to determine the number of performance-based restricted stock units between 0-200% of the target number that will vest based on the achievement of performance below or above the target performance goal.
The Company recognized $190,893$166,219 and $471,530$490,802 of stock-based compensation expense during the three- and nine-month periods ended November 30, 2022,2023, respectively, compared to $621,997$190,893 and $845,011$471,530 during the three- and nine month-month periods ended November 30, 2021,2022, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.
Except as noted above, restricted stock units generally vest in equal annual installments over a period of five to six years. During the nine-month periods ended November 30, 2022,2023 and 2021,2022, 52,421 and 117,470 restricted stock units vested and were issued as 46,632 and 52,421 shares of common stock, respectively. The totalTotal unrecognized compensation expense of non-vested, non-forfeited restricted stock units and stock options granted as of November 30, 2022,2023 was $665,709,$950,522, which is expected to be recognized over the weighted-average period of 2.051.88 years. Total unrecognized compensation expense of non-forfeited, performance vesting, restricted stock units as of November 30, 2023 was $429,481, which is expected to be recognized over the weighted-average period of 2.50 years.
NOTE 10 – EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through the settlement of restricted stock units. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.
The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include outstanding common shares issuable if their effect would be anti-dilutive. During the nine months ended November 30, 2022,2023, 130,367182,875 shares of issuable 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 nine months ended November 30, 2021,2022, 960,677 shares of common stock warrants and 160,951130,367 shares of issuable common stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
NOTE 11 – LEASING ARRANGEMENTS
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.
The Company acts as the 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 manufacturingproduction operations. The expenseExpense associated with trucking and warehouse leases is included in the 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 nine months ended November 30, 2022,2023 and 2021,2022, lease expense recognized in the Consolidated Statementsconsolidated statements of Incomeoperations was $636,202$447,498 and $582,344,$438,011, 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 Rightright of Use Assetuse asset and Lease Liabilitylease 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 Assetasset and Liability,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%3.3% as of November 30, 2022.2023. The total estimated future minimum lease payments is $2.0 million.
As of November 30, 2022,2023, the maturities of lease liabilities for the Company’s operating leases were as follows:
FYE 23 | $ | 216,848 | ||||||
FYE 24 | 760,952 | $ | 191,186 | |||||
FYE 25 | 611,988 | 611,988 | ||||||
FYE 26 | 514,346 | 514,346 | ||||||
FYE 27 | 242,558 | 242,558 | ||||||
FYE 28 | 71,671 | |||||||
Thereafter | 462,120 | 390,450 | ||||||
Total | $ | 2,808,812 | $ | 2,022,199 | ||||
Less: imputed interest | (226,761 | ) | (151,643 | ) | ||||
Present value of lease liabilities: | $ | 2,582,051 | $ | 1,870,556 | ||||
Weighted average lease term | 5.6 | 5.4 |
During the nine months ended November 30, 2023 and 2022,the Company entered into leases for equipment used in the Company’s trucking operations. These leases resulted in the Company recognizingnew lease agreements representing a total future lease liability of $1.4 million.$46,250 and $636,202, respectively.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Contested Solicitation of Proxies
During the three and nine months ended November 30, 2022, the Company incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three and nine months ended November 30, 2022, the Company incurred approximately $764,000 and $2.9 million, respectively, of costs associated with the contested solicitation of proxies, compared with $800,000 and $1.7 million, respectively, of costs associated with a contested solicitation of proxies incurred in the three and nine months ended November 30, 2021. These costs are recognized as a general and administrative expense in the Consolidated Statement of Operations. The Company will realize material increased costs during the three months ending February 28, 2023 (the Company’s fourth quarter) associated with final expenses from the 2022 contested solicitation of proxies and the December 14, 2023 Settlement Agreement, as described above under “Subsequent Events.”
Employment Agreement Payments upon a Change in Control
We haveThe 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 Mr. Dudley generally provides that, ifRobert J. Sarlls, the Company or the executive terminates the executive's employment under circumstances constituting a "triggering termination," the executive will be entitled to receive, among other benefits, 2.99 times the sum of (i) the executive's annual salary using the highest annual base compensation rate in effect at any time during employment and (ii) the greater of (a) two times the bonus that would be payable to the executive for the bonus period in which the change in control occurred or (b) 25% of the amount described in clause (i). The employment agreement of Mr. Dudley also provided for a payment of $18,000, which represents the estimated cost to the executive of obtaining accident, health, dental, disability, and life insurance coverage for the 18-month period following the expiration of COBRA coverage.
A “change in control,” as used in the agreement for Mr. Dudley, generally means a change in the control of the Company following any number of events, but specifically, a proxy contest in which our Board of Directors prior to the transaction constitutes less than a majority of our Board of Directors after the transaction or the members of our Board of Directors during any consecutive two-year period who at the beginning of such period constituted the Board of Directors cease to be the majority of the Board of Directors at the conclusion of that period. We have determined that a change in control has taken place on October 6, 2021. A “triggering termination” generally occurs when an executive is terminated during a specified period preceding a change in control of us, or if the executive or the Company terminates the executive’s employment under circumstances constituting a triggering termination during a specified period after a change in control. A triggering termination may also include a voluntary termination under certain scenarios.
In connection with Mr. Dudley’s retirement, Mr. Dudley and the Company entered into a Separation Agreement and General Release (the “Separation Agreement”), dated September 30, 2022 (the “Effective Date”). Under the Separation Agreement, Mr. Dudley retired from the Company on the Effective Date and will be entitled, subject to the terms and conditions therein, to the following payments and separation benefits: (i) a cash separation payment amount in accordance with Mr. Dudley’s employment agreement; (ii) acceleration of vesting of Mr. Dudley’s 12,499 unvested restricted stock units as of the Effective Date; (iii) an additional cash severance payment of $70,000; and (iv) Mr. Dudley has agreed to provide consulting services to the Company through December 31, 2022, to the extent requested by the Company, for which he will receive a cash payment of $56,250. In addition, the Separation Agreement includes covenants related to cooperation, solicitation, and employment, as well as the customary release of claims and non-disparagement provisions in favor of the Company.
As a result of this Separation Agreement the Company incurred the following costs during the nine months ended November 30, 2022:
Accrued severance compensation: | $ | 928,938 | ||
Accelerated restricted stock unit compensation expense: | 95,156 | |||
Consulting Services: | 37,500 | |||
Total | $ | 1,061,594 |
Mr. Sarlls’ employment agreementCompany’s Chief Executive Officer, provides for the following upon “change in control”: Ifcontrol:” 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, thea 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).
Mr. Arroyo’sA. Allen Arroyo
The employment agreement of A. Allen Arroyo, the Company’s Chief Financial Officer, provides for the following upon “change in control”: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, thea 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 26 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 November 30, 2023, the Company had accrued $345,124 of expense associated with the Retirement Agreement.
Purchase Contractscontracts
The Company frequently enters into purchase contracts of between six to eighteen18 months for chocolate and certain nuts.nuts and other ingredients. 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 November 30, 2022,2023, the Company was contracted for approximately $36,000$229,000 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 November 30, 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 fivethree reportable segments: Franchising, Manufacturing,Production, Retail Stores, U-Swirl operations, and Other.Stores. 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, 2022, as amended by Amendment No.1 on Form 10-K/A filed on June 28, 2022. statements. The CompanyChief Operating Decision Maker evaluates performance and allocates resources based on operating contribution, which excludes unallocatedcorporate general and administrative costs and income tax expensesexpense or benefits.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.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, 2022 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||||||||||||||||||||||
Three Months Ended November 30, 2023 | Franchising | Production | Retail | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 1,239,938 | $ | 7,629,146 | $ | 301,594 | $ | 650,288 | $ | - | $ | 9,820,966 | $ | 1,275,700 | $ | 6,394,694 | $ | 363,584 | $ | - | $ | 8,033,978 | ||||||||||||||||||||||
Intersegment revenues | (1,379 | ) | (344,206 | ) | - | - | - | (345,585 | ) | - | (336,577 | ) | - | - | (336,577 | ) | ||||||||||||||||||||||||||||
Revenue from external customers | 1,238,559 | 7,284,940 | 301,594 | 650,288 | - | 9,475,381 | 1,275,700 | 6,058,117 | 363,584 | - | 7,697,401 | |||||||||||||||||||||||||||||||||
Segment profit (loss) | 337,225 | 1,534,725 | 45,035 | (15,822 | ) | (2,113,142 | ) | (211,979 | ) | 299,677 | 286,858 | 30,374 | (1,373,627 | ) | (756,718 | ) | ||||||||||||||||||||||||||||
Total assets | 1,010,798 | 13,639,903 | 624,705 | 4,138,398 | 5,428,786 | 24,842,590 | 1,154,926 | 12,713,718 | 493,498 | 6,918,241 | 21,280,383 | |||||||||||||||||||||||||||||||||
Capital expenditures | 15,925 | 150,735 | 4,860 | - | 52,334 | 223,854 | 20,751 | 1,134,371 | 249 | 128,152 | 1,283,523 | |||||||||||||||||||||||||||||||||
Total depreciation & amortization | $ | 8,432 | $ | 161,515 | $ | 1,407 | $ | 98,895 | $ | 17,643 | $ | 287,892 | $ | 7,217 | $ | 188,708 | $ | 2,445 | $ | 25,107 | $ | 223,477 |
Three Months Ended November 30, 2021 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||||||||||||||||||||||
Three Months Ended November 30, 2022 | Franchising | Production | Retail | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 1,251,381 | $ | 6,685,416 | $ | 275,530 | $ | 605,601 | $ | - | $ | 8,817,928 | $ | 1,239,938 | $ | 7,629,146 | $ | 301,594 | $ | - | $ | 9,170,678 | ||||||||||||||||||||||
Intersegment revenues | (1,245 | ) | (309,049 | ) | - | - | - | (310,294 | ) | (1,379 | ) | (344,206 | ) | - | - | (345,585 | ) | |||||||||||||||||||||||||||
Revenue from external customers | 1,250,136 | 6,376,367 | 275,530 | 605,601 | - | 8,507,634 | 1,238,559 | 7,284,940 | 301,594 | - | 8,825,093 | |||||||||||||||||||||||||||||||||
Segment profit (loss) | 578,357 | 1,339,108 | 16,706 | (56,790 | ) | (3,833,894 | ) | (1,956,513 | ) | 337,225 | 1,534,725 | 45,035 | (2,113,142 | ) | (196,157 | ) | ||||||||||||||||||||||||||||
Total assets | 1,590,914 | 10,988,056 | 651,372 | 4,824,466 | 9,243,856 | 27,298,664 | 1,010,798 | 13,639,903 | 624,705 | 5,428,786 | 20,704,192 | |||||||||||||||||||||||||||||||||
Capital expenditures | 650 | 59,095 | 2,620 | 12,751 | 58,485 | 133,601 | 15,925 | 150,735 | 4,860 | - | 171,520 | |||||||||||||||||||||||||||||||||
Total depreciation & amortization | $ | 9,060 | $ | 156,696 | $ | 1,397 | $ | 116,648 | $ | 14,981 | $ | 298,782 | $ | 8,432 | $ | 161,515 | $ | 1,407 | $ | 17,643 | $ | 188,997 |
Nine Months Ended November 30, 2022 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||||||||||||||||||||||
Nine Months Ended November 30, 2023 | Franchising | Production | Retail | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 4,222,694 | $ | 18,143,863 | $ | 815,197 | $ | 2,542,991 | $ | - | $ | 25,724,745 | $ | 4,238,017 | $ | 16,385,975 | $ | 864,400 | $ | - | $ | 21,488,392 | ||||||||||||||||||||||
Intersegment revenues | (3,994 | ) | (893,113 | ) | - | - | - | (897,107 | ) | (493 | ) | (796,634 | ) | - | - | (797,127 | ) | |||||||||||||||||||||||||||
Revenue from external customers | 4,218,700 | 17,250,750 | 815,197 | 2,542,991 | - | 24,827,638 | 4,237,524 | 15,589,341 | 864,400 | - | 20,691,265 | |||||||||||||||||||||||||||||||||
Segment profit (loss) | 1,756,239 | 3,062,876 | 27,947 | 352,922 | (7,779,818 | ) | (2,579,834 | ) | 1,266,668 | 421,613 | 60,216 | (5,031,779 | ) | (3,283,282 | ) | |||||||||||||||||||||||||||||
Total assets | 1,010,798 | 13,639,903 | 624,705 | 4,138,398 | 5,428,786 | 24,842,590 | 1,154,926 | 12,713,718 | 493,498 | 6,918,241 | 21,280,383 | |||||||||||||||||||||||||||||||||
Capital expenditures | 17,106 | 685,420 | 5,435 | 32,547 | 70,224 | 810,732 | 52,848 | 2,166,138 | 19,761 | 378,279 | 2,617,026 | |||||||||||||||||||||||||||||||||
Total depreciation & amortization | $ | 25,871 | $ | 484,980 | $ | 4,231 | $ | 295,908 | $ | 52,332 | �� | $ | 863,322 | $ | 22,793 | $ | 544,691 | $ | 5,430 | $ | 67,018 | $ | 639,932 |
Nine Months Ended November 30, 2021 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 4,289,116 | $ | 17,434,641 | $ | 829,542 | $ | 2,334,487 | $ | - | $ | 24,887,786 | ||||||||||||
Intersegment revenues | (4,258 | ) | (856,106 | ) | - | - | - | (860,364 | ) | |||||||||||||||
Revenue from external customers | 4,284,858 | 16,578,535 | 829,542 | 2,334,487 | - | 24,027,422 | ||||||||||||||||||
Segment profit (loss) | 1,866,829 | 3,254,726 | 61,029 | 262,202 | (6,323,294 | ) | (878,508 | ) | ||||||||||||||||
Total assets | 1,590,914 | 10,988,056 | 651,372 | 4,824,466 | 9,243,856 | 27,298,664 | ||||||||||||||||||
Capital expenditures | 1,832 | 593,043 | 3,688 | 14,150 | 91,749 | 704,462 | ||||||||||||||||||
Total depreciation & amortization | $ | 27,732 | $ | 469,562 | $ | 4,194 | $ | 350,047 | $ | 53,437 | $ | 904,972 |
Nine Months Ended November 30, 2022 | Franchising | Production | Retail | Unallocated | Total | |||||||||||||||
Total revenues | $ | 4,222,694 | $ | 18,143,863 | $ | 815,197 | $ | - | $ | 23,181,754 | ||||||||||
Intersegment revenues | (3,994 | ) | (893,113 | ) | - | - | (897,107 | ) | ||||||||||||
Revenue from external customers | 4,218,700 | 17,250,750 | 815,197 | - | 22,284,647 | |||||||||||||||
Segment profit (loss) | 1,756,239 | 3,062,876 | 27,947 | (7,779,818 | ) | (2,932,756 | ) | |||||||||||||
Total assets | 1,010,798 | 13,639,903 | 624,705 | 5,428,786 | 20,704,192 | |||||||||||||||
Capital expenditures | 17,106 | 685,420 | 5,435 | 70,224 | 778,185 | |||||||||||||||
Total depreciation & amortization | $ | 25,871 | $ | 484,980 | $ | 4,231 | $ | 52,332 | $ | 567,414 |
NOTE 14 – CONTESTED SOLICITATION OF PROXIES
Contested Solicitation of Proxies
During the three and nine months ended November 30, 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 nine months ended November 30, 2022, the Company incurred approximately $764,000 and $2.9 million, respectively, of costs associated with the contested solicitation of proxies, compared with no comparable costs incurred in the three and nine months ended November 30, 2023. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations.
NOTE 15 – INCOME TAXES
The Company provides for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax basis of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the 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 appropriate 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 expectations of future taxable income. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change.
During the three and nine monthsfiscal year ended November 30, 2022,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 ourits 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 November 30, 2022,2023, 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, U Swirl as seller, 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 U-Swirl $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.
On October 31, 2023, we filed a certificate of dissolution with the Secretary of State of the State of Nevada with respect to U-Swirl. As a result, U-Swirl is effectively fully dissolved and no longer in legal existence.
The following table discloses the results of operations of the businesses reported as discontinued operations for the three and nine months ended November 30, 2023 and 2022:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Total Revenue | $ | - | $ | 650,288 | $ | 212,242 | $ | 2,542,991 | ||||||||
Cost of sales | - | 142,218 | - | 528,759 | ||||||||||||
Operating Expenses | - | 523,892 | 143,198 | 1,661,310 | ||||||||||||
Gain on disposal of assets | - | - | (634,790 | ) | - | |||||||||||
Other income (expense), net | - | - | - | - | ||||||||||||
Earnings (loss) from discontinued operations before income taxes | - | (15,822 | ) | 703,834 | 352,922 | |||||||||||
Income tax provision (benefit) | - | - | - | 686,613 | ||||||||||||
Earnings (loss) from discontinued operations, net of tax | $ | - | $ | (15,822 | ) | $ | 703,834 | $ | (333,691 | ) |
The following table reflects the summary of assets and liabilities held for sale for U-Swirl as of November 30, 2023 and February 28, 2023, respectively:
November 30, | 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 |
Item 2.Management’s Discussion and AnalysisThe following table summarizes the gain recognized during the three months ended November 30, 2023 related to the sale of Financial Condition and Results of Operationsassets 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 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 10-QQuarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in theour Annual Report on 10-K filed with the SEC on May 27, 2022, for the fiscal year ended February 28, 2022, as amended by Amendment No. 12023 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on Form 10-K/A filed on June 28, 2022.May 30, 2023.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, the following discussion contains certain forward-looking information. See “Cautionary Note Regarding Forward-Looking Statements” abovein this Quarterly Report for certain information concerning forward-looking statements.
Overview
We are an international franchisor, confectionery manufacturer,producer, 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 soft-serve frozen yogurt cafés.. Our revenues and profitability are derived principally from our franchised/licensed systemnetwork of retail stores that feature chocolate frozen yogurt, and other confectionary products.products including gourmet caramel apples. We also sell our candy outside of our systemnetwork of retail stores and license the use of our brand with certain consumer products.stores. As of November 30, 2022,2023, there was onewere two Company-owned, 101113 licensee-owned and 162156 franchised Rocky Mountain Chocolate Factory stores operating in 37 U.S. states, Panama, and the Philippines. As
Recent Developments
On November 10, 2023, our board of directors adopted stock ownership guidelines for our non-employee directors and executive officers. Under the guidelines, non-employee directors are required to own certain eligible securities (“Eligible Shares”) of the Company worth three (3) times the cash portion of their annual directors’ base fees paid in cash, not including any retainers for service as the Board Chair or as a Board Committee Chair. Our Chief Executive Officer is required to own Eligible Shares worth three (3) times his base salary. Other executive officers of the Company are required to own Eligible Shares worth one (1) times their base salary. Non-employee directors elected prior to November 16, 2021 will have five (5) years from November 16, 2021 to meet the holding requirements. Non-employee directors elected after November 16, 2021 and up to November 10, 2023, will have five (5) years from the date of his or her election to meet the holding requirements. Executive officers serving as of November 30, 2022, U-Swirl operated three Company-owned cafés10, 2023 will have five (5) years from that date to meet the minimum ownership requirement. All directors and 58 franchised cafés located in 21 states and Qatar. U-Swirl operates self-serve frozen yogurt cafés underexecutive officers who are elected or appointed after November 10, 2023 will have five (5) years from the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.time they are elected or appointed to meet the minimum ownership requirement.
Labor and Supply Chain
As a result of macroeconomicmacro-economic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencingto experience higher raw material, labor, and freight costs. We have begun to see labor and logistics challenges, which we believe have contributed to lower factory, retail, and e-commerce sales of our products due to the availability of material, labor, and freight. In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our manufacturing facility, or if we or our franchisees experience delays in stocking our products. For additional information, see “Part I.I, Item 1A. - Risk Factors - The Availability and Price of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our Control“Risk Factors”” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022.Report.
