UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark (Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 201728, 2019
OR
☐ 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: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’sRegistrant’s telephone number, including area code)
SecuritiesSecurities 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 | Nasdaq Global Market | |||
Preferred Stock Purchase Rights | Nasdaq Global Market |
SecuritiesSecurities Registered Pursuant To Section 12(g) Of The Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
IndicateIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of ourthe registrant’s common stock (based on the closing price as quoted on the NASDAQNasdaq Global Market on August 31, 2016,2018, the last businesstrading day of ourthe registrant’s most recently completed second fiscal quarter) held by non-affiliates was $44,591,674.$38,815,702. For purposes of this calculation, shares of common stock held by each executive officer and director and by holders of more than 5% of ourthe registrant’s outstanding common stock have been excluded since those persons may under certain circumstances be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of May 12, 2017,10, 2019, there were 5,854,3725,962,327 shares of ourthe registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’sregistrant’s definitive proxy statement in connection with the 20172019 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference in Part III of this Annual Report on Form 10-K .10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant’s fiscal year ended February 28, 2017.2019.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (“Annual Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements involve various risks and uncertainties. The nature of our operations and the environment in which we operate subject us to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this Annual Report are forward-looking statements. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect," "anticipate," "should," "plan," "estimate," "potential," or similar expressions. Factors which could cause results to differ include, but are not limited to: changes in the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding strategy, the success of international expansion efforts and the effect of government regulations. Government regulations which we and our franchisees and licensees either are, or may be, subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, licensing, employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see the “Risksection entitled “Risk Factors” contained in this Annual Report in Item 1A. These forward-looking statements apply only as of the date of this Annual Report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, we undertake no obligation to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this Annual Report or those that might reflect the occurrence of unanticipated events.
General
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including(collectively, the “Company,” “we,” “us,” or “our”), including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation) (collectively, the “Company,” “we,” “us,” or “our”corporation (“RMCF”), is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our wholly-owned subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates self-serve frozen yogurt cafés. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products. We also sell our candy in selected locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of March 31, 2017,2019, there were fourtwo Company-owned, 8390 licensee-owned and 283245 franchised Rocky Mountain Chocolate Factory stores operating in 4037 states, Canada, Japan, South Korea, the Philippines,Panama, and the United Arab Emirates.Philippines. As of March 31, 2017,2019, U-Swirl operated fivefour Company-owned cafés, 10568 franchised cafés and 4030 licensed locations located in 3326 states and Canada.Qatar. U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
Effective March 1, 2015, we reorganized to create a The Company was incorporated in Delaware in 2014 in connection with its holding company structure. Our operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF were exchanged on a one-for-one basis for shares of common stock of Newco. Our new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), we entered into two agreements to sell all of the assets of our ALY frozen yogurt stores, along with our interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini”“Yogurtini,” which we also acquired in January 2013, to U-Swirl, Inc., a publicly traded company (OTCQB: SWRL) (“SWRL”), in exchange for a 60% controlling equity interest in SWRL which was subsequently diluted down to 39%(46% equity interest as of February 28, 2017 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations.2019). Upon completion of these transactions, we ceased at the time to directly operate any Company-owned Aspen Leaf YogurtALY locations or sell and support frozen yogurt franchise locations, which were being supported by SWRL. The SWRL Board of Directors is composed solely of board members also serving on our Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serveself-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Companywe entered into a credit facility with Wells Fargo Bank, N.A. used to finance the acquisitions ofby SWRL, and in turn, the Companywe entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. UnderU-Swirl. As a result of certain defaults under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, we issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, we foreclosed on all of the outstanding stock of U-Swirl International, Inc. as ofon February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. (“U-Swirl”) becoming aour wholly-owned subsidiary of the Company as of February 29, 2016, at which timeand concurrently we beganceased to have financial control of SWRL as of February 29, 2016. As of February 28, 2019, SWRL had no operating the frozen yogurt business of U-Swirl. U-Swirl currently operates self-serve frozen yogurt cafes under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.assets.
Approximately 53%In FY 2019, approximately 52% of the products sold at Rocky Mountain Chocolate Factory stores arewere prepared on the premises. We believe that in-store preparation of products creates a special store ambiance, and the aroma and sight of products being made attracts foot traffic and assures customers that products are fresh.
Our principal competitive strengths lie in our brand name recognition, our reputation for the quality, variety and taste of our products, the special ambiance of our stores, our knowledge and experience in applying criteria for selection of new store locations, our expertise in the manufacture of chocolate candy products and the merchandising and marketing of confectionary products, and the control and training infrastructures we have implemented to assure consistent customer service and execution of successful practices and techniques at our stores.
We believe our manufacturing expertise and reputation for quality has facilitated the sale of selected products through specialty markets. We are currently selling our products in a select number of specialty markets, including wholesale, fundraising, corporate sales, mail order, private label and internet sales.
U-Swirl cafés and associated brands are designed to be attractive to customers by offering the following:
● | inside café-style seating for 50 people and outside patio seating, where feasible and appropriate; |
● | spacious surroundings of approximately 1,800 to 3,000 square feet; |
● | 8 to 16 flavors of frozen yogurt; |
● | up to 70 toppings; and |
● | self-serve format allowing guests to create their own favorite snack. |
We believe that these characteristics provide U-Swirl with the ability to compete successfully in the retail frozen yogurt industry. While U-Swirl continues to pursue locations with the characteristics described above, we recognize that its acquisition strategy may lead U-Swirl to purchase competitors with diverse layouts.
The trade dress of the Aspen Leaf Yogurt, CherryBerry, Yogli Mogli, Fuzzy Peach, Let’s Yo! and Yogurtini locations are similar to that of U-Swirl, although their locations use different color schemes and are typically smaller than the U-Swirl cafés.
Our consolidated revenues are primarily derived from three principal sources: (i) sales to franchisees and other third parties of chocolates and other confectionery products manufactured by us (66%-65%-62%(70%-68%-66%); (ii) sales at Company-owned stores of chocolates, other confectionery products and frozen yogurt (including products manufactured by us) (12%(10%-11%-12%-15%) and (iii) the collection of initial franchise fees and royalties from franchisees (22%-23%-23%(20%-21%-22%). Approximately 97%For FY 2019, approximately 98% of our revenues arewere derived from domestic sources, with 3%2% derived from international sources. The figures in parentheses above show the percentage of total revenues attributable to each source for the FY 2019, 2018 and 2017, 2016 and 2015, respectively.
According to industry data, the total U.S. candy market approximatedgenerated approximately $35.8 billion of retail sales in 2015 with chocolate generatingsales growing 2.2% from sales of approximately $21.6$22.8 billion during 2017 to $23.3 billion during 2018 and candy sales per capita of $111.16 an increase of 2.8% when compared to 2014.during 2015.
According to Ice Cream and Frozen Desserts in the U.S. 9th Edition, published in January 2017 by Packaged Facts, in 2016 the U.S. market for ice cream and related frozen desserts, including frozen yogurt and frozen novelties, grew to $28 billion.
Business Strategy
Our objective is to build on our position as a leading international franchisor and manufacturer of high qualityhigh-quality chocolate, other confectionery products and frozen yogurt. We continually seek opportunities to profitably expand our business. To accomplish this objective, we employ a business strategy that includes the elements set forth below.
Product Quality and Variety
We maintain the gourmet taste and quality of our chocolate candies by using only the finest chocolate and other wholesome ingredients. We use our own proprietary recipes, primarily developed by our master candy makers. A typical Rocky Mountain Chocolate Factory store offers up to 100 of our chocolate candies throughout the year and as many as 200, including many packaged candies, during the holiday seasons. Individual stores also offer numerous varieties of premium fudge and gourmet caramel apples, as well as other products prepared in the store from Company recipes.
Store Atmosphere and Ambiance
We seek to establish ana fun, enjoyable and inviting atmosphere in each of our stores. Eachstore locations. Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store prepares numerous products, including fudge, barks and caramel apples, in the store. In-store preparation is designed to be both fun and entertaining for customers and towe believe the in-store preparation and aroma of our products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for our customers and convey an image of freshness and homemade quality. OurTo ensure that all stores conform to the Rocky Mountain Chocolate Factory image, our design staff has developed easily replicable designs and specifications to ensureand approves the construction plans for each new store. We also control the signage and building materials that may be used in the Rocky Mountain Chocolate Factory concept is consistently implemented at each store.stores.
Site Selection
Careful selection of a site is critical to the success of our stores. We consider many factors in identifying suitable sites, including tenant mix, visibility, attractiveness, accessibility, level of foot traffic and occupancy costs. Final site selection occurs only after our senior management has approved the site. We believe that the experience of our management team in evaluating a potential site is one of our competitive strengths.
Customer Service Commitment
We emphasize excellence in customer service in our stores and cafés and seek to employ and to sell franchises to motivated and energetic people. We also foster enthusiasm for our customer service philosophy and our concepts through our regional meetings and other frequent contacts with our franchisees. Rocky Mountain Chocolate Factory holds a biennial convention for franchisees.
Increase Same Store Retail Sales at Existing Rocky Mountain Chocolate Factory and U-SwirlLocations
We seek to increase profitability of our store system through increasing sales at existing store locations. Changes in system wide domestic same store retail sales at Rocky Mountain Chocolate Factory locations are as follows:
2013 | 0.2 | % | |||
2014 | 1.2 | % | |||
2015 | 3.1 | % | 3.1% | ||
2016 | 1.6 | % | 1.6% | ||
2017 | 0.9 | % | 0.9% | ||
2018 | (2.9)% | ||||
2019 | 1.0% |
Changes in system wide domestic same store retail sales at frozen yogurt franchise locations are as follows:
2013 | * | ||||
2014 | * | ||||
2015 | * | * | |||
2016 | (1.4% | ) | (1.4)% | ||
2017 | (3.0% | ) | (3.0)% | ||
2018 | (4.3)% | ||||
2019 | (0.5)% |
*Same store sales for acquired brands are reported after 24 months of operation as a part of our network of domestic franchise stores. Because the majority of our frozen yogurt franchise brands were acquired in January 2014, the earliest period same store sales are reported is for FY 2016.
We have designed a contemporary and coordinated line of packaged products that we believe capture and convey the freshness, fun and excitement of the Rocky Mountain Chocolate Factory retail store experience. We also believe that the successful launch of new packaging has had a positive impact on same store sales.
Increase Same Store Pounds Purchased by Existing Franchised and Licensed Locations
In FY 2017,2019, same store pounds purchased by franchisees and licensees declined 4.7%decreased 0.5% compared to the prior fiscal year. We continue to add new products and focus our existing product lines in an effort to increase same store pounds purchased by existing locations. We believe historical decreases in same store pounds purchased, including for FY 2019, were due, in part, to a product mix shift from factory-made products to products made in the store, such as caramel apples.
Enhanced Operating Efficiencies
We seek to improve our profitability by controlling costs and increasing the efficiency of our operations. Efforts in the last several years include: the purchase of additional automated factory equipment, implementation of a comprehensive Advanced Planningadvanced planning and Scheduling (APS)scheduling system for production scheduling, implementation of alternative manufacturing strategies, and installation of enhanced Point-of-Sale (POS)point-of-sale systems in all of our Company-owned stores and the majority of our franchised stores.stores, and implementation of a serial/lot tracking and warehouse management system. These measures have significantly improved our ability to deliver our products to our stores safely, quickly and cost-effectively and positively impact store operations.