Contested Solicitation of Proxies
During the three and nine months ended November 30, 2022, the Companywe incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with ourits 2022 annual meeting of stockholders. During the three and nine months ended November 30, 2022, the Companywe incurred approximately $764,000 and $2.9 million, respectively, of costs associated with the contested solicitation of proxies, compared with $800,000 and $1.7 million ofno comparable costs associated with a contested solicitation of proxies incurred in the three and nine months ended November 30, 2021.2023. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations. Future costs associated with the stockholder’s contested solicitation of proxies, the related legal proceedings, and the settlement thereof, as described in Note 1 to the consolidated financial statements appearing in Item 1 of Part I of this quarterly report under the caption “Subsequent Events” in this Form 10-Q may have a material impact on the result of future periods. Additionally, as a result of the contested solicitation of proxies in the prior year and the resulting changes to the composition of the Company’s Board of Directors, the Company incurred $934,000 of severance costs during the nine months ended November 30, 2022, resulting from the retirement of Edward L. Dudley in September 2022.
Termination of Strategic Partnership with Edible Arrangements
On November 1, 2022, the Company sent a formal notice to Edible Arrangements, LLC (“Edible Arrangements”), terminating the Exclusive Supplier Operating Agreement, dated December 20, 2019 (“Exclusive Supplier Agreement”), by and between the Company and Edible Arrangements, and the Ecommerce Licensing Agreement, dated March 16, 2020 (“Licensing Agreement”), by and between the Company and Edible Arrangements. Subsequent to the termination of the Supplier Agreement and Licensing Agreement, the Company has no remaining material obligations under the Strategic Alliance Agreement, dated as of December 20, 2019, by and among the Company, Farids & Co. LLC and Edible Arrangements; the Common Stock Purchase Warrant, dated December 20, 2019, issued to Edible Arrangements; and the Indemnification Letter Agreement, dated March 16, 2020, by and between the Company and Edible Arrangements.
Results of Operations
Three Months Ended November 30, 2022,2023, Compared to the Three Months Ended November 30, 20212022
Results Summary
Basic loss per share decreased from a loss of $0.24continuing operations increased from $(0.03) per share in the three months ended November 30, 2021,2022 to a loss of $0.03$(0.12) per share in the three months ended November 30, 2022.2023. Revenues increased 11.4% from $8.5continuing operations decreased from $8.8 million in the three months ended November 30, 2021,2022 to $9.5$7.7 million in the three months ended November 30, 2022. The loss2023. Loss from continuing operations decreasedincreased from a loss of $2.0$0.2 million in the three months ended November 30, 2021,2022 to a loss from continuing operations of $215,000 in the three months ended November 30, 2022. Net loss decreased from a net loss of $1.5$0.7 million in the three months ended November 30, 2021, to a net loss of $212,000 in the three months ended November 30, 2022.2023.
Revenues
Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
November 30, | $ | % | November 30, | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(
The
Retail Sales
Retail sales at Company-owned stores increased
Royalties, Marketing Fees, and Franchise Fees
The increase in
Costs and Expenses
Cost of Sales
Gross Margin
Adjusted Gross Margin
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 Cost of Sales and Gross Margin Durango Product gross margins decreased to 7.1% in the three months ended November 30, 2023 compared to 22.9% during the three months ended November 30, 2022, due primarily to a 20.7% increase in overhead costs, and an increase in other costs from hourly wage and raw material inflation realized in the three months ended November 30, 2023 compared to the three months ended November 30, 2022. Retail gross margins were relatively flat for the three months ended November 30, 2023 compared to November 30, 2022. Franchise Costs The increase in franchise costs in the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to an increase compensation expense and an increase in travel expenses. As a percentage of total royalty, marketing fees and franchise fee revenue, franchise costs increased to 45.2% in the three months ended November 30, 2023 from 38.5% in the three months ended November 30, 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 November 30, 2023. Sales and Marketing Sales and marketing costs decreased for the three months ended November 30, 2023 to $0.5 million compared to $0.6 million for the three months ended November 30, 2022. The decrease was primarily due to lower spending on advertising and collateral production. General and Administrative The decrease in general and administrative costs for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to a decrease in professional fees related to the costs associated with the contested solicitation of proxies in 2022. As a percentage of total revenues, general and administrative expenses decreased to 17.3% in the three months ended November 30, 2023 compared to 23.6% in the three months ended November 30, 2022. Retail Operating Expenses The increase in retail operating expenses for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily the conversion of a franchise unit into a Company-owned unit in July 2023. Retail operating expenses, as a percentage of retail sales, increased from 45.7% in the three months ended November 30, 2022 to 51.2% in the three months ended November 30, 2023. This increase is primarily the result of opening costs for the new Company store in Corpus Christi, TX. Depreciation and Amortization Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $36,000 in the three months ended November 30, 2023, an increase of 24.1% from $29,000 in the three months ended November 30, 2022. Depreciation and amortization included in cost of sales increased 17.5% to $188,000 in the three months ended November 30, 2023 compared to $160,000 in the three months ended November 30, 2022. This increase was the result of acquiring new equipment for production and the associated increase in depreciation expense. Other Income Net other income was $18,600 in the three months ended November 30, 2023 compared to net other income of $3,100 incurred in the three months ended November 30, 2022. Income Tax Expense During the three months ended November 30, 2023 and 2022, we did not incur any income tax benefit on a loss before income taxes of $717,000 and $196,000, respectively. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves. Nine Months Ended November 30, 2023 Compared to the Nine Months Ended November 30, 2022 Results Summary Basic loss per share from continuing operations decreased from $(0.58) per share for the nine months ended November 30, 2022, to a net loss of $(0.51) per share for the nine months ended November 30, 2023. Revenues from continuing operations decreased 7.2% from $22.3 million for the nine months ended November 30, 2022, to $20.7 million for the nine months ended November 30, 2023. Loss from continuing operations increased from $2.9 million for the nine months ended November 30, 2022, to a loss from continuing operations of $3.3 million for the nine months ended November 30, 2023. Net loss from continuing operations decreased from $3.6 million for the nine months ended November 30, 2022, to a net loss of $3.2 million for the nine months ended November 30, 2023. Revenues
Durango Product Sales The decrease in Durango Product sales for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022, was due to a 9.6%, or $1.6 million, decrease in shipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores decreased by 7.0%, or $1.0 million. Shipment of products to our outside omni-channel network decreased by $0.6 million or 25.3% during the nine months ending November 30, 2023, when compared to the nine months ended November 30, 2022. Retail Sales Retail sales at Company-owned stores increased 6.0% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022. This increase was primarily the result of the opening of a second company store in July 2023. This was partially offset by the sale of a Company-owned store in the prior year (which resulted in only one remaining company-owned store). Retail sales at our Company-owned store in Durango, CO increased 6.2% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022. Royalties, Marketing Fees and Franchise Fees Royalty and marketing fees were approximately unchanged from the nine months ended November 30, 2022 to the nine months ended November 30, 2023. Same store sales at domestic franchise Rocky Mountain Chocolate locations decreased by 1.3% during the nine months ended November 30, 2023 when compared to the nine months ended November 30, 2022. The decrease in franchise fee revenue for the three months ended November 30, 2023, compared to the three months ended November 30, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition. Costs and Expenses Cost of Sales
Gross Margin
Adjusted Gross Margin
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 Durango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our Durango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Durango Product adjusted gross margin is equal to Durango Product gross margin plus depreciation and amortization expense. We believe adjusted gross margin and Durango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, Durango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and Durango 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 Durango Product adjusted gross margin rather than gross margin and Durango Product gross margin to make incremental pricing decisions. Adjusted gross margin and Durango Product adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider
Cost of Sales and Gross Margin
Retail gross margins
Franchise Costs
The increase in franchise costs in the
Sales and Marketing
General and Administrative
The decrease in general and administrative costs for the
Retail Operating Expenses
The
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was Other Income Net other income was $44,000 in the nine months ended November 30, 2023, compared to other income of $10,000 during the nine months ended November 30, 2022. This increase was primarily the result of
$3.2 million. During the nine months ended November 30, 2022, we incurred income tax expense of
Liquidity and Capital Resources
As of November 30,
Cash and cash equivalent balances decreased approximately
During the nine months ended November 30,
During the nine months ended November 30,
Revolving Line of Credit Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $3.0 million was available for borrowing (subject to certain borrowing-based limitations) as of November 30, As of November 30, 2023 we were As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of November 30, 2023 and as of the date of this Quarterly Report, we had enough cash In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company Significant Accounting Policies The preparation of consolidated financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that
Off-Balance Sheet Arrangements
As of November 30,
As of November 30,
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
Seasonality
We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of our products have occurred during key holidays and the summer 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.
As a smaller reporting company, we are not required to provide the information required by this Item.
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 Exchange 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
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 Reports on Form 10-Q for the three months ended May 31, 2023 and six months ended August 31,2023, management concluded that our internal control over financial reporting was not effective as of February 28, 2023, May 31, 2023, and August 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. During the previous fiscal quarter, 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
Changes in Internal Control over Financial Reporting
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.
In addition to the other information set forth in this Quarterly Report,
None.
None.
Not Applicable.
Other Information
32
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.
| 2022 | 2021 | Change | Change | 2023 | 2022 | Change | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Factory sales | $ | 7,284.9 | $ | 6,376.4 | $ | 908.5 | 14.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Durango Product sales | $ | 6,058 | $ | 7,285 | $ | (1,227 | ) | (16.8 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail sales | 678.6 | 636.0 | 42.6 | 6.7 | % | $ | 364 | $ | 302 | $ | 62 | 20.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Franchise fees | 58.5 | 61.7 | (3.2 | ) | (5.2 | )% | $ | 41 | $ | 49 | $ | (8 | ) | (16.2 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Royalty and marketing fees | 1,453.4 | 1,433.5 | 19.9 | 1.4 | % | $ | 1,235 | $ | 1,190 | $ | 45 | 3.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 9,475.4 | $ | 8,507.6 | $ | 967.8 | 11.4 | % | $ | 7,697 | $ | 8,825 | $ | (1,128 | ) | (12.8 | )% |
FactoryDurango Product Sales
The increasedecrease in factoryDurango Product sales for the three months ended November 30, 2022,2023, compared to the three months ended November 30, 2021,2022, was primarily due to a 13.0%16.8%, $661,000, increaseor $1.2 million, decrease in salesshipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores and a 19.1%decreased by 15.7%, $248,000, increase in shipmentsor $0.9 million. Shipment of product to customers outside our network of franchised retail stores. The increase in sales of productproducts to our outside omni-channel network of franchised and licensed retail stores was primarily the result of a higher sell price and higher same-store pounds purchased. Same-store pounds purchaseddecreased by domestic franchise and licensed locations increased 5.7%$0.3 million or 20.6% during the three months ended November 30, 2022,2023, when compared to the three months ended November 30, 2021.2022.
Retail Sales
Retail sales at Company-owned stores increased 6.7%20.6% during the three months ended November 30, 2022,2023 compared to the three months ended November 30, 2021, as a2022. This increase was the result of an increasethe opening of a second Company-owned store in Company-owned same store sales. Same storeJuly 2023. Additionally, retail sales at our Company-owned store in Durango, Colorado, which was open in all Company-owned locations increased 12.9%periods, decreased by 1.1% during the three months ended November 30, 2022, when2023 compared to the three months ended November 30, 2021. This increase was partially offset by a decrease in the average number of Company-owned stores in operation resulting from the sale of a Company-owned location to a franchisee.2022.
Royalties, Marketing Fees, and Franchise Fees
The increase in royaltyroyalties and marketing fees from the three months ended November 30, 2021,2022 to the three months ended November 30, 2022,2023 was primarily due to an increase in royalty revenue as a result of the Company’s purchase based royalty structure and an increase in same store sales at domestic Rocky Mountain Chocolate Factory locations and at U-Swirl Frozen Yogurt cafés. Same-storelocations. Same store sales at domestic franchise Rocky Mountain Chocolate Factory locations increased by 3.0% and same-store sales at U-Swirl Frozen Yogurt cafés increased by 14.0%2.1% during the three months ended November 30, 2022,2023 when compared to the three months ended November 30, 2021.2022.
FranchiseThe decrease in franchise fee revenue for the three months ended November 30, 2022,2023, compared to the three months ended November 30, 2021,2022 was relatively unchanged.the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 5,613.7 | $ | 4,960.9 | $ | 652.8 | 13.2 | % | ||||||||
Cost of sales - retail | 255.9 | 239.8 | 16.1 | 6.7 | % | |||||||||||
Franchise costs | 551.5 | 458.5 | 93.0 | 20.3 | % | |||||||||||
Sales and marketing | 607.2 | 377.2 | 230.0 | 61.0 | % | |||||||||||
General and administrative | 2,111.7 | 3,865.9 | (1,754.2 | ) | (45.4 | )% | ||||||||||
Retail operating | 422.4 | 420.3 | 2.1 | 0.5 | % | |||||||||||
Total | $ | 9,562.4 | $ | 10,322.6 | $ | (760.2 | ) | (7.4 | )% |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | 5,631 | 5,614 | 17 | 0.3 | % | |||||||||||
Cost of sales - retail | 138 | 114 | 24 | 21.4 | % | |||||||||||
Franchise costs | 577 | 477 | 100 | 21.0 | % | |||||||||||
Sales and marketing | 532 | 573 | (41 | ) | (7.2 | )% | ||||||||||
General and administrative | 1,333 | 2,081 | (747 | ) | (35.9 | )% | ||||||||||
Retail operating | 186 | 138 | 48 | 35.1 | % | |||||||||||
Total | 8,397 | 8,995 | (599 | ) | (6.7 | )% |
Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross profit | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Retail gross profit | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total | $ | 2,093.9 | $ | 1,811.7 | $ | 282.2 | 15.6 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total | 653 | 1,859 | (1,206 | ) | (64.9 | )% |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 22.9 | % | 22.2 | % | 0.7 | % | 3.2 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total | 26.3 | % | 25.8 | % | 0.5 | % | 1.9 | % |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 7.1 | % | 22.9 | % | (15.8 | )% | (69.0 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total | 10.2 | % | 24.5 | % | (14.3 | )% | (58.4 | )% |
Adjusted Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Plus: depreciation and amortization | 160.0 | 155.2 | 4.8 | 3.1 | % | |||||||||||
Factory adjusted gross margin | 1,831.2 | 1,570.7 | 260.5 | 16.6 | % | |||||||||||
Retail gross margin | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total Adjusted Gross Margin | $ | 2,253.9 | $ | 1,966.9 | $ | 287.0 | 14.6 | % | ||||||||
Factory adjusted gross margin | 25.1 | % | 24.6 | % | 0.5 | % | 2.0 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total Adjusted Gross Margin | 28.3 | % | 28.0 | % | 0.3 | % | 1.1 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Plus: depreciation and amortization | 188 | 160 | 28 | 17.2 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 615 | 1,831 | (1,216 | ) | (66.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 841 | 2,019 | (1,179 | ) | (58.4 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 10.2 | % | 25.1 | % | (14.9 | )% | (59.4 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 13.1 | % | 26.6 | % | (13.5 | )% | (50.8 | )% |
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 plus 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 should not be considered in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary component of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and Durango Product adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and Durango Product gross margin.
Cost of Sales and Gross Margin
Durango Product gross margins decreased to 7.1% in the three months ended November 30, 2023 compared to 22.9% during the three months ended November 30, 2022, due primarily to a 20.7% increase in overhead costs, and an increase in other costs from hourly wage and raw material inflation realized in the three months ended November 30, 2023 compared to the three months ended November 30, 2022.
Retail gross margins were relatively flat for the three months ended November 30, 2023 compared to November 30, 2022.
Franchise Costs
The increase in franchise costs in the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to an increase compensation expense and an increase in travel expenses. As a percentage of total royalty, marketing fees and franchise fee revenue, franchise costs increased to 45.2% in the three months ended November 30, 2023 from 38.5% in the three months ended November 30, 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 November 30, 2023.
Sales and Marketing
Sales and marketing costs decreased for the three months ended November 30, 2023 to $0.5 million compared to $0.6 million for the three months ended November 30, 2022. The decrease was primarily due to lower spending on advertising and collateral production.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to a decrease in professional fees related to the costs associated with the contested solicitation of proxies in 2022. As a percentage of total revenues, general and administrative expenses decreased to 17.3% in the three months ended November 30, 2023 compared to 23.6% in the three months ended November 30, 2022.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily the conversion of a franchise unit into a Company-owned unit in July 2023. Retail operating expenses, as a percentage of retail sales, increased from 45.7% in the three months ended November 30, 2022 to 51.2% in the three months ended November 30, 2023. This increase is primarily the result of opening costs for the new Company store in Corpus Christi, TX.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $36,000 in the three months ended November 30, 2023, an increase of 24.1% from $29,000 in the three months ended November 30, 2022. Depreciation and amortization included in cost of sales increased 17.5% to $188,000 in the three months ended November 30, 2023 compared to $160,000 in the three months ended November 30, 2022. This increase was the result of acquiring new equipment for production and the associated increase in depreciation expense.
Other Income
Net other income was $18,600 in the three months ended November 30, 2023 compared to net other income of $3,100 incurred in the three months ended November 30, 2022.
Income Tax Expense
During the three months ended November 30, 2023 and 2022, we did not incur any income tax benefit on a loss before income taxes of $717,000 and $196,000, respectively. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Nine Months Ended November 30, 2023 Compared to the Nine Months Ended November 30, 2022
Results Summary
Basic loss per share from continuing operations decreased from $(0.58) per share for the nine months ended November 30, 2022, to a net loss of $(0.51) per share for the nine months ended November 30, 2023. Revenues from continuing operations decreased 7.2% from $22.3 million for the nine months ended November 30, 2022, to $20.7 million for the nine months ended November 30, 2023. Loss from continuing operations increased from $2.9 million for the nine months ended November 30, 2022, to a loss from continuing operations of $3.3 million for the nine months ended November 30, 2023. Net loss from continuing operations decreased from $3.6 million for the nine months ended November 30, 2022, to a net loss of $3.2 million for the nine months ended November 30, 2023.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product sales | 15,589 | 17,251 | (1,661 | ) | (9.6 | )% | ||||||||||
Retail sales | 864 | 815 | 49 | 6.0 | % | |||||||||||
Franchise fees | 127 | 148 | (21 | ) | (14.1 | )% | ||||||||||
Royalty and marketing fees | 4,111 | 4,071 | 40 | 1.0 | % | |||||||||||
Total | 20,691 | 22,285 | (1,593 | ) | (7.2 | )% |
Durango Product Sales
The decrease in Durango Product sales for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022, was due to a 9.6%, or $1.6 million, decrease in shipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores decreased by 7.0%, or $1.0 million. Shipment of products to our outside omni-channel network decreased by $0.6 million or 25.3% during the nine months ending November 30, 2023, when compared to the nine months ended November 30, 2022.
Retail Sales
Retail sales at Company-owned stores increased 6.0% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022. This increase was primarily the result of the opening of a second company store in July 2023. This was partially offset by the sale of a Company-owned store in the prior year (which resulted in only one remaining company-owned store). Retail sales at our Company-owned store in Durango, CO increased 6.2% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees were approximately unchanged from the nine months ended November 30, 2022 to the nine months ended November 30, 2023. Same store sales at domestic franchise Rocky Mountain Chocolate locations decreased by 1.3% during the nine months ended November 30, 2023 when compared to the nine months ended November 30, 2022.
The decrease in franchise fee revenue for the three months ended November 30, 2023, compared to the three months ended November 30, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | 14,844 | 13,823 | 1,021 | 7.4 | % | |||||||||||
Cost of sales - retail | 316 | 320 | (4 | ) | (1.4 | )% | ||||||||||
Franchise costs | 1,870 | 1,344 | 525 | 39.1 | % | |||||||||||
Sales and marketing | 1,447 | 1,482 | (35 | ) | (2.4 | )% | ||||||||||
General and administrative | 4,952 | 7,723 | (2,771 | ) | (35.9 | )% | ||||||||||
Retail operating | 451 | 447 | 4 | 0.8 | % | |||||||||||
Total | 23,880 | 25,140 | (1,260 | ) | (5.0 | )% |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total | 1,294.3 | 3,922.7 | (2,628.4 | ) | (67.0 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 4.8 | % | 19.9 | % | (15.1 | )% | (75.9 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total | 7.9 | % | 21.7 | % | (13.8 | )% | (63.8 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Plus: depreciation and amortization | 541 | 480 | 61 | 12.6 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 1,287 | 3,908 | (2,621 | ) | (67.1 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 1,835 | 4,403 | (2,568 | ) | (58.3 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 8.3 | % | 22.7 | % | (14.4 | )% | (63.6 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 11.2 | % | 24.4 | % | (13.2 | )% | (54.2 | )% |
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 Durango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our Durango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Durango Product adjusted gross margin is equal to Durango Product gross margin plus depreciation and amortization expense. We believe adjusted gross margin and Durango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, Durango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and Durango 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 Durango Product adjusted gross margin rather than gross margin and Durango Product gross margin to make incremental pricing decisions. Adjusted gross margin and Durango Product adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider themit 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 increaseddecreased to 22.9%4.8% in the threenine months ended November 30, 2023 compared to 19.9% during the nine months ended November 30, 2022, compareddue primarily to 22.2%a 15.2% decrease in production volume, a 21.9% increase in overhead costs and an increase in other costs associated with hourly wage and raw material inflation realized in the threenine months ended November 30, 2021. This increase was due primarily2023 compared to an increase in prices partially offset by increased labor and material costs and expense associated with inventory obsolescence.the nine months ended November 30, 2022.