Acquisition Opportunities
We plan to evaluate other businesses and opportunities that would be complementary to our business, including both our candy products and the frozen yogurt business. Beginning in January 2013 with the acquisition of a controlling interest in SWRL, we began an initiative to improve profitability through the acquisition of self-serve frozen yogurt franchise systems. We believe that the rapid growth of the self-serve frozen yogurt market has created a highly fragmented franchise environment. We believe we can leverage the strategies we’ve developed over time to improve our profitability and bring the benefits of scale to smaller franchisors. During FY 2013 and FY 2014, we acquired Yogurtini, CherryBerry, Yogli Mogli and Fuzzy Peach frozen yogurt concepts. During FY 2016, we acquired the Let’s Yo! Frozen Yogurt concept.
Expansion Strategy
We are continually exploring opportunities to grow our brand and expand our business. Key elements of our expansion strategy are set forth below.
Unit Growth
We continue to pursue unit growth opportunities, despite the difficult financing environment for our concepts, in locations where we have traditionally been successful, to pursue new and developing real estate environments for franchisees which appear promising based on early sales results, and to improve and expand our retail store concepts, such that previously untapped and unfeasible environments generate sufficient revenue to support a successful Rocky Mountain Chocolate Factory or U-Swirl location.
High Traffic Environments
We currently establish franchised stores in the following environments: regional centers, outlet centers, tourist environments, regional centers,areas, street fronts, airports, other entertainment-oriented environments and strip centers. We have established a business relationship with most of the major developers in the United States and believe that these relationships provide us with the opportunity to take advantage of attractive sites in new and existing real estate environments.
Rocky Mountain Chocolate Factory Name Recognition and New Market Penetration
We believe the visibility of our stores and the high foot traffic at many of our locations has generated strong name recognition of Rocky Mountain Chocolate Factory and demand for our franchises. The Rocky Mountain Chocolate Factory system has historically been concentrated in the western and Rocky Mountain region of the United States, but growth has generated a gradual easterly momentum as new stores have been opened in the eastern half of the country. We believe this growth has further increased our name recognition and demand for our franchises. DistributionWe believe that distribution of Rocky Mountain Chocolate Factory products through specialty markets also increases name recognition and brand awareness in areas of the country in which we have not previously had a significant presence. Wepresence and we believe that distributing selected Rocky Mountain Chocolate Factory products through specialty marketsit will also increases our name brand recognition and will improve and benefit our entire store system.
We seek to establish a fun, enjoyable and inviting atmosphere in each of our store locations. Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store prepares certainnumerous products, including fudge, barks and caramel apples, in the store. Customers can observe store personnel making fudge from start to finish, including the mixing of ingredients in old-fashioned copper kettles and the cooling of the fudge on large granite or marble tables, and are often invited to sample the store's products. AnIn FY 2019, an average of approximately 53%52% of the revenues of franchised stores are generated by sales of products prepared on the premises. WeIn-store preparation is designed to be both fun and entertaining for customers and we believe the in-store preparation and aroma of our products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for our customers and convey an image of freshness and homemade quality.
To ensure that all stores conform to the Rocky Mountain Chocolate Factory image, our design staff provides working drawingshas developed easily replicable designs and specifications and approves the construction plans for each new store. We also control the signage and building materials that may be used in the stores.
The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores are open seven days a week. Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6 p.m. on Sundays. Store hours in tourist areas may vary depending upon the tourist season.
In January 2007, we began testing co-branded locations, such as the co-branded stores with Cold Stone Creamery. Co-branding a location is a vehicle to exploit retail environments that would not typically support a stand-alone Rocky Mountain Chocolate Factory store. Co-branding can also be used to more efficiently manage rent structure, payroll and other operating costs in environments that have not historically supported stand-alone Rocky Mountain Chocolate Factory stores. As of February 28, 2017, our partner’s2019, Cold Stone Creamery franchisees operated 8391 co-branded locations, our U-Swirl franchisees operated 1612 co-branded locations and three Company-owned co-branded units were in operation.
We have previously entered into franchise developments and licensing agreements for the expansion of our franchise stores in Canada, the United Arab Emirates, the Republic of Panama, South Korea, Thethe Republic of the Philippines, Vietnam, Qatar and Japan. We believe that international opportunities may create a favorable expansion strategy and reduce dependence on domestic franchise openings to achieve growth.
International units in operation were as follows at March 31, 2017:2019:
Rocky Mountain Chocolate Factory | ||||
Canada | ||||
| ||||
The Republic of the Philippines | ||||
South Korea | ||||
| ||||
U-Swirl Cafés | ||||
| 2 | |||
Total |
Products and Packaging
We produce approximately 350700 chocolate candies and other confectionery products using proprietary recipes developed primarily by our master candy makers. These products include many varieties of clusters, caramels, creams, toffees, mints and truffles. These products are offered for sale and also configured into approximately 400 varieties of packaged assortments. We continue to engage in a major effort to expand our product line by developing additional exciting and attractive new products. During the Christmas, Easter and Valentine's Day holiday seasons, we may make as many as 130 additional100 items, including many candies offered in packages, that are specially designed for thesuch holidays. A typical Rocky Mountain Chocolate Factory store offers up to 100 of these approximately 700 chocolate candies and other confectionery products throughout the year and up to an additional 100 during holiday seasons. Individual stores also offer more than 15 varieties of caramel apples and other products prepared in the store. On average,In FY 2019, approximately 42%45% of the revenues of Rocky Mountain Chocolate Factory stores are generated by products manufactured at our factory, 53%52% by products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and the remaining 5%3% by products such as ice cream, coffee and other sundries purchased from approved suppliers.