Retail gross margins were unchanged at 62.3%increased from 60.7% during the threenine months ended November 30, 2022 to 63.5% during the nine months ended November 30, 2023. The increase in retail gross margins was primarily the result of improved management of costs and 2021.expenses. This was the result of the hiring of a dedicated experienced general manager in our Durango, CO store early in 2023.
Franchise Costs
The increase in franchise costs in the threenine months ended November 30, 2022,2023 compared to the threenine months ended November 30, 2021,2022 was due primarily to an increase in franchise conventionprofessional fees, an increase in stock compensation expense and an increase in travel expenses in the three months ended November 30, 2022.expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 36.5%44.1% in the threenine months ended November 30, 2022,2023 from 30.7%31.9% in the threenine months ended November 30, 2021.2022. This increasedecrease as a percentage of royalty, marketing and franchise fees is primarily thea result of higher costs.franchise costs during the nine months ended November 30, 2023.
Sales and Marketing
The increase in salesSales and marketing costs were approximately unchanged for the threenine months ended November 30, 2022,2023, compared to the threenine months ended November 30, 2021, was primarily due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.2022.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, is primarily due to lower costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three months ended November 30, 2022, the Company incurred approximately $764,000 of costs associated with the contested solicitation of proxies, compared with $2.7 million of costs associated with a contested solicitation of proxies and associated severance costs during the three months ended November 30, 2021. This decrease was partially offset by an increase in legal expenses and salaries and wages in the three months ended November 30, 2022, compared with the three months ended November 30, 2021. As a percentage of total revenues, general and administrative expenses decreased to 22.3% in the three months ended November 30, 2022, compared to 45.4% in the three months ended November 30, 2021.
Retail Operating Expenses
Retail operating expenses were relatively unchanged during the three months ended November 30, 2022, compared to the three months ended November 30, 2021. Retail operating expenses, as a percentage of retail sales, decreased from 66.1% in the three months ended November 30, 2021, to 62.2% in the three months ended November 30, 2022. This decrease is primarily the result of higher retail sales.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $128,000 in the three months ended November 30, 2022, a decrease of 10.9% from $144,000 in the three months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the consolidated financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 3.1% to $160,000 in the three months ended November 30, 2022, compared to $155,000 in the three months ended November 30, 2021.
Other Income
Net interest income was $3,000 in the three months ended November 30, 2022, compared to net interest income of $2,200 incurred in the three months ended November 30, 2021.
Income Tax Expense (Benefit)
During the three months ended November 30, 2022, we did not incur any income tax benefit on a loss before income taxes of $212,000. This was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the three months ended November 30, 2021, was 24.5%. See Note 14 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.
Nine Months Ended November 30, 2022, Compared to the Nine Months Ended November 30, 2021
Results Summary
Basic earnings per share decreased from a net loss of $0.11 per share for the nine months ended November 30, 2021, to a net loss of $0.64 per share for the nine months ended November 30, 2022. Revenues increased 3.3% from $24.0 million for the nine months ended November 30, 2021, to $24.8 million for the nine months ended November 30, 2022. The loss from operations increased from a loss of $1.1 million for the nine months ended November 30, 2021, to a loss from operations of $2.6 million for the nine months ended November 30, 2022. Net loss increased from a net loss of $701,000 for the nine months ended November 30, 2021, to a net loss of $4.0 million for the nine months ended November 30, 2022.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory sales | $ | 17,250.8 | $ | 16,578.5 | $ | 672.3 | 4.1 | % | ||||||||
Retail sales | 2,267.9 | 2,208.1 | 59.8 | 2.7 | % | |||||||||||
Franchise fees | 180.0 | 165.0 | 15.0 | 9.1 | % | |||||||||||
Royalty and marketing fees | 5,128.9 | 5,075.8 | 53.1 | 1.0 | % | |||||||||||
Total | $ | 24,827.6 | $ | 24,027.4 | $ | 800.2 | 3.3 | % |
Factory Sales
The increase in factory sales for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021, was primarily due to an 8.0%, $1.1 million, increase in sales of product to our network of franchised and licensed retail stores partially offset by a 15.7%, $429,000, decrease in shipments of product to customers outside our network of franchised retail stores.
Retail Sales
Retail sales at Company-owned stores increased 2.7% during the nine months ended November 30, 2022 compared to the nine months ended November 30, 2021, primarily as a result of an increase in same-store sales at Company-owned locations. Same-store sales at all Company-owned locations increased 6.1% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021.
Royalties, Marketing Fees, and Franchise Fees
The slight increase in royalty and marketing fees for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was primarily due to an increase in same-store sales at domestic franchise frozen yogurt cafés. Same-store sales at all domestic franchise locations increased 3.8% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021, with same-store sales at the Company’s domestic franchise frozen yogurt cafés increasing 19.2% during the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021.
The increase in franchise fee revenue for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was the result of store closures and the acceleration of unrecognized franchise fee revenue, and more franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 13,823.2 | $ | 13,065.3 | $ | 757.9 | 5.8 | % | ||||||||
Cost of sales - retail | 848.8 | 754.1 | 94.7 | 12.6 | % | |||||||||||
Franchise costs | 1,569.8 | 1,747.4 | (177.6 | ) | (10.2 | )% | ||||||||||
Sales and marketing | 1,617.1 | 1,195.8 | 421.3 | 35.2 | % | |||||||||||
General and administrative | 7,810.6 | 6,575.0 | 1,235.6 | 18.8 | % | |||||||||||
Retail operating | 1,364.7 | 1,304.6 | 60.1 | 4.6 | % | |||||||||||
Total | $ | 27,034.2 | $ | 24,642.2 | $ | 2,392.0 | 9.7 | % |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross profit | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Retail gross profit | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total | $ | 4,846.7 | $ | 4,967.2 | $ | (120.5 | ) | (2.4 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross margin | 19.9 | % | 21.2 | % | (1.3 | )% | (6.2 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total | 24.8 | % | 26.4 | % | (1.6 | )% | (6.1 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Plus: depreciation and amortization | 480.5 | 464.8 | 15.7 | 3.4 | % | |||||||||||
Factory adjusted gross margin | 3,908.1 | 3,978.0 | (69.9 | ) | (1.8 | )% | ||||||||||
Retail gross margin | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 5,327.2 | $ | 5,432.0 | $ | (104.8 | ) | (1.9 | )% | |||||||
Factory adjusted gross margin | 22.7 | % | 24.0 | % | (1.3 | )% | (5.6 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 28.9 | % | (1.6 | )% | (5.6 | )% |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin, and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider them in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margins decreased to 19.9% in the nine months ended November 30, 2022, compared to a gross margin of 21.2% during the nine months ended November 30, 2021, due primarily to an increase in costs from wage and material inflation and the impacts of Employee Retention Credits recognized in the nine months ended November 30, 2021, with no comparable credits in the nine months ended November 30, 2022. These cost increases were partially offset by an increase in product prices. The Company recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits (“ERC”) in the nine months ended November 30, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 65.8% during the nine months ended November 30, 2021, to 62.6% during the nine months ended November 30, 2022. The decrease in retail gross margins was primarily the result of an increase in the costs of raw materials.
Franchise Costs
The decrease in franchise costs in the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to a decrease in professional fees, the result of litigation with our licensee in Canada incurred during the nine months ended November 30, 2021, with no comparable legal expense in the nine months ended November 30, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 29.6% in the nine months ended November 30, 2022, from 33.3% in the nine months ended November 30, 2021. This decrease as a percentage of royalty, marketing, and franchise fees is primarily the result of lower franchise costs.
Sales and Marketing
The increase in sales and marketing costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.
General and Administrative
The increase in general and administrative costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the nine months ended November 30, 2022, the Company incurred approximately $2.9 million of costs associated with the contested solicitation of proxies, compared with $1.7 million ofno costs associated with a contested solicitation of proxies during the nine months ended November 30, 2021. The2023. During the nine months ended November 30, 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.Officer, with no comparable costs incurred during the nine months ended November 30, 2023. Additionally, due to a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholdersduring the nine months ended November 30, 2022, the Company had become contingently liable for certain change in controlrecorded $859,000 of severance payments to Mr. Dudley if a triggering termination was to occur. Ascompensation as a result of Mr. Dudley’s retirementan executive’s departure last year with no comparable compensation costs in September 2022,G&A during the Company incurred $934,000 of associated severance costs.nine months ended November 30, 2023. As a percentage of total revenues, general and administrative expenses increaseddecreased to 31.5%23.9% in the nine months ended November 30, 2022,2023, compared to 27.4%34.7% in the nine months ended November 30, 2021.2022.
Retail Operating Expenses
The increasedecrease in retail operating expenses for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021,2022, was due primarily to an increasea change in salaries and wages, and utilities in our Company-owned stores in operation, the result of the sale of a Company-owned store in the prior year and cafés.the conversion of a franchise store into a Company owned store in July 2023. Retail operating expenses, as a percentage of retail sales, increaseddecreased from 59.1%39.3% in the nine months ended November 30, 2021,2022, to 60.2%36.5% in the nine months ended November 30, 2022.2023. This increasedecrease is primarily the result of higherlower retail costs.operating expenses.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $383,000$99,000 in the nine months ended November 30, 2022, a decrease2023, an increase of 13.0%13.7% from $440,000$87,000 in the nine months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives.2022. Depreciation and amortization included in cost of sales increased 3.4%12.7% from $465,000$480,000 in the nine months ended November 30, 2021,2022 to $480,000$541,000 in the nine months ended November 30, 2023. This increase was the result of acquiring new equipment for production and the associated increase to depreciation expense.
Other Income
Net other income was $44,000 in the nine months ended November 30, 2023, compared to other income of $10,000 during the nine months ended November 30, 2022. This increase was primarily the result of investmentan increase in equipment.interest income on our note receivable.
Other Income Tax Expense
Other income was $9,600 inDuring the nine months ended November 30, 2022, compared to other2023, we did not incur any income tax benefit on a loss before income taxes of $176,500 during the nine months ended November 30, 2021. Net interest income was $9,600 in the nine months ended November 30, 2022, compared to interest income of $9,300 during the nine months ended November 30, 2021.
The Company recognized a gain on insurance recovery of $167,100 during the nine months ended November 30, 2021, compared with no similar amounts recognized during the nine months ended November 30, 2022.
Income Tax Expense (Benefit)
$3.2 million. During the nine months ended November 30, 2022, we incurred income tax expense of $1.4 million$702,000 on a loss before income taxes of $2.6$2.9 million. This expense was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the nine months ended November 30, 2021, was 20.2%.assets. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Liquidity and Capital Resources
As of November 30, 2022,2023, working capital was $7.4$3.0 million, compared to $9.7$6.2 million as of February 28, 2022,2023, a decrease of $2.3$3.2 million. The decrease in working capital was primarily due to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders.operating activities.
Cash and cash equivalent balances decreased approximately $4.4$2.6 million to $3.2$2.1 million as of November 30, 2022,2023 compared to $7.6$4.7 million as of February 28, 2022.2023. This decrease in cash and cash equivalents was primarily due to fundingproceeds from the sale of a rabbi trust established for severance payments to our former Chief Executive OfficerU-Swirl assets more than offset by operating results and the resulting $1.3 million decrease in cash balancespurchase of property and an increase in inventory of $2.1 million.equipment. Our current ratio was 2.21.5 to 1 at November 30, 2022,2023 compared to 2.82.2 to 1 at February 28, 2022.2023. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During the nine months ended November 30, 2022,2023, we had a net loss of $4.0$2.5 million. Operating activities used cash of $3,583,418, with$2.5 million, primarily the principal adjustment to reconcileresult of the net income to net cash used by operating activities being deferred income taxes of $1,388,271, depreciation and amortization of $863,322, an increase in accounts payable of $1,976,869 and expense recordedNet loss for stock compensation of $471,530, mostly offset by an increase in inventory of $2,091,099, a decrease in accrued liabilities of $1,284,330 and an increase in accounts receivable of $1,171,146.the nine months ended November 30, 2023. During the comparable 20212022 period, we had a net loss of $700,908,$3.9 million, and cash used in operating activities provided cash of $857,048. The principal adjustment to reconcile the net income to net cash used by operating activities being an increase in accrued liabilities of $1,343,856, an increase in accounts payable of $1,079,671, depreciation and amortization of $904,972, and expense related to stock-based compensation of $709,210, partially offset by an increase in accounts receivable of $985,887 and an increase in inventory of $936,483.$3.6 million.
During the nine months ended November 30, 2022,2023, investing activities used cash of $787,824,$1.1 million, primarily due to the purchases of property and equipment of $810,732.$2.5 million. This was partially offset by cash provided by discontinued operation (the result of the sale of U-Swirl assets) of $1.4 million. In comparison, investing activities used cash of $407,457$0.8 million during the nine months ended November 30, 2021,2022, primarily due to the purchasespurchase of property and equipment of $704,462 partially offset by proceeds from insurance recovery of $206,336.equipment.
DuringWe borrowed $1.0 million on our line of credit during the nine months endedquarter which provided cash from financing activities.
Revolving Line of Credit
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $3.0 million was available for borrowing (subject to certain borrowing-based limitations) as of November 30, 2022, there2023 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.68% at November 30, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.
As of November 30, 2023 we were nonot in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was 1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of November 30, 2023 and as of the date of this Quarterly Report, we had enough cash flows from financing activities. In comparison, financing activities used cash of $61,276on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the nine months ended November 30, 2021, duefuture, however, we may not have sufficient funds available to make the redemptionpayments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the shareholder rights plan.Credit Agreement.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company believesis exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities.
Significant Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that cash flow from operations will be sufficientaffect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to fund capital expendituresthe consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and working capital requirementsin the Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for FYthe fiscal year ended February 28, 2023 describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
As of November 30, 2022,2023, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
As of November 30, 2022,2023, we had purchase obligations of approximately $36,000.$229,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.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 the 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 products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide the information required by this Item.
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 Exchange 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 Securities and Exchange Commission’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.
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 Reports on Form 10-Q for the three months ended May 31, 2023 and six months ended August 31,2023, management concluded that our internal control over financial reporting was not effective as of February 28, 2023, May 31, 2023, and August 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.
During the previous fiscal quarter, 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 arewere not effective as of November 30, 2022.2023.
Changes in Internal Control over Financial Reporting
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, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION |
Legal Proceedings |
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
Item 1.Legal ProceedingsWe may, from time to time, become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially susceptible to litigation, 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 an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
The information set forth in Note 1 to the consolidated financial statements appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q under the caption “Subsequent Events” is incorporated by reference herein.
Risk Factors |
In addition to the other information set forth in this Quarterly Report, on Form 10-Q, you should carefully consider the factors discussed in Part 1, “ItemItem 1A. Risk“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022,2023 (our “Annual Report”), filed with the Securities and Exchange Commission on May 27, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022, which could materially and adversely affect our business, financial condition and results of operations.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, 2022, as amended by Amendment No. 1 on Form 10-K/A.Report.
Item 2.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Defaults Upon Senior Securities |
None.
Mine Safety Disclosures |
Not Applicable.
Other InformationItem 5.Other Information
On December 14, 2022, the Company filed a Form 8-K, which is incorporated herein by reference, disclosing Gabriel Arreaga’s December 8, 2022, notification to the Board of Directors of the Company (the “Board”) of his decision to resign from the Board effective upon the earlier of (a) the nomination of a new chairperson of the Compensation Committee of the Board, (b) the nomination of a new member to the Board, or (c) the conclusion of the Company’s current fiscal year (February 28, 2023). On January 11, 2023, the Board nominated and elected Jeffrey R. Geygan as the new chairperson of the Compensation Committee of the Board. Consequently, Mr. Arreaga’s resignation as a member of the Board, as the chairperson of the Compensation Committee of the Board and as a member of the Audit Committee of the Board was effective on January 11, 2023.None.
Exhibits |
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32.1* |
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(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 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: January | /s/ Allen Arroyo | ||
Allen Arroyo, Chief Financial Officer |
2022
2021
Change
Change
2023
2022
Change
Change
Factory gross profit
Retail gross profit
Durango Product gross margin
Retail gross margin
Total
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 22.9 | % | 22.2 | % | 0.7 | % | 3.2 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total | 26.3 | % | 25.8 | % | 0.5 | % | 1.9 | % |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 7.1 | % | 22.9 | % | (15.8 | )% | (69.0 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total | 10.2 | % | 24.5 | % | (14.3 | )% | (58.4 | )% |
Adjusted Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Plus: depreciation and amortization | 160.0 | 155.2 | 4.8 | 3.1 | % | |||||||||||
Factory adjusted gross margin | 1,831.2 | 1,570.7 | 260.5 | 16.6 | % | |||||||||||
Retail gross margin | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total Adjusted Gross Margin | $ | 2,253.9 | $ | 1,966.9 | $ | 287.0 | 14.6 | % | ||||||||
Factory adjusted gross margin | 25.1 | % | 24.6 | % | 0.5 | % | 2.0 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total Adjusted Gross Margin | 28.3 | % | 28.0 | % | 0.3 | % | 1.1 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Plus: depreciation and amortization | 188 | 160 | 28 | 17.2 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 615 | 1,831 | (1,216 | ) | (66.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 841 | 2,019 | (1,179 | ) | (58.4 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 10.2 | % | 25.1 | % | (14.9 | )% | (59.4 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 13.1 | % | 26.6 | % | (13.5 | )% | (50.8 | )% |
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 plus 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 should not be considered in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary component of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and Durango Product adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and Durango Product gross margin.
Cost of Sales and Gross Margin
Durango Product gross margins decreased to 7.1% in the three months ended November 30, 2023 compared to 22.9% during the three months ended November 30, 2022, due primarily to a 20.7% increase in overhead costs, and an increase in other costs from hourly wage and raw material inflation realized in the three months ended November 30, 2023 compared to the three months ended November 30, 2022.
Retail gross margins were relatively flat for the three months ended November 30, 2023 compared to November 30, 2022.
Franchise Costs
The increase in franchise costs in the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to an increase compensation expense and an increase in travel expenses. As a percentage of total royalty, marketing fees and franchise fee revenue, franchise costs increased to 45.2% in the three months ended November 30, 2023 from 38.5% in the three months ended November 30, 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 November 30, 2023.
Sales and Marketing
Sales and marketing costs decreased for the three months ended November 30, 2023 to $0.5 million compared to $0.6 million for the three months ended November 30, 2022. The decrease was primarily due to lower spending on advertising and collateral production.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to a decrease in professional fees related to the costs associated with the contested solicitation of proxies in 2022. As a percentage of total revenues, general and administrative expenses decreased to 17.3% in the three months ended November 30, 2023 compared to 23.6% in the three months ended November 30, 2022.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily the conversion of a franchise unit into a Company-owned unit in July 2023. Retail operating expenses, as a percentage of retail sales, increased from 45.7% in the three months ended November 30, 2022 to 51.2% in the three months ended November 30, 2023. This increase is primarily the result of opening costs for the new Company store in Corpus Christi, TX.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $36,000 in the three months ended November 30, 2023, an increase of 24.1% from $29,000 in the three months ended November 30, 2022. Depreciation and amortization included in cost of sales increased 17.5% to $188,000 in the three months ended November 30, 2023 compared to $160,000 in the three months ended November 30, 2022. This increase was the result of acquiring new equipment for production and the associated increase in depreciation expense.
Other Income
Net other income was $18,600 in the three months ended November 30, 2023 compared to net other income of $3,100 incurred in the three months ended November 30, 2022.
Income Tax Expense
During the three months ended November 30, 2023 and 2022, we did not incur any income tax benefit on a loss before income taxes of $717,000 and $196,000, respectively. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Nine Months Ended November 30, 2023 Compared to the Nine Months Ended November 30, 2022
Results Summary
Basic loss per share from continuing operations decreased from $(0.58) per share for the nine months ended November 30, 2022, to a net loss of $(0.51) per share for the nine months ended November 30, 2023. Revenues from continuing operations decreased 7.2% from $22.3 million for the nine months ended November 30, 2022, to $20.7 million for the nine months ended November 30, 2023. Loss from continuing operations increased from $2.9 million for the nine months ended November 30, 2022, to a loss from continuing operations of $3.3 million for the nine months ended November 30, 2023. Net loss from continuing operations decreased from $3.6 million for the nine months ended November 30, 2022, to a net loss of $3.2 million for the nine months ended November 30, 2023.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product sales | 15,589 | 17,251 | (1,661 | ) | (9.6 | )% | ||||||||||
Retail sales | 864 | 815 | 49 | 6.0 | % | |||||||||||
Franchise fees | 127 | 148 | (21 | ) | (14.1 | )% | ||||||||||
Royalty and marketing fees | 4,111 | 4,071 | 40 | 1.0 | % | |||||||||||
Total | 20,691 | 22,285 | (1,593 | ) | (7.2 | )% |
Durango Product Sales
The decrease in Durango Product sales for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022, was due to a 9.6%, or $1.6 million, decrease in shipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores decreased by 7.0%, or $1.0 million. Shipment of products to our outside omni-channel network decreased by $0.6 million or 25.3% during the nine months ending November 30, 2023, when compared to the nine months ended November 30, 2022.
Retail Sales
Retail sales at Company-owned stores increased 6.0% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022. This increase was primarily the result of the opening of a second company store in July 2023. This was partially offset by the sale of a Company-owned store in the prior year (which resulted in only one remaining company-owned store). Retail sales at our Company-owned store in Durango, CO increased 6.2% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees were approximately unchanged from the nine months ended November 30, 2022 to the nine months ended November 30, 2023. Same store sales at domestic franchise Rocky Mountain Chocolate locations decreased by 1.3% during the nine months ended November 30, 2023 when compared to the nine months ended November 30, 2022.
The decrease in franchise fee revenue for the three months ended November 30, 2023, compared to the three months ended November 30, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | 14,844 | 13,823 | 1,021 | 7.4 | % | |||||||||||
Cost of sales - retail | 316 | 320 | (4 | ) | (1.4 | )% | ||||||||||
Franchise costs | 1,870 | 1,344 | 525 | 39.1 | % | |||||||||||
Sales and marketing | 1,447 | 1,482 | (35 | ) | (2.4 | )% | ||||||||||
General and administrative | 4,952 | 7,723 | (2,771 | ) | (35.9 | )% | ||||||||||
Retail operating | 451 | 447 | 4 | 0.8 | % | |||||||||||
Total | 23,880 | 25,140 | (1,260 | ) | (5.0 | )% |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total | 1,294.3 | 3,922.7 | (2,628.4 | ) | (67.0 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 4.8 | % | 19.9 | % | (15.1 | )% | (75.9 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total | 7.9 | % | 21.7 | % | (13.8 | )% | (63.8 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Plus: depreciation and amortization | 541 | 480 | 61 | 12.6 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 1,287 | 3,908 | (2,621 | ) | (67.1 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 1,835 | 4,403 | (2,568 | ) | (58.3 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 8.3 | % | 22.7 | % | (14.4 | )% | (63.6 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 11.2 | % | 24.4 | % | (13.2 | )% | (54.2 | )% |
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 Durango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our Durango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Durango Product adjusted gross margin is equal to Durango Product gross margin plus depreciation and amortization expense. We believe adjusted gross margin and Durango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, Durango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and Durango 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 Durango Product adjusted gross margin rather than gross margin and Durango Product gross margin to make incremental pricing decisions. Adjusted gross margin and Durango Product adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider themit 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 increaseddecreased to 22.9%4.8% in the threenine months ended November 30, 2023 compared to 19.9% during the nine months ended November 30, 2022, compareddue primarily to 22.2%a 15.2% decrease in production volume, a 21.9% increase in overhead costs and an increase in other costs associated with hourly wage and raw material inflation realized in the threenine months ended November 30, 2021. This increase was due primarily2023 compared to an increase in prices partially offset by increased labor and material costs and expense associated with inventory obsolescence.the nine months ended November 30, 2022.
Retail gross margins were unchanged at 62.3%increased from 60.7% during the threenine months ended November 30, 2022 to 63.5% during the nine months ended November 30, 2023. The increase in retail gross margins was primarily the result of improved management of costs and 2021.expenses. This was the result of the hiring of a dedicated experienced general manager in our Durango, CO store early in 2023.
Franchise Costs
The increase in franchise costs in the threenine months ended November 30, 2022,2023 compared to the threenine months ended November 30, 2021,2022 was due primarily to an increase in franchise conventionprofessional fees, an increase in stock compensation expense and an increase in travel expenses in the three months ended November 30, 2022.expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 36.5%44.1% in the threenine months ended November 30, 2022,2023 from 30.7%31.9% in the threenine months ended November 30, 2021.2022. This increasedecrease as a percentage of royalty, marketing and franchise fees is primarily thea result of higher costs.franchise costs during the nine months ended November 30, 2023.
Sales and Marketing
The increase in salesSales and marketing costs were approximately unchanged for the threenine months ended November 30, 2022,2023, compared to the threenine months ended November 30, 2021, was primarily due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.2022.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, is primarily due to lower costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three months ended November 30, 2022, the Company incurred approximately $764,000 of costs associated with the contested solicitation of proxies, compared with $2.7 million of costs associated with a contested solicitation of proxies and associated severance costs during the three months ended November 30, 2021. This decrease was partially offset by an increase in legal expenses and salaries and wages in the three months ended November 30, 2022, compared with the three months ended November 30, 2021. As a percentage of total revenues, general and administrative expenses decreased to 22.3% in the three months ended November 30, 2022, compared to 45.4% in the three months ended November 30, 2021.
Retail Operating Expenses
Retail operating expenses were relatively unchanged during the three months ended November 30, 2022, compared to the three months ended November 30, 2021. Retail operating expenses, as a percentage of retail sales, decreased from 66.1% in the three months ended November 30, 2021, to 62.2% in the three months ended November 30, 2022. This decrease is primarily the result of higher retail sales.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $128,000 in the three months ended November 30, 2022, a decrease of 10.9% from $144,000 in the three months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the consolidated financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 3.1% to $160,000 in the three months ended November 30, 2022, compared to $155,000 in the three months ended November 30, 2021.
Other Income
Net interest income was $3,000 in the three months ended November 30, 2022, compared to net interest income of $2,200 incurred in the three months ended November 30, 2021.
Income Tax Expense (Benefit)
During the three months ended November 30, 2022, we did not incur any income tax benefit on a loss before income taxes of $212,000. This was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the three months ended November 30, 2021, was 24.5%. See Note 14 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.
Nine Months Ended November 30, 2022, Compared to the Nine Months Ended November 30, 2021
Results Summary
Basic earnings per share decreased from a net loss of $0.11 per share for the nine months ended November 30, 2021, to a net loss of $0.64 per share for the nine months ended November 30, 2022. Revenues increased 3.3% from $24.0 million for the nine months ended November 30, 2021, to $24.8 million for the nine months ended November 30, 2022. The loss from operations increased from a loss of $1.1 million for the nine months ended November 30, 2021, to a loss from operations of $2.6 million for the nine months ended November 30, 2022. Net loss increased from a net loss of $701,000 for the nine months ended November 30, 2021, to a net loss of $4.0 million for the nine months ended November 30, 2022.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory sales | $ | 17,250.8 | $ | 16,578.5 | $ | 672.3 | 4.1 | % | ||||||||
Retail sales | 2,267.9 | 2,208.1 | 59.8 | 2.7 | % | |||||||||||
Franchise fees | 180.0 | 165.0 | 15.0 | 9.1 | % | |||||||||||
Royalty and marketing fees | 5,128.9 | 5,075.8 | 53.1 | 1.0 | % | |||||||||||
Total | $ | 24,827.6 | $ | 24,027.4 | $ | 800.2 | 3.3 | % |
Factory Sales
The increase in factory sales for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021, was primarily due to an 8.0%, $1.1 million, increase in sales of product to our network of franchised and licensed retail stores partially offset by a 15.7%, $429,000, decrease in shipments of product to customers outside our network of franchised retail stores.
Retail Sales
Retail sales at Company-owned stores increased 2.7% during the nine months ended November 30, 2022 compared to the nine months ended November 30, 2021, primarily as a result of an increase in same-store sales at Company-owned locations. Same-store sales at all Company-owned locations increased 6.1% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021.
Royalties, Marketing Fees, and Franchise Fees
The slight increase in royalty and marketing fees for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was primarily due to an increase in same-store sales at domestic franchise frozen yogurt cafés. Same-store sales at all domestic franchise locations increased 3.8% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021, with same-store sales at the Company’s domestic franchise frozen yogurt cafés increasing 19.2% during the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021.
The increase in franchise fee revenue for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was the result of store closures and the acceleration of unrecognized franchise fee revenue, and more franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 13,823.2 | $ | 13,065.3 | $ | 757.9 | 5.8 | % | ||||||||
Cost of sales - retail | 848.8 | 754.1 | 94.7 | 12.6 | % | |||||||||||
Franchise costs | 1,569.8 | 1,747.4 | (177.6 | ) | (10.2 | )% | ||||||||||
Sales and marketing | 1,617.1 | 1,195.8 | 421.3 | 35.2 | % | |||||||||||
General and administrative | 7,810.6 | 6,575.0 | 1,235.6 | 18.8 | % | |||||||||||
Retail operating | 1,364.7 | 1,304.6 | 60.1 | 4.6 | % | |||||||||||
Total | $ | 27,034.2 | $ | 24,642.2 | $ | 2,392.0 | 9.7 | % |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross profit | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Retail gross profit | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total | $ | 4,846.7 | $ | 4,967.2 | $ | (120.5 | ) | (2.4 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross margin | 19.9 | % | 21.2 | % | (1.3 | )% | (6.2 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total | 24.8 | % | 26.4 | % | (1.6 | )% | (6.1 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Plus: depreciation and amortization | 480.5 | 464.8 | 15.7 | 3.4 | % | |||||||||||
Factory adjusted gross margin | 3,908.1 | 3,978.0 | (69.9 | ) | (1.8 | )% | ||||||||||
Retail gross margin | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 5,327.2 | $ | 5,432.0 | $ | (104.8 | ) | (1.9 | )% | |||||||
Factory adjusted gross margin | 22.7 | % | 24.0 | % | (1.3 | )% | (5.6 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 28.9 | % | (1.6 | )% | (5.6 | )% |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin, and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider them in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margins decreased to 19.9% in the nine months ended November 30, 2022, compared to a gross margin of 21.2% during the nine months ended November 30, 2021, due primarily to an increase in costs from wage and material inflation and the impacts of Employee Retention Credits recognized in the nine months ended November 30, 2021, with no comparable credits in the nine months ended November 30, 2022. These cost increases were partially offset by an increase in product prices. The Company recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits (“ERC”) in the nine months ended November 30, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 65.8% during the nine months ended November 30, 2021, to 62.6% during the nine months ended November 30, 2022. The decrease in retail gross margins was primarily the result of an increase in the costs of raw materials.
Franchise Costs
The decrease in franchise costs in the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to a decrease in professional fees, the result of litigation with our licensee in Canada incurred during the nine months ended November 30, 2021, with no comparable legal expense in the nine months ended November 30, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 29.6% in the nine months ended November 30, 2022, from 33.3% in the nine months ended November 30, 2021. This decrease as a percentage of royalty, marketing, and franchise fees is primarily the result of lower franchise costs.
Sales and Marketing
The increase in sales and marketing costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.
General and Administrative
The increase in general and administrative costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the nine months ended November 30, 2022, the Company incurred approximately $2.9 million of costs associated with the contested solicitation of proxies, compared with $1.7 million ofno costs associated with a contested solicitation of proxies during the nine months ended November 30, 2021. The2023. During the nine months ended November 30, 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.Officer, with no comparable costs incurred during the nine months ended November 30, 2023. Additionally, due to a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholdersduring the nine months ended November 30, 2022, the Company had become contingently liable for certain change in controlrecorded $859,000 of severance payments to Mr. Dudley if a triggering termination was to occur. Ascompensation as a result of Mr. Dudley’s retirementan executive’s departure last year with no comparable compensation costs in September 2022,G&A during the Company incurred $934,000 of associated severance costs.nine months ended November 30, 2023. As a percentage of total revenues, general and administrative expenses increaseddecreased to 31.5%23.9% in the nine months ended November 30, 2022,2023, compared to 27.4%34.7% in the nine months ended November 30, 2021.2022.
Retail Operating Expenses
The increasedecrease in retail operating expenses for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021,2022, was due primarily to an increasea change in salaries and wages, and utilities in our Company-owned stores in operation, the result of the sale of a Company-owned store in the prior year and cafés.the conversion of a franchise store into a Company owned store in July 2023. Retail operating expenses, as a percentage of retail sales, increaseddecreased from 59.1%39.3% in the nine months ended November 30, 2021,2022, to 60.2%36.5% in the nine months ended November 30, 2022.2023. This increasedecrease is primarily the result of higherlower retail costs.operating expenses.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $383,000$99,000 in the nine months ended November 30, 2022, a decrease2023, an increase of 13.0%13.7% from $440,000$87,000 in the nine months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives.2022. Depreciation and amortization included in cost of sales increased 3.4%12.7% from $465,000$480,000 in the nine months ended November 30, 2021,2022 to $480,000$541,000 in the nine months ended November 30, 2023. This increase was the result of acquiring new equipment for production and the associated increase to depreciation expense.
Other Income
Net other income was $44,000 in the nine months ended November 30, 2023, compared to other income of $10,000 during the nine months ended November 30, 2022. This increase was primarily the result of investmentan increase in equipment.interest income on our note receivable.
Other Income Tax Expense
Other income was $9,600 inDuring the nine months ended November 30, 2022, compared to other2023, we did not incur any income tax benefit on a loss before income taxes of $176,500 during the nine months ended November 30, 2021. Net interest income was $9,600 in the nine months ended November 30, 2022, compared to interest income of $9,300 during the nine months ended November 30, 2021.
The Company recognized a gain on insurance recovery of $167,100 during the nine months ended November 30, 2021, compared with no similar amounts recognized during the nine months ended November 30, 2022.
Income Tax Expense (Benefit)
$3.2 million. During the nine months ended November 30, 2022, we incurred income tax expense of $1.4 million$702,000 on a loss before income taxes of $2.6$2.9 million. This expense was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the nine months ended November 30, 2021, was 20.2%.assets. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Liquidity and Capital Resources
As of November 30, 2022,2023, working capital was $7.4$3.0 million, compared to $9.7$6.2 million as of February 28, 2022,2023, a decrease of $2.3$3.2 million. The decrease in working capital was primarily due to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders.operating activities.
Cash and cash equivalent balances decreased approximately $4.4$2.6 million to $3.2$2.1 million as of November 30, 2022,2023 compared to $7.6$4.7 million as of February 28, 2022.2023. This decrease in cash and cash equivalents was primarily due to fundingproceeds from the sale of a rabbi trust established for severance payments to our former Chief Executive OfficerU-Swirl assets more than offset by operating results and the resulting $1.3 million decrease in cash balancespurchase of property and an increase in inventory of $2.1 million.equipment. Our current ratio was 2.21.5 to 1 at November 30, 2022,2023 compared to 2.82.2 to 1 at February 28, 2022.2023. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During the nine months ended November 30, 2022,2023, we had a net loss of $4.0$2.5 million. Operating activities used cash of $3,583,418, with$2.5 million, primarily the principal adjustment to reconcileresult of the net income to net cash used by operating activities being deferred income taxes of $1,388,271, depreciation and amortization of $863,322, an increase in accounts payable of $1,976,869 and expense recordedNet loss for stock compensation of $471,530, mostly offset by an increase in inventory of $2,091,099, a decrease in accrued liabilities of $1,284,330 and an increase in accounts receivable of $1,171,146.the nine months ended November 30, 2023. During the comparable 20212022 period, we had a net loss of $700,908,$3.9 million, and cash used in operating activities provided cash of $857,048. The principal adjustment to reconcile the net income to net cash used by operating activities being an increase in accrued liabilities of $1,343,856, an increase in accounts payable of $1,079,671, depreciation and amortization of $904,972, and expense related to stock-based compensation of $709,210, partially offset by an increase in accounts receivable of $985,887 and an increase in inventory of $936,483.$3.6 million.
During the nine months ended November 30, 2022,2023, investing activities used cash of $787,824,$1.1 million, primarily due to the purchases of property and equipment of $810,732.$2.5 million. This was partially offset by cash provided by discontinued operation (the result of the sale of U-Swirl assets) of $1.4 million. In comparison, investing activities used cash of $407,457$0.8 million during the nine months ended November 30, 2021,2022, primarily due to the purchasespurchase of property and equipment of $704,462 partially offset by proceeds from insurance recovery of $206,336.equipment.
DuringWe borrowed $1.0 million on our line of credit during the nine months endedquarter which provided cash from financing activities.
Revolving Line of Credit
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $3.0 million was available for borrowing (subject to certain borrowing-based limitations) as of November 30, 2022, there2023 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.68% at November 30, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.
As of November 30, 2023 we were nonot in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was 1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of November 30, 2023 and as of the date of this Quarterly Report, we had enough cash flows from financing activities. In comparison, financing activities used cash of $61,276on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the nine months ended November 30, 2021, duefuture, however, we may not have sufficient funds available to make the redemptionpayments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the shareholder rights plan.Credit Agreement.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company believesis exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities.
Significant Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that cash flow from operations will be sufficientaffect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to fund capital expendituresthe consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and working capital requirementsin the Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for FYthe fiscal year ended February 28, 2023 describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
As of November 30, 2022,2023, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
As of November 30, 2022,2023, we had purchase obligations of approximately $36,000.$229,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.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 the 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 products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide the information required by this Item.
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 Exchange 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 Securities and Exchange Commission’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.
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 Reports on Form 10-Q for the three months ended May 31, 2023 and six months ended August 31,2023, management concluded that our internal control over financial reporting was not effective as of February 28, 2023, May 31, 2023, and August 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.
During the previous fiscal quarter, 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 arewere not effective as of November 30, 2022.2023.
Changes in Internal Control over Financial Reporting
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, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION |
Legal Proceedings |
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
Item 1.Legal ProceedingsWe may, from time to time, become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially susceptible to litigation, 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 an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
The information set forth in Note 1 to the consolidated financial statements appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q under the caption “Subsequent Events” is incorporated by reference herein.
Risk Factors |
In addition to the other information set forth in this Quarterly Report, on Form 10-Q, you should carefully consider the factors discussed in Part 1, “ItemItem 1A. Risk“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022,2023 (our “Annual Report”), filed with the Securities and Exchange Commission on May 27, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022, which could materially and adversely affect our business, financial condition and results of operations.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, 2022, as amended by Amendment No. 1 on Form 10-K/A.Report.
Item 2.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Defaults Upon Senior Securities |
None.
Mine Safety Disclosures |
Not Applicable.
Other InformationItem 5.Other Information
On December 14, 2022, the Company filed a Form 8-K, which is incorporated herein by reference, disclosing Gabriel Arreaga’s December 8, 2022, notification to the Board of Directors of the Company (the “Board”) of his decision to resign from the Board effective upon the earlier of (a) the nomination of a new chairperson of the Compensation Committee of the Board, (b) the nomination of a new member to the Board, or (c) the conclusion of the Company’s current fiscal year (February 28, 2023). On January 11, 2023, the Board nominated and elected Jeffrey R. Geygan as the new chairperson of the Compensation Committee of the Board. Consequently, Mr. Arreaga’s resignation as a member of the Board, as the chairperson of the Compensation Committee of the Board and as a member of the Audit Committee of the Board was effective on January 11, 2023.None.