Approximately 31%In FY 2019, approximately 28% of our product sales resultresulted from the sale of products outside of our system of franchised and licensed locations, (specialty markets).which we refer to as specialty markets. The majority of sales outside our system of franchised and licensed locationsto specialty markets are the result ofto a single customer. In the twelve months ended February 28, 2017,For FY 2019, this customer represented 52%approximately 46% of total shipments to specialty markets.markets and approximately 9% of our total revenues. These products are produced using the same quality ingredients and manufacturing processes as the products sold in our network of retail stores. See Item 1A “Risk Factors—Our Sales to Specialty Market Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among a Small Number of Customers.”
We use only the finest chocolates, nutmeats and other wholesome ingredients in our candies and continually strive to offer new confectionery items in order to maintain the excitement and appeal of our products. We develop special packaging for the Christmas, Valentine's Day and Easter holidays, and customers can have their purchases packaged in decorative boxes and fancy tins throughout the year.
Chocolate candies that we manufacture are sold at prices ranging from $17.90$19.75 to $28.95$29.95 per pound, with an average price of $21.98$23.32 per pound. Franchisees set their own retail prices, though we do recommend prices for all of our products.
Our frozen yogurt cafés feature a high qualityhigh-quality yogurt that we believe is superior to products offered by many of our competitors. Our product is nationally distributed and consistent among our cafés. Most cafés feature 8-168 to 16 flavor varieties, including custom and seasonal specialty flavors. Our toppings bars feature up to 70 toppings allowing for a customizable frozen dessert experience. Cafés typically sell frozen yogurt by the ounce, with prices generally ranging between $0.44$0.46 and $0.59$0.61 per ounce.
Operating Environment
Rocky Mountain Chocolate Factory
We currently establish Rocky Mountain Chocolate Factory stores in six primary environments: regional centers, outlet centers, tourist areas, outlet centers, street fronts, airports and other entertainment-oriented shopping centers. Each of these environments has a number of attractive features, including high levels of foot traffic. Rocky Mountain Chocolate Factory domestic franchise locations in operation as of February 28, 20172019 include:
Regional Centers | % | |||
Outlet Centers | % | |||
Festival/Community Centers | % | |||
Tourist Areas | % | |||
Street Fronts | % | |||
Airports | % | |||
Other | % |
Regional Centers
As of February 28, 2017,2019, there were Rocky Mountain Chocolate Factory stores in approximately 4443 regional centers, including a location in the Mall of America in Bloomington, Minnesota. Although they often providingprovide favorable levels of foot traffic, regional centers typically involve more expensive rent structures and competing food and beverage concepts.
Outlet Centers
As of February 28, 2019, there were approximately 39 Rocky Mountain Chocolate Factory stores in outlet centers. We have established business relationships with most of the major outlet center developers in the United States. Although not all factory outlet centers provide desirable locations for our stores, we believe our relationships with these developers will provide us with the opportunity to take advantage of attractive sites in new and existing outlet centers.
Tourist Areas, Street Fronts, Airports and Other Entertainment-Oriented Shopping Centers
As of February 28, 2017,28, 2019, there were approximately 3029 Rocky Mountain Chocolate Factory stores in locations considered to be tourist areas, including Fisherman's Wharf in San Francisco, California and the River Walk in San Antonio, Texas. Tourist areas are very attractive locations because they offer high levels of foot traffic and favorable customer spending characteristics, and greatly increase our visibility and name recognition.
Other Environments
We believe there are a number of other environments that have the characteristics necessary for the successful operation of Rocky Mountain Chocolate Factory stores such as airports and sports arenas. EightAs of February 28, 2019, there were 11 franchised Rocky Mountain Chocolate Factory stores exist at airport locations.
Strip/Convenience Centers
Our self-serve frozen yogurt locations are primarily located in strip and convenience center locations. Such centers generally have convenient parking and feature many retail entities without enclosed connecting walkways. Such centers generally offer favorable rents and the ability to operate during hours when other operating environments are closed, such as late at night.
Franchising Program
General
Our franchising philosophy is one of service and commitment to our franchise system and we continuously seek to improve our franchise support services. Our concept has been rated as an outstanding franchise opportunity by publications and organizations rating such opportunities. In January 2011, Rocky Mountain Chocolate Factory was rated the number one franchise opportunity in the candy category by Entrepreneur Magazine (the last publication of this category ranking). and since then has been ranked in the Top 500 Franchises every year by Entrepreneur Magazine. As of March 31, 2017,2019, there were 283245 franchised stores in the Rocky Mountain Chocolate Factory system and 10568 franchised stores under the U-Swirl frozen yogurt brands. We strive to bring this philosophy of service and commitment to all of our franchised brands and believe this strategy gives us a competitive advantage in the support of frozen yogurt franchises.
Franchisee Sourcing and Selection
The majority of new franchises are awarded to persons referred to us by existing franchisees, to interested consumers who have visited Rocky Mountain Chocolate Factory storesone of our domestic franchise locations and to existing franchisees. We also advertise for new franchisees in national and regional newspapers as suitable potential store locations come to our attention. Franchisees are approved by us on the basis of the applicant's net worth and liquidity, together with an assessment of work ethic and personality compatibility with our operating philosophy.
International Franchising and Licensing
In FY 1992, we entered into a franchise development agreement covering Canada with Immaculate Confections, Ltd. of Vancouver, British Columbia (“Immaculate Confections”). Pursuant to this agreement, Immaculate Confections purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores in Canada. As of March 31, 2017,2019, Immaculate Confections operated 6458 stores under this agreement.
In FY 2000, we entered into a franchise development agreement covering the Gulf Cooperation Council States of United Arab Emirates, Qatar, Bahrain, Kuwait and Oman with Al Muhairy Group of United Arab Emirates (“Al Muhairy Group”). Pursuant to this agreement, Al Muhairy Group purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores in the Gulf Cooperation Council States. As of March 31, 2017, Al Muhairy Group operated four stores under this agreement.