Exhibits |
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32.1* |
101.INS |
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(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 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: January | /s/ Allen Arroyo | ||
Allen Arroyo, Chief Financial Officer |
2022
2021
Change
Change
2023
2022
Change
Change
Factory sales
Durango Product sales
Retail sales
Franchise fees
Royalty and marketing fees
Total
FactoryDurango Product Sales
The increasedecrease in factoryDurango Product sales for the three months ended November 30, 2022,2023, compared to the three months ended November 30, 2021,2022, was primarily due to a 13.0%16.8%, $661,000, increaseor $1.2 million, decrease in salesshipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores and a 19.1%decreased by 15.7%, $248,000, increase in shipmentsor $0.9 million. Shipment of product to customers outside our network of franchised retail stores. The increase in sales of productproducts to our outside omni-channel network of franchised and licensed retail stores was primarily the result of a higher sell price and higher same-store pounds purchased. Same-store pounds purchaseddecreased by domestic franchise and licensed locations increased 5.7%$0.3 million or 20.6% during the three months ended November 30, 2022,2023, when compared to the three months ended November 30, 2021.2022.
Retail Sales
Retail sales at Company-owned stores increased 6.7%20.6% during the three months ended November 30, 2022,2023 compared to the three months ended November 30, 2021, as a2022. This increase was the result of an increasethe opening of a second Company-owned store in Company-owned same store sales. Same storeJuly 2023. Additionally, retail sales at our Company-owned store in Durango, Colorado, which was open in all Company-owned locations increased 12.9%periods, decreased by 1.1% during the three months ended November 30, 2022, when2023 compared to the three months ended November 30, 2021. This increase was partially offset by a decrease in the average number of Company-owned stores in operation resulting from the sale of a Company-owned location to a franchisee.2022.
Royalties, Marketing Fees, and Franchise Fees
The increase in royaltyroyalties and marketing fees from the three months ended November 30, 2021,2022 to the three months ended November 30, 2022,2023 was primarily due to an increase in royalty revenue as a result of the Company’s purchase based royalty structure and an increase in same store sales at domestic Rocky Mountain Chocolate Factory locations and at U-Swirl Frozen Yogurt cafés. Same-storelocations. Same store sales at domestic franchise Rocky Mountain Chocolate Factory locations increased by 3.0% and same-store sales at U-Swirl Frozen Yogurt cafés increased by 14.0%2.1% during the three months ended November 30, 2022,2023 when compared to the three months ended November 30, 2021.2022.
FranchiseThe decrease in franchise fee revenue for the three months ended November 30, 2022,2023, compared to the three months ended November 30, 2021,2022 was relatively unchanged.the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 5,613.7 | $ | 4,960.9 | $ | 652.8 | 13.2 | % | ||||||||
Cost of sales - retail | 255.9 | 239.8 | 16.1 | 6.7 | % | |||||||||||
Franchise costs | 551.5 | 458.5 | 93.0 | 20.3 | % | |||||||||||
Sales and marketing | 607.2 | 377.2 | 230.0 | 61.0 | % | |||||||||||
General and administrative | 2,111.7 | 3,865.9 | (1,754.2 | ) | (45.4 | )% | ||||||||||
Retail operating | 422.4 | 420.3 | 2.1 | 0.5 | % | |||||||||||
Total | $ | 9,562.4 | $ | 10,322.6 | $ | (760.2 | ) | (7.4 | )% |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | 5,631 | 5,614 | 17 | 0.3 | % | |||||||||||
Cost of sales - retail | 138 | 114 | 24 | 21.4 | % | |||||||||||
Franchise costs | 577 | 477 | 100 | 21.0 | % | |||||||||||
Sales and marketing | 532 | 573 | (41 | ) | (7.2 | )% | ||||||||||
General and administrative | 1,333 | 2,081 | (747 | ) | (35.9 | )% | ||||||||||
Retail operating | 186 | 138 | 48 | 35.1 | % | |||||||||||
Total | 8,397 | 8,995 | (599 | ) | (6.7 | )% |
Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross profit | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Retail gross profit | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total | $ | 2,093.9 | $ | 1,811.7 | $ | 282.2 | 15.6 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total | 653 | 1,859 | (1,206 | ) | (64.9 | )% |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 22.9 | % | 22.2 | % | 0.7 | % | 3.2 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total | 26.3 | % | 25.8 | % | 0.5 | % | 1.9 | % |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 7.1 | % | 22.9 | % | (15.8 | )% | (69.0 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total | 10.2 | % | 24.5 | % | (14.3 | )% | (58.4 | )% |
Adjusted Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Plus: depreciation and amortization | 160.0 | 155.2 | 4.8 | 3.1 | % | |||||||||||
Factory adjusted gross margin | 1,831.2 | 1,570.7 | 260.5 | 16.6 | % | |||||||||||
Retail gross margin | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total Adjusted Gross Margin | $ | 2,253.9 | $ | 1,966.9 | $ | 287.0 | 14.6 | % | ||||||||
Factory adjusted gross margin | 25.1 | % | 24.6 | % | 0.5 | % | 2.0 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total Adjusted Gross Margin | 28.3 | % | 28.0 | % | 0.3 | % | 1.1 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Plus: depreciation and amortization | 188 | 160 | 28 | 17.2 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 615 | 1,831 | (1,216 | ) | (66.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 841 | 2,019 | (1,179 | ) | (58.4 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 10.2 | % | 25.1 | % | (14.9 | )% | (59.4 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 13.1 | % | 26.6 | % | (13.5 | )% | (50.8 | )% |
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 plus 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 should not be considered in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary component of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and Durango Product adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and Durango Product gross margin.
Cost of Sales and Gross Margin
Durango Product gross margins decreased to 7.1% in the three months ended November 30, 2023 compared to 22.9% during the three months ended November 30, 2022, due primarily to a 20.7% increase in overhead costs, and an increase in other costs from hourly wage and raw material inflation realized in the three months ended November 30, 2023 compared to the three months ended November 30, 2022.
Retail gross margins were relatively flat for the three months ended November 30, 2023 compared to November 30, 2022.
Franchise Costs
The increase in franchise costs in the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to an increase compensation expense and an increase in travel expenses. As a percentage of total royalty, marketing fees and franchise fee revenue, franchise costs increased to 45.2% in the three months ended November 30, 2023 from 38.5% in the three months ended November 30, 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 November 30, 2023.
Sales and Marketing
Sales and marketing costs decreased for the three months ended November 30, 2023 to $0.5 million compared to $0.6 million for the three months ended November 30, 2022. The decrease was primarily due to lower spending on advertising and collateral production.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to a decrease in professional fees related to the costs associated with the contested solicitation of proxies in 2022. As a percentage of total revenues, general and administrative expenses decreased to 17.3% in the three months ended November 30, 2023 compared to 23.6% in the three months ended November 30, 2022.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily the conversion of a franchise unit into a Company-owned unit in July 2023. Retail operating expenses, as a percentage of retail sales, increased from 45.7% in the three months ended November 30, 2022 to 51.2% in the three months ended November 30, 2023. This increase is primarily the result of opening costs for the new Company store in Corpus Christi, TX.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $36,000 in the three months ended November 30, 2023, an increase of 24.1% from $29,000 in the three months ended November 30, 2022. Depreciation and amortization included in cost of sales increased 17.5% to $188,000 in the three months ended November 30, 2023 compared to $160,000 in the three months ended November 30, 2022. This increase was the result of acquiring new equipment for production and the associated increase in depreciation expense.
Other Income
Net other income was $18,600 in the three months ended November 30, 2023 compared to net other income of $3,100 incurred in the three months ended November 30, 2022.
Income Tax Expense
During the three months ended November 30, 2023 and 2022, we did not incur any income tax benefit on a loss before income taxes of $717,000 and $196,000, respectively. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Nine Months Ended November 30, 2023 Compared to the Nine Months Ended November 30, 2022
Results Summary
Basic loss per share from continuing operations decreased from $(0.58) per share for the nine months ended November 30, 2022, to a net loss of $(0.51) per share for the nine months ended November 30, 2023. Revenues from continuing operations decreased 7.2% from $22.3 million for the nine months ended November 30, 2022, to $20.7 million for the nine months ended November 30, 2023. Loss from continuing operations increased from $2.9 million for the nine months ended November 30, 2022, to a loss from continuing operations of $3.3 million for the nine months ended November 30, 2023. Net loss from continuing operations decreased from $3.6 million for the nine months ended November 30, 2022, to a net loss of $3.2 million for the nine months ended November 30, 2023.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product sales | 15,589 | 17,251 | (1,661 | ) | (9.6 | )% | ||||||||||
Retail sales | 864 | 815 | 49 | 6.0 | % | |||||||||||
Franchise fees | 127 | 148 | (21 | ) | (14.1 | )% | ||||||||||
Royalty and marketing fees | 4,111 | 4,071 | 40 | 1.0 | % | |||||||||||
Total | 20,691 | 22,285 | (1,593 | ) | (7.2 | )% |
Durango Product Sales
The decrease in Durango Product sales for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022, was due to a 9.6%, or $1.6 million, decrease in shipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores decreased by 7.0%, or $1.0 million. Shipment of products to our outside omni-channel network decreased by $0.6 million or 25.3% during the nine months ending November 30, 2023, when compared to the nine months ended November 30, 2022.
Retail Sales
Retail sales at Company-owned stores increased 6.0% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022. This increase was primarily the result of the opening of a second company store in July 2023. This was partially offset by the sale of a Company-owned store in the prior year (which resulted in only one remaining company-owned store). Retail sales at our Company-owned store in Durango, CO increased 6.2% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees were approximately unchanged from the nine months ended November 30, 2022 to the nine months ended November 30, 2023. Same store sales at domestic franchise Rocky Mountain Chocolate locations decreased by 1.3% during the nine months ended November 30, 2023 when compared to the nine months ended November 30, 2022.
The decrease in franchise fee revenue for the three months ended November 30, 2023, compared to the three months ended November 30, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | 14,844 | 13,823 | 1,021 | 7.4 | % | |||||||||||
Cost of sales - retail | 316 | 320 | (4 | ) | (1.4 | )% | ||||||||||
Franchise costs | 1,870 | 1,344 | 525 | 39.1 | % | |||||||||||
Sales and marketing | 1,447 | 1,482 | (35 | ) | (2.4 | )% | ||||||||||
General and administrative | 4,952 | 7,723 | (2,771 | ) | (35.9 | )% | ||||||||||
Retail operating | 451 | 447 | 4 | 0.8 | % | |||||||||||
Total | 23,880 | 25,140 | (1,260 | ) | (5.0 | )% |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total | 1,294.3 | 3,922.7 | (2,628.4 | ) | (67.0 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 4.8 | % | 19.9 | % | (15.1 | )% | (75.9 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total | 7.9 | % | 21.7 | % | (13.8 | )% | (63.8 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Plus: depreciation and amortization | 541 | 480 | 61 | 12.6 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 1,287 | 3,908 | (2,621 | ) | (67.1 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 1,835 | 4,403 | (2,568 | ) | (58.3 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 8.3 | % | 22.7 | % | (14.4 | )% | (63.6 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 11.2 | % | 24.4 | % | (13.2 | )% | (54.2 | )% |
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 Durango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our Durango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Durango Product adjusted gross margin is equal to Durango Product gross margin plus depreciation and amortization expense. We believe adjusted gross margin and Durango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, Durango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and Durango 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 Durango Product adjusted gross margin rather than gross margin and Durango Product gross margin to make incremental pricing decisions. Adjusted gross margin and Durango Product adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider themit 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 increaseddecreased to 22.9%4.8% in the threenine months ended November 30, 2023 compared to 19.9% during the nine months ended November 30, 2022, compareddue primarily to 22.2%a 15.2% decrease in production volume, a 21.9% increase in overhead costs and an increase in other costs associated with hourly wage and raw material inflation realized in the threenine months ended November 30, 2021. This increase was due primarily2023 compared to an increase in prices partially offset by increased labor and material costs and expense associated with inventory obsolescence.the nine months ended November 30, 2022.
Retail gross margins were unchanged at 62.3%increased from 60.7% during the threenine months ended November 30, 2022 to 63.5% during the nine months ended November 30, 2023. The increase in retail gross margins was primarily the result of improved management of costs and 2021.expenses. This was the result of the hiring of a dedicated experienced general manager in our Durango, CO store early in 2023.
Franchise Costs
The increase in franchise costs in the threenine months ended November 30, 2022,2023 compared to the threenine months ended November 30, 2021,2022 was due primarily to an increase in franchise conventionprofessional fees, an increase in stock compensation expense and an increase in travel expenses in the three months ended November 30, 2022.expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 36.5%44.1% in the threenine months ended November 30, 2022,2023 from 30.7%31.9% in the threenine months ended November 30, 2021.2022. This increasedecrease as a percentage of royalty, marketing and franchise fees is primarily thea result of higher costs.franchise costs during the nine months ended November 30, 2023.
Sales and Marketing
The increase in salesSales and marketing costs were approximately unchanged for the threenine months ended November 30, 2022,2023, compared to the threenine months ended November 30, 2021, was primarily due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.2022.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, is primarily due to lower costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three months ended November 30, 2022, the Company incurred approximately $764,000 of costs associated with the contested solicitation of proxies, compared with $2.7 million of costs associated with a contested solicitation of proxies and associated severance costs during the three months ended November 30, 2021. This decrease was partially offset by an increase in legal expenses and salaries and wages in the three months ended November 30, 2022, compared with the three months ended November 30, 2021. As a percentage of total revenues, general and administrative expenses decreased to 22.3% in the three months ended November 30, 2022, compared to 45.4% in the three months ended November 30, 2021.
Retail Operating Expenses
Retail operating expenses were relatively unchanged during the three months ended November 30, 2022, compared to the three months ended November 30, 2021. Retail operating expenses, as a percentage of retail sales, decreased from 66.1% in the three months ended November 30, 2021, to 62.2% in the three months ended November 30, 2022. This decrease is primarily the result of higher retail sales.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $128,000 in the three months ended November 30, 2022, a decrease of 10.9% from $144,000 in the three months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the consolidated financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 3.1% to $160,000 in the three months ended November 30, 2022, compared to $155,000 in the three months ended November 30, 2021.
Other Income
Net interest income was $3,000 in the three months ended November 30, 2022, compared to net interest income of $2,200 incurred in the three months ended November 30, 2021.
Income Tax Expense (Benefit)
During the three months ended November 30, 2022, we did not incur any income tax benefit on a loss before income taxes of $212,000. This was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the three months ended November 30, 2021, was 24.5%. See Note 14 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.
Nine Months Ended November 30, 2022, Compared to the Nine Months Ended November 30, 2021
Results Summary
Basic earnings per share decreased from a net loss of $0.11 per share for the nine months ended November 30, 2021, to a net loss of $0.64 per share for the nine months ended November 30, 2022. Revenues increased 3.3% from $24.0 million for the nine months ended November 30, 2021, to $24.8 million for the nine months ended November 30, 2022. The loss from operations increased from a loss of $1.1 million for the nine months ended November 30, 2021, to a loss from operations of $2.6 million for the nine months ended November 30, 2022. Net loss increased from a net loss of $701,000 for the nine months ended November 30, 2021, to a net loss of $4.0 million for the nine months ended November 30, 2022.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory sales | $ | 17,250.8 | $ | 16,578.5 | $ | 672.3 | 4.1 | % | ||||||||
Retail sales | 2,267.9 | 2,208.1 | 59.8 | 2.7 | % | |||||||||||
Franchise fees | 180.0 | 165.0 | 15.0 | 9.1 | % | |||||||||||
Royalty and marketing fees | 5,128.9 | 5,075.8 | 53.1 | 1.0 | % | |||||||||||
Total | $ | 24,827.6 | $ | 24,027.4 | $ | 800.2 | 3.3 | % |
Factory Sales
The increase in factory sales for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021, was primarily due to an 8.0%, $1.1 million, increase in sales of product to our network of franchised and licensed retail stores partially offset by a 15.7%, $429,000, decrease in shipments of product to customers outside our network of franchised retail stores.
Retail Sales
Retail sales at Company-owned stores increased 2.7% during the nine months ended November 30, 2022 compared to the nine months ended November 30, 2021, primarily as a result of an increase in same-store sales at Company-owned locations. Same-store sales at all Company-owned locations increased 6.1% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021.
Royalties, Marketing Fees, and Franchise Fees
The slight increase in royalty and marketing fees for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was primarily due to an increase in same-store sales at domestic franchise frozen yogurt cafés. Same-store sales at all domestic franchise locations increased 3.8% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021, with same-store sales at the Company’s domestic franchise frozen yogurt cafés increasing 19.2% during the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021.
The increase in franchise fee revenue for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was the result of store closures and the acceleration of unrecognized franchise fee revenue, and more franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 13,823.2 | $ | 13,065.3 | $ | 757.9 | 5.8 | % | ||||||||
Cost of sales - retail | 848.8 | 754.1 | 94.7 | 12.6 | % | |||||||||||
Franchise costs | 1,569.8 | 1,747.4 | (177.6 | ) | (10.2 | )% | ||||||||||
Sales and marketing | 1,617.1 | 1,195.8 | 421.3 | 35.2 | % | |||||||||||
General and administrative | 7,810.6 | 6,575.0 | 1,235.6 | 18.8 | % | |||||||||||
Retail operating | 1,364.7 | 1,304.6 | 60.1 | 4.6 | % | |||||||||||
Total | $ | 27,034.2 | $ | 24,642.2 | $ | 2,392.0 | 9.7 | % |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross profit | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Retail gross profit | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total | $ | 4,846.7 | $ | 4,967.2 | $ | (120.5 | ) | (2.4 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross margin | 19.9 | % | 21.2 | % | (1.3 | )% | (6.2 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total | 24.8 | % | 26.4 | % | (1.6 | )% | (6.1 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Plus: depreciation and amortization | 480.5 | 464.8 | 15.7 | 3.4 | % | |||||||||||
Factory adjusted gross margin | 3,908.1 | 3,978.0 | (69.9 | ) | (1.8 | )% | ||||||||||
Retail gross margin | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 5,327.2 | $ | 5,432.0 | $ | (104.8 | ) | (1.9 | )% | |||||||
Factory adjusted gross margin | 22.7 | % | 24.0 | % | (1.3 | )% | (5.6 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 28.9 | % | (1.6 | )% | (5.6 | )% |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin, and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider them in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margins decreased to 19.9% in the nine months ended November 30, 2022, compared to a gross margin of 21.2% during the nine months ended November 30, 2021, due primarily to an increase in costs from wage and material inflation and the impacts of Employee Retention Credits recognized in the nine months ended November 30, 2021, with no comparable credits in the nine months ended November 30, 2022. These cost increases were partially offset by an increase in product prices. The Company recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits (“ERC”) in the nine months ended November 30, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 65.8% during the nine months ended November 30, 2021, to 62.6% during the nine months ended November 30, 2022. The decrease in retail gross margins was primarily the result of an increase in the costs of raw materials.
Franchise Costs
The decrease in franchise costs in the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to a decrease in professional fees, the result of litigation with our licensee in Canada incurred during the nine months ended November 30, 2021, with no comparable legal expense in the nine months ended November 30, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 29.6% in the nine months ended November 30, 2022, from 33.3% in the nine months ended November 30, 2021. This decrease as a percentage of royalty, marketing, and franchise fees is primarily the result of lower franchise costs.
Sales and Marketing
The increase in sales and marketing costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.
General and Administrative
The increase in general and administrative costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the nine months ended November 30, 2022, the Company incurred approximately $2.9 million of costs associated with the contested solicitation of proxies, compared with $1.7 million ofno costs associated with a contested solicitation of proxies during the nine months ended November 30, 2021. The2023. During the nine months ended November 30, 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.Officer, with no comparable costs incurred during the nine months ended November 30, 2023. Additionally, due to a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholdersduring the nine months ended November 30, 2022, the Company had become contingently liable for certain change in controlrecorded $859,000 of severance payments to Mr. Dudley if a triggering termination was to occur. Ascompensation as a result of Mr. Dudley’s retirementan executive’s departure last year with no comparable compensation costs in September 2022,G&A during the Company incurred $934,000 of associated severance costs.nine months ended November 30, 2023. As a percentage of total revenues, general and administrative expenses increaseddecreased to 31.5%23.9% in the nine months ended November 30, 2022,2023, compared to 27.4%34.7% in the nine months ended November 30, 2021.2022.