Our business was significantly affected by the global recession during 2008-2009. During this period there was a decrease in leads and qualified franchisees for domestic franchise growth. Amidst this environment we initiated a program to focus on international expansion. International growth is generally achieved through entry into a Master License Agreement covering specific countries, with a licensee that meets minimum qualifications to develop Rocky Mountain Chocolate Factory, or a brand of U-Swirl in that country. License agreements are generally entered into for a period of 3-10 years and allow the licensee exclusive development rights in a country. Generally, we require an initial license fee and commitment to a development schedule. International license agreements in place at February 28, 2017 include the following:
|
|
● | In March 2013, |
● | In October 2014, we entered into a Licensing Agreement in the Republic of the Philippines. As of March 31, |
● | In May 2017, we entered into a Licensing Agreement in the Republic of the Panama. As of March 31, 2019, one unit was operating under the agreement. |
● | In May 2017, we entered into a Licensing Agreement in the Socialist Republic of Vietnam. As of March 31, 2019, there were no units operating under the agreement. |
● | Through our U-Swirl subsidiary, |
Co-brandingCo-Branding
In August 2009, we entered into a Master License Agreement with Kahala Franchise Corp. Under the terms of the agreement, select current and future Cold Stone Creamery franchise stores are co-branded with both the Rocky Mountain Chocolate Factory and the Cold Stone Creamery brands. Locations developed or modified under the agreement are subject to the approval of both parties. Locations developed or modified under the agreement will remain franchisees of Cold Stone Creamery and will be licensed to offer the Rocky Mountain Chocolate Factory brand. As of March 31, 2017,2019, Cold Stone Creamery franchisees operated 8390 stores under this agreement.
Additionally, we allow U-Swirl brands to offer Rocky Mountain Chocolate Factory products under terms similar to other co-branding agreements. As of March 31, 2017,2019, there were 1912 franchise and Company-owned U-Swirl cafés offering Rocky Mountain Chocolate Factory products.
Training and Support
Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a comprehensive training program in store operations and management. We have established a training center at our Durango headquarters in the form of a full-sized replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store. U-Swirl franchisees are required to complete a similar training program. Topics covered in the training course include our philosophy of store operation and management, customer service, merchandising, pricing, cooking, inventory and cost control, quality standards, record keeping, labor scheduling and personnel management. Training is based on standard operating policies and procedures contained in an operations manual provided to all franchisees, which the franchisee is required to follow by terms of the franchise agreement. Additionally, and importantly, trainees are provided with a complete orientation to our operations by working in key factory operational areas and by meeting with members of our senior management.
Our operating objectives include providing knowledge and expertise in merchandising, marketing and customer service to all front-line store level employees to maximize their skills and ensure that they are fully versed in our proven techniques.
We provide ongoing support to franchisees through our field consultants, who maintain regular and frequent communication with the stores by phone and by site visits. The field consultants also review and discuss store operating results with the franchisee store operating results and provide advice and guidance in improving store profitability and in developing and executing store marketing and merchandising programs.
Quality Standards and Control
The franchise agreementagreements for Rocky Mountain Chocolate Factory and U-Swirl brands franchisees requiresrequire compliance with our procedures of operation and food quality specifications and permits audits and inspections by us.
Operating standards for Rocky Mountain Chocolate Factory and U-Swirl brands stores are set forth in operating manuals. These manuals cover general operations, factory ordering, merchandising, advertising and accounting procedures. Through their regular visits to franchised stores, our field consultants audit performance and adherence to our standards. We have the right to terminate any franchise agreement for non-compliance with our operating standards. Products sold at the stores and ingredients used in the preparation of products approved for on-site preparation must be purchased from us or from approved suppliers.
The Franchise Agreement: Terms and Conditions
The domestic offer and salesales of our franchise concepts are made pursuant to the respective Franchise Disclosure Document prepared in accordance with federal and state laws and regulations. States that regulate the sale and operation of franchises require a franchisor to register or file certain notices with the state authorities prior to offering and selling franchises in those states.
Under the current form of our domestic franchise agreements, franchisees pay us (i) an initial franchise fee for each store, (ii) royalties based on monthly gross sales, and (iii) a marketing fee based on monthly gross sales. Franchisees are generally granted exclusive territory with respect to the operation of their stores only in the immediate vicinity of their stores. Chocolate and yogurt products not made on the premises by franchisees must be purchased from us or approved suppliers. The franchise agreements require franchisees to comply with our procedures of operation and food quality specifications, to permit inspections and audits by us and to remodel stores to conform with standards then in effect. We may terminate the franchise agreement upon the failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission by the franchisee of any unlawful or deceptive practice, which in our judgment isare likely to adversely affect the system. Our ability to terminate franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See "Business - Regulation.""Regulation" Below for additional information.
The agreements prohibit the transfer or assignment of any interest in a franchise without our prior written consent. The agreements also give us a right of first refusal to purchase any interest in a franchise if a proposed transfer would result in a change of control of that franchise. The refusal right, if exercised, would allow us to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee.
The term of each franchise agreement is ten years, and franchisees have the right to renew for one additional ten-year term.
Franchise Financing
We do not typically provide prospective franchisees with financing for their stores for new or existing franchises, but we have developed relationships with several sources of franchisee financing to whom we will refer franchisees. Typically, franchisees have obtained their own sources of such financing and have not required our assistance. In the normal course of business, we extend credit to customers, primarily franchisees that satisfy pre-defined credit criteria, for inventory and other operational costs.
During FY 2014,, we began an initiative to finance entrepreneurial graduates of the Missouri Western State University (“MWSU”) entrepreneurial program. Beginning in FY 2010, recent graduates were awarded the opportunity to own a Rocky Mountain Chocolate Factory franchise under favorable financing terms. Prior to FY 2014, the financing was provided by an independent benefactor of the MWSU School of Business. Beginning in FY 2014, we began to finance the graduates directly, under similar terms as the previous financing facility. This program has generally included financing for the purchase of formerly Company-owned locations or for the purchase of underperforming franchise locations. As of February 28, 2017,2019, approximately $460,000$219,000 was included in notes receivable as a result of this program. As of March 31, 2017,2019, there were 1815 units in operation by graduates of the MWSU entrepreneurial program.