Retail Operating Expenses
The increasedecrease in retail operating expenses for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021,2022, was due primarily to an increasea change in salaries and wages, and utilities in our Company-owned stores in operation, the result of the sale of a Company-owned store in the prior year and cafés.the conversion of a franchise store into a Company owned store in July 2023. Retail operating expenses, as a percentage of retail sales, increaseddecreased from 59.1%39.3% in the nine months ended November 30, 2021,2022, to 60.2%36.5% in the nine months ended November 30, 2022.2023. This increasedecrease is primarily the result of higherlower retail costs.operating expenses.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $383,000$99,000 in the nine months ended November 30, 2022, a decrease2023, an increase of 13.0%13.7% from $440,000$87,000 in the nine months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives.2022. Depreciation and amortization included in cost of sales increased 3.4%12.7% from $465,000$480,000 in the nine months ended November 30, 2021,2022 to $480,000$541,000 in the nine months ended November 30, 2023. This increase was the result of acquiring new equipment for production and the associated increase to depreciation expense.
Other Income
Net other income was $44,000 in the nine months ended November 30, 2023, compared to other income of $10,000 during the nine months ended November 30, 2022. This increase was primarily the result of investmentan increase in equipment.interest income on our note receivable.
Other Income Tax Expense
Other income was $9,600 inDuring the nine months ended November 30, 2022, compared to other2023, we did not incur any income tax benefit on a loss before income taxes of $176,500 during the nine months ended November 30, 2021. Net interest income was $9,600 in the nine months ended November 30, 2022, compared to interest income of $9,300 during the nine months ended November 30, 2021.
The Company recognized a gain on insurance recovery of $167,100 during the nine months ended November 30, 2021, compared with no similar amounts recognized during the nine months ended November 30, 2022.
Income Tax Expense (Benefit)
$3.2 million. During the nine months ended November 30, 2022, we incurred income tax expense of $1.4 million$702,000 on a loss before income taxes of $2.6$2.9 million. This expense was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the nine months ended November 30, 2021, was 20.2%.assets. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Liquidity and Capital Resources
As of November 30, 2022,2023, working capital was $7.4$3.0 million, compared to $9.7$6.2 million as of February 28, 2022,2023, a decrease of $2.3$3.2 million. The decrease in working capital was primarily due to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders.operating activities.
Cash and cash equivalent balances decreased approximately $4.4$2.6 million to $3.2$2.1 million as of November 30, 2022,2023 compared to $7.6$4.7 million as of February 28, 2022.2023. This decrease in cash and cash equivalents was primarily due to fundingproceeds from the sale of a rabbi trust established for severance payments to our former Chief Executive OfficerU-Swirl assets more than offset by operating results and the resulting $1.3 million decrease in cash balancespurchase of property and an increase in inventory of $2.1 million.equipment. Our current ratio was 2.21.5 to 1 at November 30, 2022,2023 compared to 2.82.2 to 1 at February 28, 2022.2023. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During the nine months ended November 30, 2022,2023, we had a net loss of $4.0$2.5 million. Operating activities used cash of $3,583,418, with$2.5 million, primarily the principal adjustment to reconcileresult of the net income to net cash used by operating activities being deferred income taxes of $1,388,271, depreciation and amortization of $863,322, an increase in accounts payable of $1,976,869 and expense recordedNet loss for stock compensation of $471,530, mostly offset by an increase in inventory of $2,091,099, a decrease in accrued liabilities of $1,284,330 and an increase in accounts receivable of $1,171,146.the nine months ended November 30, 2023. During the comparable 20212022 period, we had a net loss of $700,908,$3.9 million, and cash used in operating activities provided cash of $857,048. The principal adjustment to reconcile the net income to net cash used by operating activities being an increase in accrued liabilities of $1,343,856, an increase in accounts payable of $1,079,671, depreciation and amortization of $904,972, and expense related to stock-based compensation of $709,210, partially offset by an increase in accounts receivable of $985,887 and an increase in inventory of $936,483.$3.6 million.
During the nine months ended November 30, 2022,2023, investing activities used cash of $787,824,$1.1 million, primarily due to the purchases of property and equipment of $810,732.$2.5 million. This was partially offset by cash provided by discontinued operation (the result of the sale of U-Swirl assets) of $1.4 million. In comparison, investing activities used cash of $407,457$0.8 million during the nine months ended November 30, 2021,2022, primarily due to the purchasespurchase of property and equipment of $704,462 partially offset by proceeds from insurance recovery of $206,336.equipment.
DuringWe borrowed $1.0 million on our line of credit during the nine months endedquarter which provided cash from financing activities.
Revolving Line of Credit
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $3.0 million was available for borrowing (subject to certain borrowing-based limitations) as of November 30, 2022, there2023 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.68% at November 30, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.
As of November 30, 2023 we were nonot in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was 1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of November 30, 2023 and as of the date of this Quarterly Report, we had enough cash flows from financing activities. In comparison, financing activities used cash of $61,276on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the nine months ended November 30, 2021, duefuture, however, we may not have sufficient funds available to make the redemptionpayments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the shareholder rights plan.Credit Agreement.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company believesis exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities.
Significant Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that cash flow from operations will be sufficientaffect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to fund capital expendituresthe consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and working capital requirementsin the Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for FYthe fiscal year ended February 28, 2023 describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
As of November 30, 2022,2023, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
As of November 30, 2022,2023, we had purchase obligations of approximately $36,000.$229,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.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 the 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 products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide the information required by this Item.
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 Exchange 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 Securities and Exchange Commission’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.
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 Reports on Form 10-Q for the three months ended May 31, 2023 and six months ended August 31,2023, management concluded that our internal control over financial reporting was not effective as of February 28, 2023, May 31, 2023, and August 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.
During the previous fiscal quarter, 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 arewere not effective as of November 30, 2022.2023.
Changes in Internal Control over Financial Reporting
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, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION |
Legal Proceedings |
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
Item 1.Legal ProceedingsWe may, from time to time, become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially susceptible to litigation, 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 an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
The information set forth in Note 1 to the consolidated financial statements appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q under the caption “Subsequent Events” is incorporated by reference herein.
Risk Factors |
In addition to the other information set forth in this Quarterly Report, on Form 10-Q, you should carefully consider the factors discussed in Part 1, “ItemItem 1A. Risk“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022,2023 (our “Annual Report”), filed with the Securities and Exchange Commission on May 27, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022, which could materially and adversely affect our business, financial condition and results of operations.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, 2022, as amended by Amendment No. 1 on Form 10-K/A.Report.
Item 2.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Defaults Upon Senior Securities |
None.
Mine Safety Disclosures |
Not Applicable.
Other InformationItem 5.Other Information
On December 14, 2022, the Company filed a Form 8-K, which is incorporated herein by reference, disclosing Gabriel Arreaga’s December 8, 2022, notification to the Board of Directors of the Company (the “Board”) of his decision to resign from the Board effective upon the earlier of (a) the nomination of a new chairperson of the Compensation Committee of the Board, (b) the nomination of a new member to the Board, or (c) the conclusion of the Company’s current fiscal year (February 28, 2023). On January 11, 2023, the Board nominated and elected Jeffrey R. Geygan as the new chairperson of the Compensation Committee of the Board. Consequently, Mr. Arreaga’s resignation as a member of the Board, as the chairperson of the Compensation Committee of the Board and as a member of the Audit Committee of the Board was effective on January 11, 2023.None.
Exhibits |
3.1 |
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10.1 |
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32.1* |
101.INS |
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101.SCH |
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101.CAL |
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101.DEF |
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101.LAB |
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101.PRE |
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104 |
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(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 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: January | /s/ Allen Arroyo | ||
Allen Arroyo, Chief Financial Officer |
2022
2021
Change
Change
2023
2022
Change
Change
Cost of sales - factory
Cost of sales - Durango Product
Cost of sales - retail
Franchise costs
Sales and marketing
General and administrative
Retail operating
Total
Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross profit | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Retail gross profit | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total | $ | 2,093.9 | $ | 1,811.7 | $ | 282.2 | 15.6 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total | 653 | 1,859 | (1,206 | ) | (64.9 | )% |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 22.9 | % | 22.2 | % | 0.7 | % | 3.2 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total | 26.3 | % | 25.8 | % | 0.5 | % | 1.9 | % |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 7.1 | % | 22.9 | % | (15.8 | )% | (69.0 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total | 10.2 | % | 24.5 | % | (14.3 | )% | (58.4 | )% |
Adjusted Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Plus: depreciation and amortization | 160.0 | 155.2 | 4.8 | 3.1 | % | |||||||||||
Factory adjusted gross margin | 1,831.2 | 1,570.7 | 260.5 | 16.6 | % | |||||||||||
Retail gross margin | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total Adjusted Gross Margin | $ | 2,253.9 | $ | 1,966.9 | $ | 287.0 | 14.6 | % | ||||||||
Factory adjusted gross margin | 25.1 | % | 24.6 | % | 0.5 | % | 2.0 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total Adjusted Gross Margin | 28.3 | % | 28.0 | % | 0.3 | % | 1.1 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Plus: depreciation and amortization | 188 | 160 | 28 | 17.2 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 615 | 1,831 | (1,216 | ) | (66.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 841 | 2,019 | (1,179 | ) | (58.4 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 10.2 | % | 25.1 | % | (14.9 | )% | (59.4 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 13.1 | % | 26.6 | % | (13.5 | )% | (50.8 | )% |
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 plus 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 should not be considered in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary component of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and Durango Product adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and Durango Product gross margin.
Cost of Sales and Gross Margin
Durango Product gross margins decreased to 7.1% in the three months ended November 30, 2023 compared to 22.9% during the three months ended November 30, 2022, due primarily to a 20.7% increase in overhead costs, and an increase in other costs from hourly wage and raw material inflation realized in the three months ended November 30, 2023 compared to the three months ended November 30, 2022.
Retail gross margins were relatively flat for the three months ended November 30, 2023 compared to November 30, 2022.
Franchise Costs
The increase in franchise costs in the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to an increase compensation expense and an increase in travel expenses. As a percentage of total royalty, marketing fees and franchise fee revenue, franchise costs increased to 45.2% in the three months ended November 30, 2023 from 38.5% in the three months ended November 30, 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 November 30, 2023.
Sales and Marketing
Sales and marketing costs decreased for the three months ended November 30, 2023 to $0.5 million compared to $0.6 million for the three months ended November 30, 2022. The decrease was primarily due to lower spending on advertising and collateral production.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to a decrease in professional fees related to the costs associated with the contested solicitation of proxies in 2022. As a percentage of total revenues, general and administrative expenses decreased to 17.3% in the three months ended November 30, 2023 compared to 23.6% in the three months ended November 30, 2022.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily the conversion of a franchise unit into a Company-owned unit in July 2023. Retail operating expenses, as a percentage of retail sales, increased from 45.7% in the three months ended November 30, 2022 to 51.2% in the three months ended November 30, 2023. This increase is primarily the result of opening costs for the new Company store in Corpus Christi, TX.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $36,000 in the three months ended November 30, 2023, an increase of 24.1% from $29,000 in the three months ended November 30, 2022. Depreciation and amortization included in cost of sales increased 17.5% to $188,000 in the three months ended November 30, 2023 compared to $160,000 in the three months ended November 30, 2022. This increase was the result of acquiring new equipment for production and the associated increase in depreciation expense.
Other Income
Net other income was $18,600 in the three months ended November 30, 2023 compared to net other income of $3,100 incurred in the three months ended November 30, 2022.
Income Tax Expense
During the three months ended November 30, 2023 and 2022, we did not incur any income tax benefit on a loss before income taxes of $717,000 and $196,000, respectively. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Nine Months Ended November 30, 2023 Compared to the Nine Months Ended November 30, 2022
Results Summary
Basic loss per share from continuing operations decreased from $(0.58) per share for the nine months ended November 30, 2022, to a net loss of $(0.51) per share for the nine months ended November 30, 2023. Revenues from continuing operations decreased 7.2% from $22.3 million for the nine months ended November 30, 2022, to $20.7 million for the nine months ended November 30, 2023. Loss from continuing operations increased from $2.9 million for the nine months ended November 30, 2022, to a loss from continuing operations of $3.3 million for the nine months ended November 30, 2023. Net loss from continuing operations decreased from $3.6 million for the nine months ended November 30, 2022, to a net loss of $3.2 million for the nine months ended November 30, 2023.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product sales | 15,589 | 17,251 | (1,661 | ) | (9.6 | )% | ||||||||||
Retail sales | 864 | 815 | 49 | 6.0 | % | |||||||||||
Franchise fees | 127 | 148 | (21 | ) | (14.1 | )% | ||||||||||
Royalty and marketing fees | 4,111 | 4,071 | 40 | 1.0 | % | |||||||||||
Total | 20,691 | 22,285 | (1,593 | ) | (7.2 | )% |
Durango Product Sales
The decrease in Durango Product sales for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022, was due to a 9.6%, or $1.6 million, decrease in shipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores decreased by 7.0%, or $1.0 million. Shipment of products to our outside omni-channel network decreased by $0.6 million or 25.3% during the nine months ending November 30, 2023, when compared to the nine months ended November 30, 2022.
Retail Sales
Retail sales at Company-owned stores increased 6.0% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022. This increase was primarily the result of the opening of a second company store in July 2023. This was partially offset by the sale of a Company-owned store in the prior year (which resulted in only one remaining company-owned store). Retail sales at our Company-owned store in Durango, CO increased 6.2% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees were approximately unchanged from the nine months ended November 30, 2022 to the nine months ended November 30, 2023. Same store sales at domestic franchise Rocky Mountain Chocolate locations decreased by 1.3% during the nine months ended November 30, 2023 when compared to the nine months ended November 30, 2022.
The decrease in franchise fee revenue for the three months ended November 30, 2023, compared to the three months ended November 30, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | 14,844 | 13,823 | 1,021 | 7.4 | % | |||||||||||
Cost of sales - retail | 316 | 320 | (4 | ) | (1.4 | )% | ||||||||||
Franchise costs | 1,870 | 1,344 | 525 | 39.1 | % | |||||||||||
Sales and marketing | 1,447 | 1,482 | (35 | ) | (2.4 | )% | ||||||||||
General and administrative | 4,952 | 7,723 | (2,771 | ) | (35.9 | )% | ||||||||||
Retail operating | 451 | 447 | 4 | 0.8 | % | |||||||||||
Total | 23,880 | 25,140 | (1,260 | ) | (5.0 | )% |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total | 1,294.3 | 3,922.7 | (2,628.4 | ) | (67.0 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 4.8 | % | 19.9 | % | (15.1 | )% | (75.9 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total | 7.9 | % | 21.7 | % | (13.8 | )% | (63.8 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Plus: depreciation and amortization | 541 | 480 | 61 | 12.6 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 1,287 | 3,908 | (2,621 | ) | (67.1 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 1,835 | 4,403 | (2,568 | ) | (58.3 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 8.3 | % | 22.7 | % | (14.4 | )% | (63.6 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 11.2 | % | 24.4 | % | (13.2 | )% | (54.2 | )% |
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 Durango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our Durango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Durango Product adjusted gross margin is equal to Durango Product gross margin plus depreciation and amortization expense. We believe adjusted gross margin and Durango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, Durango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and Durango 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 Durango Product adjusted gross margin rather than gross margin and Durango Product gross margin to make incremental pricing decisions. Adjusted gross margin and Durango Product adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider themit 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 increaseddecreased to 22.9%4.8% in the threenine months ended November 30, 2023 compared to 19.9% during the nine months ended November 30, 2022, compareddue primarily to 22.2%a 15.2% decrease in production volume, a 21.9% increase in overhead costs and an increase in other costs associated with hourly wage and raw material inflation realized in the threenine months ended November 30, 2021. This increase was due primarily2023 compared to an increase in prices partially offset by increased labor and material costs and expense associated with inventory obsolescence.the nine months ended November 30, 2022.
Retail gross margins were unchanged at 62.3%increased from 60.7% during the threenine months ended November 30, 2022 to 63.5% during the nine months ended November 30, 2023. The increase in retail gross margins was primarily the result of improved management of costs and 2021.expenses. This was the result of the hiring of a dedicated experienced general manager in our Durango, CO store early in 2023.
Franchise Costs
The increase in franchise costs in the threenine months ended November 30, 2022,2023 compared to the threenine months ended November 30, 2021,2022 was due primarily to an increase in franchise conventionprofessional fees, an increase in stock compensation expense and an increase in travel expenses in the three months ended November 30, 2022.expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 36.5%44.1% in the threenine months ended November 30, 2022,2023 from 30.7%31.9% in the threenine months ended November 30, 2021.2022. This increasedecrease as a percentage of royalty, marketing and franchise fees is primarily thea result of higher costs.franchise costs during the nine months ended November 30, 2023.
Sales and Marketing
The increase in salesSales and marketing costs were approximately unchanged for the threenine months ended November 30, 2022,2023, compared to the threenine months ended November 30, 2021, was primarily due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.2022.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, is primarily due to lower costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three months ended November 30, 2022, the Company incurred approximately $764,000 of costs associated with the contested solicitation of proxies, compared with $2.7 million of costs associated with a contested solicitation of proxies and associated severance costs during the three months ended November 30, 2021. This decrease was partially offset by an increase in legal expenses and salaries and wages in the three months ended November 30, 2022, compared with the three months ended November 30, 2021. As a percentage of total revenues, general and administrative expenses decreased to 22.3% in the three months ended November 30, 2022, compared to 45.4% in the three months ended November 30, 2021.
Retail Operating Expenses
Retail operating expenses were relatively unchanged during the three months ended November 30, 2022, compared to the three months ended November 30, 2021. Retail operating expenses, as a percentage of retail sales, decreased from 66.1% in the three months ended November 30, 2021, to 62.2% in the three months ended November 30, 2022. This decrease is primarily the result of higher retail sales.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $128,000 in the three months ended November 30, 2022, a decrease of 10.9% from $144,000 in the three months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the consolidated financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 3.1% to $160,000 in the three months ended November 30, 2022, compared to $155,000 in the three months ended November 30, 2021.
Other Income
Net interest income was $3,000 in the three months ended November 30, 2022, compared to net interest income of $2,200 incurred in the three months ended November 30, 2021.
Income Tax Expense (Benefit)
During the three months ended November 30, 2022, we did not incur any income tax benefit on a loss before income taxes of $212,000. This was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the three months ended November 30, 2021, was 24.5%. See Note 14 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.
Nine Months Ended November 30, 2022, Compared to the Nine Months Ended November 30, 2021
Results Summary
Basic earnings per share decreased from a net loss of $0.11 per share for the nine months ended November 30, 2021, to a net loss of $0.64 per share for the nine months ended November 30, 2022. Revenues increased 3.3% from $24.0 million for the nine months ended November 30, 2021, to $24.8 million for the nine months ended November 30, 2022. The loss from operations increased from a loss of $1.1 million for the nine months ended November 30, 2021, to a loss from operations of $2.6 million for the nine months ended November 30, 2022. Net loss increased from a net loss of $701,000 for the nine months ended November 30, 2021, to a net loss of $4.0 million for the nine months ended November 30, 2022.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory sales | $ | 17,250.8 | $ | 16,578.5 | $ | 672.3 | 4.1 | % | ||||||||
Retail sales | 2,267.9 | 2,208.1 | 59.8 | 2.7 | % | |||||||||||
Franchise fees | 180.0 | 165.0 | 15.0 | 9.1 | % | |||||||||||
Royalty and marketing fees | 5,128.9 | 5,075.8 | 53.1 | 1.0 | % | |||||||||||
Total | $ | 24,827.6 | $ | 24,027.4 | $ | 800.2 | 3.3 | % |
Factory Sales
The increase in factory sales for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021, was primarily due to an 8.0%, $1.1 million, increase in sales of product to our network of franchised and licensed retail stores partially offset by a 15.7%, $429,000, decrease in shipments of product to customers outside our network of franchised retail stores.
Retail Sales
Retail sales at Company-owned stores increased 2.7% during the nine months ended November 30, 2022 compared to the nine months ended November 30, 2021, primarily as a result of an increase in same-store sales at Company-owned locations. Same-store sales at all Company-owned locations increased 6.1% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021.