Licensee Financing
During FY 2011, we began a program to finance the remodel costs of a select number of co-branded licensed Cold Stone Creamery locations. The financing was provided to existing Cold Stone Creamery franchisees that were required to meet a number of financial qualifications prior to approval. At February 28, 2017,2019, approximately $49,000$3,000 was included in notes receivable as a result of this program. We initially financed this program in order to encourage early adoption of the co-branding program. Now that the program is mature, we do not intend to continue direct financing unless circumstances change.
Company Store Program
As of March 31, 2017,2019, there were four company-ownedtwo Company-owned Rocky Mountain Chocolate Factory stores and five company-ownedfour Company-owned U-Swirl cafés. Company-owned stores provide a training ground for Company-owned store personnel and district managers and a controllable testing ground for new products and promotions, operating and training methods and merchandising techniques, which may then be incorporated into the franchise store operations.
Managers of company-ownedCompany-owned stores are required to comply with all Company operating standards and undergo training and receive support from us similar to the training and support provided to franchisees. See "Franchising Program-Training"—Franchising Program—Training and Support" and "Franchising Program-Quality"—Franchising Program—Quality Standards and Control."
Manufacturing Operations
General
We manufacture our chocolate candies at our factory in Durango, Colorado. All products are produced consistent with our philosophy of using only the finest high qualityhigh-quality ingredients to achieve our marketing motto of "The Peak of Perfection in Handmade Chocolates®."
We have always believed that we should control the manufacturing of our own chocolate products. By controlling manufacturing, we can better maintain our high product quality standards, offer unique, proprietary products, manage costs, control production and shipment schedules and potentially pursue new or under-utilized distribution channels.
Manufacturing Processes
The manufacturing process primarily involves cooking or preparing candy centers, including nuts, caramel, peanut butter, creams and jellies, and then coating them with chocolate or other toppings. All of these processes are conducted in carefully controlled temperature ranges, and we employ strict quality control procedures at every stage of the manufacturing process. We use a combination of manual and automated processes at our factory. Although we believe that it is currently preferable to perform certain manufacturing processes, such as dipping of some large pieces by hand, automation increases the speed and efficiency of the manufacturing process. We have from time to time automated certain processes formerly performed by hand where it has become cost-effective for us to do so without compromising product quality or appearance.
We also seek to ensure the freshness of products sold in Rocky Mountain Chocolate Factory stores with frequent shipments. Most Rocky Mountain Chocolate Factory stores do not have significant space for the storage of inventory, and we encourage franchisees and store managers to order only the quantities that they can reasonably expect to sell within approximately two to four weeks. For these reasons, we generally do not have a significant backlog of orders.
Ingredients
The principal ingredients used in our products are chocolate, nuts, sugar, corn syrup, cream and butter. The factory receives shipments of ingredients daily. To ensure the consistency of our products, we buy ingredients from a limited number of reliable suppliers. In order to assure a continuous supply of chocolate and certain nuts, we frequently enter into purchase contracts of between six to eighteen months for these products. Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall. We have one or more alternative sources for most essential ingredients and therefore believe that the loss of any supplier would not have a material adverse effect on our business or results of operations. We currently purchase small amounts of finished candy from third parties on a private label basis for sale in Rocky Mountain Chocolate Factory stores.
Trucking Operations
We operate eight nine trucks and ship a substantial portion of our products from the factory on our own fleet. Our trucking operations enable us to deliver our products to the stores quickly and cost-effectively. In addition, we back-haul our own ingredients and supplies, as well as products from third parties, on return trips, which helps achieve even greater efficiencies and cost savings.
Marketing
General
We rely primarily on in-store promotion and point-of-purchase materials to promote the sale of our products. The monthly marketing fees collected from franchisees are used by us to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update our local store marketing handbooks.
We focus on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and mail order catalogs generated by our in-house Creative Services department. The department works directly with franchisees to implement local store marketing programs.
We have not historically,, and do not intend to, engage in national traditional media advertising in the near future. Consistent with our commitment to community support, we aggressively seek opportunities to participate in local and regional events, sponsorships and charitable causes. This support leverages low cost, high return publicity opportunities for mutual gain partnerships. Through programs such as Fudge for Troops, and collaborations with Sylvan Learning CentersCare and Share Food Bank and other national/local organizations focused on youth/leadership development and underserved populations in our community, we have developed relationships that define our principal platforms, and contribute to charitable causes that provide great benefitsexposure at a national level.
Internet and Social Media
Beginning in 2010, we initiated a program to leverage the marketing benefits of various social media outlets. These low costlow-cost marketing opportunities seek to leverage the positive feedback of our customers to expand brand awareness through a customer’scustomer’s network of contacts. Complementary to local store marketing efforts, these networks also provide a medium for us to communicate regularly and authentically with customers. When possible, we work to facilitate direct relationships between our franchisees and their customers. We use social media as a powerful tool to build brand recognition, increase repeat exposure and enhance dialogue with consumers about their preferences and needs. To date, the majority of stores have location specific websites and location specific Facebook® pages dedicated to help customers interact directly with their local store. Proceeds from the monthly marketing fees collected from franchisees are used by us to facilitate and assist stores in managing their online presence consistent with our brand and marketing efforts.