Royalties, Marketing Fees, and Franchise Fees
The slight increase in royalty and marketing fees for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was primarily due to an increase in same-store sales at domestic franchise frozen yogurt cafés. Same-store sales at all domestic franchise locations increased 3.8% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021, with same-store sales at the Company’s domestic franchise frozen yogurt cafés increasing 19.2% during the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021.
The increase in franchise fee revenue for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was the result of store closures and the acceleration of unrecognized franchise fee revenue, and more franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 13,823.2 | $ | 13,065.3 | $ | 757.9 | 5.8 | % | ||||||||
Cost of sales - retail | 848.8 | 754.1 | 94.7 | 12.6 | % | |||||||||||
Franchise costs | 1,569.8 | 1,747.4 | (177.6 | ) | (10.2 | )% | ||||||||||
Sales and marketing | 1,617.1 | 1,195.8 | 421.3 | 35.2 | % | |||||||||||
General and administrative | 7,810.6 | 6,575.0 | 1,235.6 | 18.8 | % | |||||||||||
Retail operating | 1,364.7 | 1,304.6 | 60.1 | 4.6 | % | |||||||||||
Total | $ | 27,034.2 | $ | 24,642.2 | $ | 2,392.0 | 9.7 | % |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross profit | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Retail gross profit | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total | $ | 4,846.7 | $ | 4,967.2 | $ | (120.5 | ) | (2.4 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross margin | 19.9 | % | 21.2 | % | (1.3 | )% | (6.2 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total | 24.8 | % | 26.4 | % | (1.6 | )% | (6.1 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Plus: depreciation and amortization | 480.5 | 464.8 | 15.7 | 3.4 | % | |||||||||||
Factory adjusted gross margin | 3,908.1 | 3,978.0 | (69.9 | ) | (1.8 | )% | ||||||||||
Retail gross margin | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 5,327.2 | $ | 5,432.0 | $ | (104.8 | ) | (1.9 | )% | |||||||
Factory adjusted gross margin | 22.7 | % | 24.0 | % | (1.3 | )% | (5.6 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 28.9 | % | (1.6 | )% | (5.6 | )% |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin, and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider them in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margins decreased to 19.9% in the nine months ended November 30, 2022, compared to a gross margin of 21.2% during the nine months ended November 30, 2021, due primarily to an increase in costs from wage and material inflation and the impacts of Employee Retention Credits recognized in the nine months ended November 30, 2021, with no comparable credits in the nine months ended November 30, 2022. These cost increases were partially offset by an increase in product prices. The Company recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits (“ERC”) in the nine months ended November 30, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 65.8% during the nine months ended November 30, 2021, to 62.6% during the nine months ended November 30, 2022. The decrease in retail gross margins was primarily the result of an increase in the costs of raw materials.
Franchise Costs
The decrease in franchise costs in the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to a decrease in professional fees, the result of litigation with our licensee in Canada incurred during the nine months ended November 30, 2021, with no comparable legal expense in the nine months ended November 30, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 29.6% in the nine months ended November 30, 2022, from 33.3% in the nine months ended November 30, 2021. This decrease as a percentage of royalty, marketing, and franchise fees is primarily the result of lower franchise costs.
Sales and Marketing
The increase in sales and marketing costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.
General and Administrative
The increase in general and administrative costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the nine months ended November 30, 2022, the Company incurred approximately $2.9 million of costs associated with the contested solicitation of proxies, compared with $1.7 million ofno costs associated with a contested solicitation of proxies during the nine months ended November 30, 2021. The2023. During the nine months ended November 30, 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.Officer, with no comparable costs incurred during the nine months ended November 30, 2023. Additionally, due to a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholdersduring the nine months ended November 30, 2022, the Company had become contingently liable for certain change in controlrecorded $859,000 of severance payments to Mr. Dudley if a triggering termination was to occur. Ascompensation as a result of Mr. Dudley’s retirementan executive’s departure last year with no comparable compensation costs in September 2022,G&A during the Company incurred $934,000 of associated severance costs.nine months ended November 30, 2023. As a percentage of total revenues, general and administrative expenses increaseddecreased to 31.5%23.9% in the nine months ended November 30, 2022,2023, compared to 27.4%34.7% in the nine months ended November 30, 2021.2022.
Retail Operating Expenses
The increasedecrease in retail operating expenses for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021,2022, was due primarily to an increasea change in salaries and wages, and utilities in our Company-owned stores in operation, the result of the sale of a Company-owned store in the prior year and cafés.the conversion of a franchise store into a Company owned store in July 2023. Retail operating expenses, as a percentage of retail sales, increaseddecreased from 59.1%39.3% in the nine months ended November 30, 2021,2022, to 60.2%36.5% in the nine months ended November 30, 2022.2023. This increasedecrease is primarily the result of higherlower retail costs.operating expenses.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $383,000$99,000 in the nine months ended November 30, 2022, a decrease2023, an increase of 13.0%13.7% from $440,000$87,000 in the nine months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives.2022. Depreciation and amortization included in cost of sales increased 3.4%12.7% from $465,000$480,000 in the nine months ended November 30, 2021,2022 to $480,000$541,000 in the nine months ended November 30, 2023. This increase was the result of acquiring new equipment for production and the associated increase to depreciation expense.
Other Income
Net other income was $44,000 in the nine months ended November 30, 2023, compared to other income of $10,000 during the nine months ended November 30, 2022. This increase was primarily the result of investmentan increase in equipment.interest income on our note receivable.
Other Income Tax Expense
Other income was $9,600 inDuring the nine months ended November 30, 2022, compared to other2023, we did not incur any income tax benefit on a loss before income taxes of $176,500 during the nine months ended November 30, 2021. Net interest income was $9,600 in the nine months ended November 30, 2022, compared to interest income of $9,300 during the nine months ended November 30, 2021.
The Company recognized a gain on insurance recovery of $167,100 during the nine months ended November 30, 2021, compared with no similar amounts recognized during the nine months ended November 30, 2022.
Income Tax Expense (Benefit)
$3.2 million. During the nine months ended November 30, 2022, we incurred income tax expense of $1.4 million$702,000 on a loss before income taxes of $2.6$2.9 million. This expense was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the nine months ended November 30, 2021, was 20.2%.assets. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Liquidity and Capital Resources
As of November 30, 2022,2023, working capital was $7.4$3.0 million, compared to $9.7$6.2 million as of February 28, 2022,2023, a decrease of $2.3$3.2 million. The decrease in working capital was primarily due to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders.operating activities.
Cash and cash equivalent balances decreased approximately $4.4$2.6 million to $3.2$2.1 million as of November 30, 2022,2023 compared to $7.6$4.7 million as of February 28, 2022.2023. This decrease in cash and cash equivalents was primarily due to fundingproceeds from the sale of a rabbi trust established for severance payments to our former Chief Executive OfficerU-Swirl assets more than offset by operating results and the resulting $1.3 million decrease in cash balancespurchase of property and an increase in inventory of $2.1 million.equipment. Our current ratio was 2.21.5 to 1 at November 30, 2022,2023 compared to 2.82.2 to 1 at February 28, 2022.2023. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During the nine months ended November 30, 2022,2023, we had a net loss of $4.0$2.5 million. Operating activities used cash of $3,583,418, with$2.5 million, primarily the principal adjustment to reconcileresult of the net income to net cash used by operating activities being deferred income taxes of $1,388,271, depreciation and amortization of $863,322, an increase in accounts payable of $1,976,869 and expense recordedNet loss for stock compensation of $471,530, mostly offset by an increase in inventory of $2,091,099, a decrease in accrued liabilities of $1,284,330 and an increase in accounts receivable of $1,171,146.the nine months ended November 30, 2023. During the comparable 20212022 period, we had a net loss of $700,908,$3.9 million, and cash used in operating activities provided cash of $857,048. The principal adjustment to reconcile the net income to net cash used by operating activities being an increase in accrued liabilities of $1,343,856, an increase in accounts payable of $1,079,671, depreciation and amortization of $904,972, and expense related to stock-based compensation of $709,210, partially offset by an increase in accounts receivable of $985,887 and an increase in inventory of $936,483.$3.6 million.
During the nine months ended November 30, 2022,2023, investing activities used cash of $787,824,$1.1 million, primarily due to the purchases of property and equipment of $810,732.$2.5 million. This was partially offset by cash provided by discontinued operation (the result of the sale of U-Swirl assets) of $1.4 million. In comparison, investing activities used cash of $407,457$0.8 million during the nine months ended November 30, 2021,2022, primarily due to the purchasespurchase of property and equipment of $704,462 partially offset by proceeds from insurance recovery of $206,336.equipment.
DuringWe borrowed $1.0 million on our line of credit during the nine months endedquarter which provided cash from financing activities.
Revolving Line of Credit
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $3.0 million was available for borrowing (subject to certain borrowing-based limitations) as of November 30, 2022, there2023 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.68% at November 30, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.
As of November 30, 2023 we were nonot in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was 1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of November 30, 2023 and as of the date of this Quarterly Report, we had enough cash flows from financing activities. In comparison, financing activities used cash of $61,276on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the nine months ended November 30, 2021, duefuture, however, we may not have sufficient funds available to make the redemptionpayments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the shareholder rights plan.Credit Agreement.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company believesis exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities.
Significant Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that cash flow from operations will be sufficientaffect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to fund capital expendituresthe consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and working capital requirementsin the Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for FYthe fiscal year ended February 28, 2023 describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
As of November 30, 2022,2023, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
As of November 30, 2022,2023, we had purchase obligations of approximately $36,000.$229,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.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 the 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 products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide the information required by this Item.
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 Exchange 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 Securities and Exchange Commission’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.
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 Reports on Form 10-Q for the three months ended May 31, 2023 and six months ended August 31,2023, management concluded that our internal control over financial reporting was not effective as of February 28, 2023, May 31, 2023, and August 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.
During the previous fiscal quarter, 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 arewere not effective as of November 30, 2022.2023.
Changes in Internal Control over Financial Reporting
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, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION |
Legal Proceedings |
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
Item 1.Legal ProceedingsWe may, from time to time, become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially susceptible to litigation, 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 an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
The information set forth in Note 1 to the consolidated financial statements appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q under the caption “Subsequent Events” is incorporated by reference herein.
Risk Factors |
In addition to the other information set forth in this Quarterly Report, on Form 10-Q, you should carefully consider the factors discussed in Part 1, “ItemItem 1A. Risk“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022,2023 (our “Annual Report”), filed with the Securities and Exchange Commission on May 27, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022, which could materially and adversely affect our business, financial condition and results of operations.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, 2022, as amended by Amendment No. 1 on Form 10-K/A.Report.
Item 2.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Defaults Upon Senior Securities |
None.
Mine Safety Disclosures |
Not Applicable.
Other InformationItem 5.Other Information
On December 14, 2022, the Company filed a Form 8-K, which is incorporated herein by reference, disclosing Gabriel Arreaga’s December 8, 2022, notification to the Board of Directors of the Company (the “Board”) of his decision to resign from the Board effective upon the earlier of (a) the nomination of a new chairperson of the Compensation Committee of the Board, (b) the nomination of a new member to the Board, or (c) the conclusion of the Company’s current fiscal year (February 28, 2023). On January 11, 2023, the Board nominated and elected Jeffrey R. Geygan as the new chairperson of the Compensation Committee of the Board. Consequently, Mr. Arreaga’s resignation as a member of the Board, as the chairperson of the Compensation Committee of the Board and as a member of the Audit Committee of the Board was effective on January 11, 2023.None.
Exhibits |
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10.1 |
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32.1* |
101.INS |
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101.SCH |
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101.CAL |
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101.DEF |
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101.LAB |
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101.PRE |
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(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 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: January | /s/ Allen Arroyo | ||
Allen Arroyo, Chief Financial Officer |
2022
2021
Change
Change
2023
2022
Change
Change
Factory sales
Durango Product sales
Retail sales
Franchise fees
Royalty and marketing fees
Total
FactoryDurango Product Sales
The increasedecrease in factoryDurango Product sales for the three months ended November 30, 2022,2023, compared to the three months ended November 30, 2021,2022, was primarily due to a 13.0%16.8%, $661,000, increaseor $1.2 million, decrease in salesshipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores and a 19.1%decreased by 15.7%, $248,000, increase in shipmentsor $0.9 million. Shipment of product to customers outside our network of franchised retail stores. The increase in sales of productproducts to our outside omni-channel network of franchised and licensed retail stores was primarily the result of a higher sell price and higher same-store pounds purchased. Same-store pounds purchaseddecreased by domestic franchise and licensed locations increased 5.7%$0.3 million or 20.6% during the three months ended November 30, 2022,2023, when compared to the three months ended November 30, 2021.2022.
Retail Sales
Retail sales at Company-owned stores increased 6.7%20.6% during the three months ended November 30, 2022,2023 compared to the three months ended November 30, 2021, as a2022. This increase was the result of an increasethe opening of a second Company-owned store in Company-owned same store sales. Same storeJuly 2023. Additionally, retail sales at our Company-owned store in Durango, Colorado, which was open in all Company-owned locations increased 12.9%periods, decreased by 1.1% during the three months ended November 30, 2022, when2023 compared to the three months ended November 30, 2021. This increase was partially offset by a decrease in the average number of Company-owned stores in operation resulting from the sale of a Company-owned location to a franchisee.2022.
Royalties, Marketing Fees, and Franchise Fees
The increase in royaltyroyalties and marketing fees from the three months ended November 30, 2021,2022 to the three months ended November 30, 2022,2023 was primarily due to an increase in royalty revenue as a result of the Company’s purchase based royalty structure and an increase in same store sales at domestic Rocky Mountain Chocolate Factory locations and at U-Swirl Frozen Yogurt cafés. Same-storelocations. Same store sales at domestic franchise Rocky Mountain Chocolate Factory locations increased by 3.0% and same-store sales at U-Swirl Frozen Yogurt cafés increased by 14.0%2.1% during the three months ended November 30, 2022,2023 when compared to the three months ended November 30, 2021.2022.
FranchiseThe decrease in franchise fee revenue for the three months ended November 30, 2022,2023, compared to the three months ended November 30, 2021,2022 was relatively unchanged.the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 5,613.7 | $ | 4,960.9 | $ | 652.8 | 13.2 | % | ||||||||
Cost of sales - retail | 255.9 | 239.8 | 16.1 | 6.7 | % | |||||||||||
Franchise costs | 551.5 | 458.5 | 93.0 | 20.3 | % | |||||||||||
Sales and marketing | 607.2 | 377.2 | 230.0 | 61.0 | % | |||||||||||
General and administrative | 2,111.7 | 3,865.9 | (1,754.2 | ) | (45.4 | )% | ||||||||||
Retail operating | 422.4 | 420.3 | 2.1 | 0.5 | % | |||||||||||
Total | $ | 9,562.4 | $ | 10,322.6 | $ | (760.2 | ) | (7.4 | )% |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | 5,631 | 5,614 | 17 | 0.3 | % | |||||||||||
Cost of sales - retail | 138 | 114 | 24 | 21.4 | % | |||||||||||
Franchise costs | 577 | 477 | 100 | 21.0 | % | |||||||||||
Sales and marketing | 532 | 573 | (41 | ) | (7.2 | )% | ||||||||||
General and administrative | 1,333 | 2,081 | (747 | ) | (35.9 | )% | ||||||||||
Retail operating | 186 | 138 | 48 | 35.1 | % | |||||||||||
Total | 8,397 | 8,995 | (599 | ) | (6.7 | )% |
Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross profit | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Retail gross profit | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total | $ | 2,093.9 | $ | 1,811.7 | $ | 282.2 | 15.6 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total | 653 | 1,859 | (1,206 | ) | (64.9 | )% |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 22.9 | % | 22.2 | % | 0.7 | % | 3.2 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total | 26.3 | % | 25.8 | % | 0.5 | % | 1.9 | % |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 7.1 | % | 22.9 | % | (15.8 | )% | (69.0 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total | 10.2 | % | 24.5 | % | (14.3 | )% | (58.4 | )% |
Adjusted Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Plus: depreciation and amortization | 160.0 | 155.2 | 4.8 | 3.1 | % | |||||||||||
Factory adjusted gross margin | 1,831.2 | 1,570.7 | 260.5 | 16.6 | % | |||||||||||
Retail gross margin | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total Adjusted Gross Margin | $ | 2,253.9 | $ | 1,966.9 | $ | 287.0 | 14.6 | % | ||||||||
Factory adjusted gross margin | 25.1 | % | 24.6 | % | 0.5 | % | 2.0 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total Adjusted Gross Margin | 28.3 | % | 28.0 | % | 0.3 | % | 1.1 | % |
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 428 | 1,671 | (1,244 | ) | (74.4 | )% | ||||||||||
Plus: depreciation and amortization | 188 | 160 | 28 | 17.2 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 615 | 1,831 | (1,216 | ) | (66.4 | )% | ||||||||||
Retail gross margin | 226 | 188 | 38 | 20.0 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 841 | 2,019 | (1,179 | ) | (58.4 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 10.2 | % | 25.1 | % | (14.9 | )% | (59.4 | )% | ||||||||
Retail gross margin | 62.0 | % | 62.3 | % | (0.3 | )% | (0.5 | )% | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 13.1 | % | 26.6 | % | (13.5 | )% | (50.8 | )% |
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 plus 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 should not be considered in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary component of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and Durango Product adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and Durango Product gross margin.
Cost of Sales and Gross Margin
Durango Product gross margins decreased to 7.1% in the three months ended November 30, 2023 compared to 22.9% during the three months ended November 30, 2022, due primarily to a 20.7% increase in overhead costs, and an increase in other costs from hourly wage and raw material inflation realized in the three months ended November 30, 2023 compared to the three months ended November 30, 2022.
Retail gross margins were relatively flat for the three months ended November 30, 2023 compared to November 30, 2022.
Franchise Costs
The increase in franchise costs in the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to an increase compensation expense and an increase in travel expenses. As a percentage of total royalty, marketing fees and franchise fee revenue, franchise costs increased to 45.2% in the three months ended November 30, 2023 from 38.5% in the three months ended November 30, 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 November 30, 2023.
Sales and Marketing
Sales and marketing costs decreased for the three months ended November 30, 2023 to $0.5 million compared to $0.6 million for the three months ended November 30, 2022. The decrease was primarily due to lower spending on advertising and collateral production.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily to a decrease in professional fees related to the costs associated with the contested solicitation of proxies in 2022. As a percentage of total revenues, general and administrative expenses decreased to 17.3% in the three months ended November 30, 2023 compared to 23.6% in the three months ended November 30, 2022.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November 30, 2023 compared to the three months ended November 30, 2022 was due primarily the conversion of a franchise unit into a Company-owned unit in July 2023. Retail operating expenses, as a percentage of retail sales, increased from 45.7% in the three months ended November 30, 2022 to 51.2% in the three months ended November 30, 2023. This increase is primarily the result of opening costs for the new Company store in Corpus Christi, TX.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $36,000 in the three months ended November 30, 2023, an increase of 24.1% from $29,000 in the three months ended November 30, 2022. Depreciation and amortization included in cost of sales increased 17.5% to $188,000 in the three months ended November 30, 2023 compared to $160,000 in the three months ended November 30, 2022. This increase was the result of acquiring new equipment for production and the associated increase in depreciation expense.
Other Income
Net other income was $18,600 in the three months ended November 30, 2023 compared to net other income of $3,100 incurred in the three months ended November 30, 2022.
Income Tax Expense
During the three months ended November 30, 2023 and 2022, we did not incur any income tax benefit on a loss before income taxes of $717,000 and $196,000, respectively. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Nine Months Ended November 30, 2023 Compared to the Nine Months Ended November 30, 2022
Results Summary
Basic loss per share from continuing operations decreased from $(0.58) per share for the nine months ended November 30, 2022, to a net loss of $(0.51) per share for the nine months ended November 30, 2023. Revenues from continuing operations decreased 7.2% from $22.3 million for the nine months ended November 30, 2022, to $20.7 million for the nine months ended November 30, 2023. Loss from continuing operations increased from $2.9 million for the nine months ended November 30, 2022, to a loss from continuing operations of $3.3 million for the nine months ended November 30, 2023. Net loss from continuing operations decreased from $3.6 million for the nine months ended November 30, 2022, to a net loss of $3.2 million for the nine months ended November 30, 2023.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product sales | 15,589 | 17,251 | (1,661 | ) | (9.6 | )% | ||||||||||
Retail sales | 864 | 815 | 49 | 6.0 | % | |||||||||||
Franchise fees | 127 | 148 | (21 | ) | (14.1 | )% | ||||||||||
Royalty and marketing fees | 4,111 | 4,071 | 40 | 1.0 | % | |||||||||||
Total | 20,691 | 22,285 | (1,593 | ) | (7.2 | )% |
Durango Product Sales
The decrease in Durango Product sales for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022, was due to a 9.6%, or $1.6 million, decrease in shipments of product to our franchise network of franchised and licensed retails stores and to our outside omni-channel customers. Shipments to our network of franchised and licensed retail stores decreased by 7.0%, or $1.0 million. Shipment of products to our outside omni-channel network decreased by $0.6 million or 25.3% during the nine months ending November 30, 2023, when compared to the nine months ended November 30, 2022.
Retail Sales
Retail sales at Company-owned stores increased 6.0% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022. This increase was primarily the result of the opening of a second company store in July 2023. This was partially offset by the sale of a Company-owned store in the prior year (which resulted in only one remaining company-owned store). Retail sales at our Company-owned store in Durango, CO increased 6.2% during the nine months ended November 30, 2023 compared to the nine months ended November 30, 2022.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees were approximately unchanged from the nine months ended November 30, 2022 to the nine months ended November 30, 2023. Same store sales at domestic franchise Rocky Mountain Chocolate locations decreased by 1.3% during the nine months ended November 30, 2023 when compared to the nine months ended November 30, 2022.
The decrease in franchise fee revenue for the three months ended November 30, 2023, compared to the three months ended November 30, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | 14,844 | 13,823 | 1,021 | 7.4 | % | |||||||||||
Cost of sales - retail | 316 | 320 | (4 | ) | (1.4 | )% | ||||||||||
Franchise costs | 1,870 | 1,344 | 525 | 39.1 | % | |||||||||||
Sales and marketing | 1,447 | 1,482 | (35 | ) | (2.4 | )% | ||||||||||
General and administrative | 4,952 | 7,723 | (2,771 | ) | (35.9 | )% | ||||||||||
Retail operating | 451 | 447 | 4 | 0.8 | % | |||||||||||
Total | 23,880 | 25,140 | (1,260 | ) | (5.0 | )% |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total | 1,294.3 | 3,922.7 | (2,628.4 | ) | (67.0 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Product gross margin | 4.8 | % | 19.9 | % | (15.1 | )% | (75.9 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total | 7.9 | % | 21.7 | % | (13.8 | )% | (63.8 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | 746 | 3,428 | (2,682 | ) | (78.2 | )% | ||||||||||
Plus: depreciation and amortization | 541 | 480 | 61 | 12.6 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 1,287 | 3,908 | (2,621 | ) | (67.1 | )% | ||||||||||
Retail gross margin | 549 | 495 | 54 | 10.8 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 1,835 | 4,403 | (2,568 | ) | (58.3 | )% | ||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 8.3 | % | 22.7 | % | (14.4 | )% | (63.6 | )% | ||||||||
Retail gross margin | 63.5 | % | 60.7 | % | 2.7 | % | 4.5 | % | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 11.2 | % | 24.4 | % | (13.2 | )% | (54.2 | )% |
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 Durango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our Durango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Durango Product adjusted gross margin is equal to Durango Product gross margin plus depreciation and amortization expense. We believe adjusted gross margin and Durango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, Durango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and Durango 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 Durango Product adjusted gross margin rather than gross margin and Durango Product gross margin to make incremental pricing decisions. Adjusted gross margin and Durango Product adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider themit 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 increaseddecreased to 22.9%4.8% in the threenine months ended November 30, 2023 compared to 19.9% during the nine months ended November 30, 2022, compareddue primarily to 22.2%a 15.2% decrease in production volume, a 21.9% increase in overhead costs and an increase in other costs associated with hourly wage and raw material inflation realized in the threenine months ended November 30, 2021. This increase was due primarily2023 compared to an increase in prices partially offset by increased labor and material costs and expense associated with inventory obsolescence.the nine months ended November 30, 2022.
Retail gross margins were unchanged at 62.3%increased from 60.7% during the threenine months ended November 30, 2022 to 63.5% during the nine months ended November 30, 2023. The increase in retail gross margins was primarily the result of improved management of costs and 2021.expenses. This was the result of the hiring of a dedicated experienced general manager in our Durango, CO store early in 2023.
Franchise Costs
The increase in franchise costs in the threenine months ended November 30, 2022,2023 compared to the threenine months ended November 30, 2021,2022 was due primarily to an increase in franchise conventionprofessional fees, an increase in stock compensation expense and an increase in travel expenses in the three months ended November 30, 2022.expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 36.5%44.1% in the threenine months ended November 30, 2022,2023 from 30.7%31.9% in the threenine months ended November 30, 2021.2022. This increasedecrease as a percentage of royalty, marketing and franchise fees is primarily thea result of higher costs.franchise costs during the nine months ended November 30, 2023.
Sales and Marketing
The increase in salesSales and marketing costs were approximately unchanged for the threenine months ended November 30, 2022,2023, compared to the threenine months ended November 30, 2021, was primarily due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.2022.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, is primarily due to lower costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three months ended November 30, 2022, the Company incurred approximately $764,000 of costs associated with the contested solicitation of proxies, compared with $2.7 million of costs associated with a contested solicitation of proxies and associated severance costs during the three months ended November 30, 2021. This decrease was partially offset by an increase in legal expenses and salaries and wages in the three months ended November 30, 2022, compared with the three months ended November 30, 2021. As a percentage of total revenues, general and administrative expenses decreased to 22.3% in the three months ended November 30, 2022, compared to 45.4% in the three months ended November 30, 2021.
Retail Operating Expenses
Retail operating expenses were relatively unchanged during the three months ended November 30, 2022, compared to the three months ended November 30, 2021. Retail operating expenses, as a percentage of retail sales, decreased from 66.1% in the three months ended November 30, 2021, to 62.2% in the three months ended November 30, 2022. This decrease is primarily the result of higher retail sales.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $128,000 in the three months ended November 30, 2022, a decrease of 10.9% from $144,000 in the three months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the consolidated financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 3.1% to $160,000 in the three months ended November 30, 2022, compared to $155,000 in the three months ended November 30, 2021.
Other Income
Net interest income was $3,000 in the three months ended November 30, 2022, compared to net interest income of $2,200 incurred in the three months ended November 30, 2021.
Income Tax Expense (Benefit)
During the three months ended November 30, 2022, we did not incur any income tax benefit on a loss before income taxes of $212,000. This was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the three months ended November 30, 2021, was 24.5%. See Note 14 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.
Nine Months Ended November 30, 2022, Compared to the Nine Months Ended November 30, 2021
Results Summary
Basic earnings per share decreased from a net loss of $0.11 per share for the nine months ended November 30, 2021, to a net loss of $0.64 per share for the nine months ended November 30, 2022. Revenues increased 3.3% from $24.0 million for the nine months ended November 30, 2021, to $24.8 million for the nine months ended November 30, 2022. The loss from operations increased from a loss of $1.1 million for the nine months ended November 30, 2021, to a loss from operations of $2.6 million for the nine months ended November 30, 2022. Net loss increased from a net loss of $701,000 for the nine months ended November 30, 2021, to a net loss of $4.0 million for the nine months ended November 30, 2022.
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory sales | $ | 17,250.8 | $ | 16,578.5 | $ | 672.3 | 4.1 | % | ||||||||
Retail sales | 2,267.9 | 2,208.1 | 59.8 | 2.7 | % | |||||||||||
Franchise fees | 180.0 | 165.0 | 15.0 | 9.1 | % | |||||||||||
Royalty and marketing fees | 5,128.9 | 5,075.8 | 53.1 | 1.0 | % | |||||||||||
Total | $ | 24,827.6 | $ | 24,027.4 | $ | 800.2 | 3.3 | % |
Factory Sales
The increase in factory sales for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021, was primarily due to an 8.0%, $1.1 million, increase in sales of product to our network of franchised and licensed retail stores partially offset by a 15.7%, $429,000, decrease in shipments of product to customers outside our network of franchised retail stores.
Retail Sales
Retail sales at Company-owned stores increased 2.7% during the nine months ended November 30, 2022 compared to the nine months ended November 30, 2021, primarily as a result of an increase in same-store sales at Company-owned locations. Same-store sales at all Company-owned locations increased 6.1% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021.
Royalties, Marketing Fees, and Franchise Fees
The slight increase in royalty and marketing fees for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was primarily due to an increase in same-store sales at domestic franchise frozen yogurt cafés. Same-store sales at all domestic franchise locations increased 3.8% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021, with same-store sales at the Company’s domestic franchise frozen yogurt cafés increasing 19.2% during the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021.
The increase in franchise fee revenue for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was the result of store closures and the acceleration of unrecognized franchise fee revenue, and more franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 13,823.2 | $ | 13,065.3 | $ | 757.9 | 5.8 | % | ||||||||
Cost of sales - retail | 848.8 | 754.1 | 94.7 | 12.6 | % | |||||||||||
Franchise costs | 1,569.8 | 1,747.4 | (177.6 | ) | (10.2 | )% | ||||||||||
Sales and marketing | 1,617.1 | 1,195.8 | 421.3 | 35.2 | % | |||||||||||
General and administrative | 7,810.6 | 6,575.0 | 1,235.6 | 18.8 | % | |||||||||||
Retail operating | 1,364.7 | 1,304.6 | 60.1 | 4.6 | % | |||||||||||
Total | $ | 27,034.2 | $ | 24,642.2 | $ | 2,392.0 | 9.7 | % |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross profit | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Retail gross profit | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total | $ | 4,846.7 | $ | 4,967.2 | $ | (120.5 | ) | (2.4 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross margin | 19.9 | % | 21.2 | % | (1.3 | )% | (6.2 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total | 24.8 | % | 26.4 | % | (1.6 | )% | (6.1 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Plus: depreciation and amortization | 480.5 | 464.8 | 15.7 | 3.4 | % | |||||||||||
Factory adjusted gross margin | 3,908.1 | 3,978.0 | (69.9 | ) | (1.8 | )% | ||||||||||
Retail gross margin | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 5,327.2 | $ | 5,432.0 | $ | (104.8 | ) | (1.9 | )% | |||||||
Factory adjusted gross margin | 22.7 | % | 24.0 | % | (1.3 | )% | (5.6 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 28.9 | % | (1.6 | )% | (5.6 | )% |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin, and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider them in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margins decreased to 19.9% in the nine months ended November 30, 2022, compared to a gross margin of 21.2% during the nine months ended November 30, 2021, due primarily to an increase in costs from wage and material inflation and the impacts of Employee Retention Credits recognized in the nine months ended November 30, 2021, with no comparable credits in the nine months ended November 30, 2022. These cost increases were partially offset by an increase in product prices. The Company recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits (“ERC”) in the nine months ended November 30, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 65.8% during the nine months ended November 30, 2021, to 62.6% during the nine months ended November 30, 2022. The decrease in retail gross margins was primarily the result of an increase in the costs of raw materials.
Franchise Costs
The decrease in franchise costs in the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to a decrease in professional fees, the result of litigation with our licensee in Canada incurred during the nine months ended November 30, 2021, with no comparable legal expense in the nine months ended November 30, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 29.6% in the nine months ended November 30, 2022, from 33.3% in the nine months ended November 30, 2021. This decrease as a percentage of royalty, marketing, and franchise fees is primarily the result of lower franchise costs.
Sales and Marketing
The increase in sales and marketing costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.
General and Administrative
The increase in general and administrative costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the nine months ended November 30, 2022, the Company incurred approximately $2.9 million of costs associated with the contested solicitation of proxies, compared with $1.7 million ofno costs associated with a contested solicitation of proxies during the nine months ended November 30, 2021. The2023. During the nine months ended November 30, 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.Officer, with no comparable costs incurred during the nine months ended November 30, 2023. Additionally, due to a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholdersduring the nine months ended November 30, 2022, the Company had become contingently liable for certain change in controlrecorded $859,000 of severance payments to Mr. Dudley if a triggering termination was to occur. Ascompensation as a result of Mr. Dudley’s retirementan executive’s departure last year with no comparable compensation costs in September 2022,G&A during the Company incurred $934,000 of associated severance costs.nine months ended November 30, 2023. As a percentage of total revenues, general and administrative expenses increaseddecreased to 31.5%23.9% in the nine months ended November 30, 2022,2023, compared to 27.4%34.7% in the nine months ended November 30, 2021.2022.
Retail Operating Expenses
The increasedecrease in retail operating expenses for the nine months ended November 30, 2022,2023, compared to the nine months ended November 30, 2021,2022, was due primarily to an increasea change in salaries and wages, and utilities in our Company-owned stores in operation, the result of the sale of a Company-owned store in the prior year and cafés.the conversion of a franchise store into a Company owned store in July 2023. Retail operating expenses, as a percentage of retail sales, increaseddecreased from 59.1%39.3% in the nine months ended November 30, 2021,2022, to 60.2%36.5% in the nine months ended November 30, 2022.2023. This increasedecrease is primarily the result of higherlower retail costs.operating expenses.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $383,000$99,000 in the nine months ended November 30, 2022, a decrease2023, an increase of 13.0%13.7% from $440,000$87,000 in the nine months ended November 30, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives.2022. Depreciation and amortization included in cost of sales increased 3.4%12.7% from $465,000$480,000 in the nine months ended November 30, 2021,2022 to $480,000$541,000 in the nine months ended November 30, 2023. This increase was the result of acquiring new equipment for production and the associated increase to depreciation expense.
Other Income
Net other income was $44,000 in the nine months ended November 30, 2023, compared to other income of $10,000 during the nine months ended November 30, 2022. This increase was primarily the result of investmentan increase in equipment.interest income on our note receivable.
Other Income Tax Expense
Other income was $9,600 inDuring the nine months ended November 30, 2022, compared to other2023, we did not incur any income tax benefit on a loss before income taxes of $176,500 during the nine months ended November 30, 2021. Net interest income was $9,600 in the nine months ended November 30, 2022, compared to interest income of $9,300 during the nine months ended November 30, 2021.
The Company recognized a gain on insurance recovery of $167,100 during the nine months ended November 30, 2021, compared with no similar amounts recognized during the nine months ended November 30, 2022.
Income Tax Expense (Benefit)
$3.2 million. During the nine months ended November 30, 2022, we incurred income tax expense of $1.4 million$702,000 on a loss before income taxes of $2.6$2.9 million. This expense was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the nine months ended November 30, 2021, was 20.2%.assets. See Note 14 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Liquidity and Capital Resources
As of November 30, 2022,2023, working capital was $7.4$3.0 million, compared to $9.7$6.2 million as of February 28, 2022,2023, a decrease of $2.3$3.2 million. The decrease in working capital was primarily due to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders.operating activities.
Cash and cash equivalent balances decreased approximately $4.4$2.6 million to $3.2$2.1 million as of November 30, 2022,2023 compared to $7.6$4.7 million as of February 28, 2022.2023. This decrease in cash and cash equivalents was primarily due to fundingproceeds from the sale of a rabbi trust established for severance payments to our former Chief Executive OfficerU-Swirl assets more than offset by operating results and the resulting $1.3 million decrease in cash balancespurchase of property and an increase in inventory of $2.1 million.equipment. Our current ratio was 2.21.5 to 1 at November 30, 2022,2023 compared to 2.82.2 to 1 at February 28, 2022.2023. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During the nine months ended November 30, 2022,2023, we had a net loss of $4.0$2.5 million. Operating activities used cash of $3,583,418, with$2.5 million, primarily the principal adjustment to reconcileresult of the net income to net cash used by operating activities being deferred income taxes of $1,388,271, depreciation and amortization of $863,322, an increase in accounts payable of $1,976,869 and expense recordedNet loss for stock compensation of $471,530, mostly offset by an increase in inventory of $2,091,099, a decrease in accrued liabilities of $1,284,330 and an increase in accounts receivable of $1,171,146.the nine months ended November 30, 2023. During the comparable 20212022 period, we had a net loss of $700,908,$3.9 million, and cash used in operating activities provided cash of $857,048. The principal adjustment to reconcile the net income to net cash used by operating activities being an increase in accrued liabilities of $1,343,856, an increase in accounts payable of $1,079,671, depreciation and amortization of $904,972, and expense related to stock-based compensation of $709,210, partially offset by an increase in accounts receivable of $985,887 and an increase in inventory of $936,483.$3.6 million.
During the nine months ended November 30, 2022,2023, investing activities used cash of $787,824,$1.1 million, primarily due to the purchases of property and equipment of $810,732.$2.5 million. This was partially offset by cash provided by discontinued operation (the result of the sale of U-Swirl assets) of $1.4 million. In comparison, investing activities used cash of $407,457$0.8 million during the nine months ended November 30, 2021,2022, primarily due to the purchasespurchase of property and equipment of $704,462 partially offset by proceeds from insurance recovery of $206,336.equipment.
DuringWe borrowed $1.0 million on our line of credit during the nine months endedquarter which provided cash from financing activities.
Revolving Line of Credit
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $3.0 million was available for borrowing (subject to certain borrowing-based limitations) as of November 30, 2022, there2023 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.68% at November 30, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.
As of November 30, 2023 we were nonot in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was 1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of November 30, 2023 and as of the date of this Quarterly Report, we had enough cash flows from financing activities. In comparison, financing activities used cash of $61,276on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the nine months ended November 30, 2021, duefuture, however, we may not have sufficient funds available to make the redemptionpayments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the shareholder rights plan.Credit Agreement.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company believesis exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities.
Significant Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that cash flow from operations will be sufficientaffect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to fund capital expendituresthe consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and working capital requirementsin the Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for FYthe fiscal year ended February 28, 2023 describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
As of November 30, 2022,2023, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
As of November 30, 2022,2023, we had purchase obligations of approximately $36,000.$229,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.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 the 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 products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide the information required by this Item.
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 Exchange 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 Securities and Exchange Commission’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.
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 Reports on Form 10-Q for the three months ended May 31, 2023 and six months ended August 31,2023, management concluded that our internal control over financial reporting was not effective as of February 28, 2023, May 31, 2023, and August 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.
During the previous fiscal quarter, 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 arewere not effective as of November 30, 2022.2023.
Changes in Internal Control over Financial Reporting
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, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION |
Legal Proceedings |
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
Item 1.Legal ProceedingsWe may, from time to time, become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially susceptible to litigation, 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 an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
The information set forth in Note 1 to the consolidated financial statements appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q under the caption “Subsequent Events” is incorporated by reference herein.
Risk Factors |
In addition to the other information set forth in this Quarterly Report, on Form 10-Q, you should carefully consider the factors discussed in Part 1, “ItemItem 1A. Risk“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022,2023 (our “Annual Report”), filed with the Securities and Exchange Commission on May 27, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022, which could materially and adversely affect our business, financial condition and results of operations.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, 2022, as amended by Amendment No. 1 on Form 10-K/A.Report.
Item 2.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Defaults Upon Senior Securities |
None.
Mine Safety Disclosures |
Not Applicable.
Other InformationItem 5.Other Information
On December 14, 2022, the Company filed a Form 8-K, which is incorporated herein by reference, disclosing Gabriel Arreaga’s December 8, 2022, notification to the Board of Directors of the Company (the “Board”) of his decision to resign from the Board effective upon the earlier of (a) the nomination of a new chairperson of the Compensation Committee of the Board, (b) the nomination of a new member to the Board, or (c) the conclusion of the Company’s current fiscal year (February 28, 2023). On January 11, 2023, the Board nominated and elected Jeffrey R. Geygan as the new chairperson of the Compensation Committee of the Board. Consequently, Mr. Arreaga’s resignation as a member of the Board, as the chairperson of the Compensation Committee of the Board and as a member of the Audit Committee of the Board was effective on January 11, 2023.None.
Exhibits |
3.1 |
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10.1 |
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32.1* |
101.INS |
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101.SCH |
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101.CAL |
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101.DEF |
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101.LAB |
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101.PRE |
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104 |
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(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 |
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| * Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: January | /s/ Allen Arroyo | ||
Allen Arroyo, Chief Financial Officer |