Licensing
WeWe have developed relationships and utilized licensing partners to leverage the equity of the Rocky Mountain Chocolate Factory brand. These licensed products place our brandbrands and story in front of consumers in environments where they regularly shop but may not be seeing our brandbrands at present. We regularly review product opportunities and selectively pursue those we believe will have the greatest impact. The most recent example is the announcement of our Rocky Mountain Chocolate Factory Chocolatey Almond breakfast cereal, which was manufactured, marketed, and distributed by Kellogg’s Company. Some of our specialty markets customers (customers outside our system of franchised domestic retail locations) have worked with us to offer licensed products alongside products we produce to further enhance brand placement and awareness.
Competition
The retailing of confectionery and frozen dessert products is highly competitive. We and our franchisees compete with numerous businesses that offer products similar to those offered by our stores offer.stores. Many of these competitors have greater name recognition and financial, marketing and other resources than us. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees.
We believe that our principal competitive strengths lie in our name recognition and our reputation for the quality, value, variety and taste of our products and the special ambiance of our stores; our knowledge and experience in applying criteria for selection of new store locations; our expertise in merchandising and marketing of chocolate, and other candy products;products and frozen yogurt; and the control and training infrastructures we have implemented to assure execution of successful practices and techniques at our store locations. In addition, by controlling the manufacturing of our own chocolate products, we can better maintain our high product quality standards for those products, offer proprietary products, manage costs, control production and shipment schedules and pursue new or under-utilized distribution channels.
Trade Name and Trademarks
The trade name "Rocky Mountain Chocolate Factory®," the phrases, "The Peak of Perfection in Handmade Chocolates®", "America's Chocolatier®”, “The World’s Chocolatier®” as well as all other trademarks, service marks, symbols, slogans, emblems, logos and designs used in the Rocky Mountain Chocolate Factory system, are our proprietary rights. We believe that all of the foregoing are of material importance to our business. The registration for the trademark “Rocky Mountain Chocolate Factory” is registered in the United States and Canada. Applications have been filed to register the Rocky Mountain Chocolate Factory trademark have been filed and/or obtained in certain foreign countries.
In connection with U-Swirl’s frozen yogurt café operations, the following marks are owned by U-Swirl and have been registered with the U.S. Patent and Trademark Office: “U-Swirl Frozen Yogurt And Design”; “U-Swirl Frozen Yogurt”; “U-Swirl”; “U and Design”; “Worth The Weight”; “Frequent Swirler”; “Yogurtini”; “CherryBerry Self-Serve Yogurt Bar”; “Yogli Mogli”; “Best on the Planet”; “Fuzzy Peach”; “U-Swirl-N-Go”; and “Serve Yo Self”. The “U-Swirl Frozen Yogurt and Design” (a logo) is also registered in Mexico and U-Swirl has a registration for “U-Swirl” in Canada.
We have not attempted to obtain patent protection for the proprietary recipes developed by our master candy-maker and instead rely upon our ability to maintain the confidentiality of those recipes.
Employees
At February 28, 2017,28, 2019, we employed approximately 280231 people. Most employees, with the exception of store management, factory management and corporate management, are paid on an hourly basis. We also employ some peopleindividuals on a temporary basis during peak periods of store and factory operations. We seek to assure that participatory management processes, mutual respect and professionalism and high performancehigh-performance expectations for the employee exist throughout the organization. We believe that we provide working conditions, wages and benefits that compare favorably with those of our competitors. Our employees are not covered by a collective bargaining agreement. We consider our employee relations to be good.
Seasonal Factors
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays, such as Christmas, Easter and Valentine's Day, and the U.S. summer vacation season than at other times of the year, which may cause fluctuations in our quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings, the sale of franchises and the timing of purchases by customers outside our network of franchised locations. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year.
Regulation
Company-owned Rocky Mountain Chocolate Factory stores and Company-owned U-Swirl cafés are subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining the required licensing or approvals could delay or prevent the opening of new stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises. We are also subject to the Federal Trade Commission regulations relating to disclosure requirements in the sale of franchises and ongoing disclosure obligations.
Additionally, certain states have enacted and others may enact laws and regulations governing the termination or non-renewal of franchises and other aspects of the franchise relationship that are intended to protect franchisees. Although these laws and regulations, and related court decisions, may limit our ability to terminate franchises and alter franchise agreements, we do not believe that such laws or decisions will have a material adverse effect on our franchise operations. However, the laws applicable to franchise operations and relationships continue to develop, and we are unable to predict the effect on our intended operations of additional requirements or restrictions that may be enacted or of court decisions that may be adverse to franchisors.
Federal and state environmental regulations have not had a material impact on our operations but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay construction of new stores.stores, increase our capital expenditures and thereby decrease our earnings and negatively impact competitive position.
Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time. Our product labeling is subject to and complies with the Nutrition Labeling and Education Act of 1990 and the Food Allergen Labeling and Consumer Protection Act of 2004.
We provide a limited amount of trucking services to third parties, to fill available space on our trucks. Our trucking operations are subject to various federal and state regulations, including regulations of the Federal Highway Administration and other federal and state agencies applicable to motor carriers, safety requirements of the Department of Transportation relating to interstate transportation and federal, state and Canadian provincial regulations governing matters such as vehicle weight and dimensions.
We believe that we are operating in substantial compliance with all applicable laws and regulations.
Financial Information About Segments
See Note 9 “Operating Segments” to our consolidated financial statements included in this Annual Report in Part II. Item 8. “Financial Statements and Supplementary Data” for financial information relating to our segments.
Available Information
The Internet address of our website is www.rmcf.com. Additional websites specific to our franchise opportunities are www.sweetfranchise.com and www.u-swirl.com.
We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). We make available free of charge, through our Internet website, our annual reportAnnual Report on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. The public may also read and copy materials we file with the SEC at the SEC’s Public Reference Room, which is located at 100 F Street, NE, Room 1580, Washington, DC 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains these reports, proxy and information statements and other information regarding issuers that file electronically with the SECcan be accessed, free of charge, at www.sec.gov. The contents of our websites are not incorporated into, and should not be considered a part of, this Annual Report.
General Economic Conditions Could Have a Material Adverse Effect on our Business, Results of Operations and Liquidity or our Franchisees, with Adverse Consequences to Us.
Consumer purchases of discretionary items, including our products, generally decline during weak economic periods and other periods where disposable income is adversely affected. Our performance is subject to factors that affect worldwide economic conditions, including employment, consumer debt, reductions in net worth based on severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, value of the U.S. dollar versus foreign currencies and other macroeconomic factors. These factors may cause consumers to purchase products from lower priced competitors or to defer purchases of discretionary products altogether.
Economic weakness could have a material effect on our results of operations, liquidity and capital resources. It could also impact our ability to fund growth and/or result in us becoming more reliant on external financing, the availability and terms of which may be uncertain. In addition, a weak economic environment may exacerbate the other risks noted below.
We rely in part on our franchisees and the manner in which they operate their stores to develop and promote our business. It is possible that some franchisees could file for bankruptcy or become delinquent in their payments to us, which could have a significant adverse impact on our business due to loss or delay in payments of royalties, contributions to our marketing fund and other fees.
Although we have developed criteria to evaluate and screen prospective developers and franchisees, we cannot be certain that the developers and franchisees we select will have the business acumen or financial resources necessary to open and operate successful franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise arrangements. Moreover, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. The failure of developers and franchisees to open and operate franchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees and could materially adversely affect our business, financial condition, results of operations and cash flows.
Our Sales to Specialty Market Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among a Small Number of Customers.
Revenue from one customer of the Company’sour manufacturing segment represented approximately $4.1$3.1 million or 11%9% of the Company’sour total revenues during the year ended February 28, 2017. The Company’s2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by a changefurther decreases in the purchases of this customer.customer or the loss of this customer entirely.
Our Growth is Dependent Upon Attracting and Retaining Qualified Franchisees and Their Ability to Operate Their Franchised Stores Successfully.
Our continued growth and success is dependent in part upon our ability to attract, retain and contract with qualified franchisees. Our growth is dependent upon the ability of franchisees to operate their stores successfully, promote and develop our store concepts, and maintain our reputation for an enjoyable in-store experience and high qualityhigh-quality products. Although we have established criteria to evaluate prospective franchisees and have been successful in attracting franchisees, there can be no assurance that franchisees will be able to operate successfully in their franchise areas in a manner consistent with our concepts and standards.
The Financial Performance of Our Franchisees Can Negatively Impact Our Business.
Our financial results are dependent in part upon the operational and financial success of our franchisees. We receive royalties, franchise fees, contributions to our marketing fund, and other fees from our franchisees. We have established operational standards and guidelines for our franchisees; however, we have limited control over how our franchisees’ businesses are run. While we are responsible for ensuring the success of our entire system of stores and for taking a longer-term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may not be able to secure adequate financing to open or continue operating their Rocky Mountain Chocolate Factory stores or U-Swirl cafés. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience financial distress or even bankruptcy. If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalty revenues and the impact on our profitability could be greater than the percentage decrease in the royalty revenues. Closure of franchised stores, which during FY 2019, and potentially in subsequent years, could exceed levels experienced in recent years, would reduce our royalty revenues and could negatively impact margins, since we may not be able to reduce fixed costs which we continue to incur.
We Have Limited Control with Respect to the Operations of Our Franchisees, Which Could Have a Negative Impact on Our Business.
Franchisees are independent business operators and are not our employees, and we do not exercise control over the day-to-day operations of their stores. We provide training and support to franchisees, and set and monitor operational standards, but the quality of franchised stores may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could decline significantly, which would reduce our royalty revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.
Our Expansion Plans Are Dependent on the Availability of Suitable Sites for Franchised Stores at Reasonable Occupancy Costs.
Our expansion plans are critically dependent on our ability to obtain suitable sites for franchised stores at reasonable occupancy costs for our franchised stores in high foot traffic retail environments. There is no assurance that we will be able to obtain suitable locations for our franchised stores and kiosks in this environment at a cost that will allow such stores to be economically viable.
A Significant Shift by Franchisees from Company-Manufactured Products to Products Produced By by Third Parties Could Adversely Affect Our Operations.
We believeIn FY 2019, approximately 42%45% of franchised stores' revenues are generated by sales of products manufactured by and purchased from us, 53%52% by sales of products made in the stores with ingredients purchased from us or approved suppliers and 5%3% by sales of products purchased from approved suppliers for resale in the stores. Franchisees' sales of products manufactured by us generate higher revenues to us than sales of store-made or other products. We have seen a significant increase in system-wide sales of store-made and other products, which has led to a decrease in purchases from us and had an adverse effect on our revenues. If this trend continues, it could further adversely affect our total revenues and results of operations. Such a decrease could result from franchisees' decisions to sell more store-made products or products purchased from approved third party suppliers.
Same Store Sales Have Fluctuated and Will Continue to Fluctuate on a Regular Basis.
Our same store sales, defined as year-over-year sales for a store that has been open at least one year, have fluctuated significantly in the past on an annual and quarterly basis and are expected to continue to fluctuate in the future. During the past five fiscal years, same store sales results at RMCFRocky Mountain Chocolate Factory franchise stores have fluctuated as follows: (a) from 0.2%(2.9%) to 3.1% for annual results; and (b) from (3.9%(4.6%) to 7.5% for quarterly results. During the past four fiscal years, same store sales results at U-Swirl franchise stores have fluctuated as follows: (a) from (4.3%) to (0.5%) for annual results; and (b) from (8.6%) to 2.8% for quarterly results. Sustained declines in same store sales or significant same store sales declines in any single period could have a material adverse effect on our results of operations.
Increases in Costs Could Adversely Affect Our Operations.
Inflationary factors such as increases in the costs of ingredients, energy 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 reflect potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on our increased costs to our customers.
Price Increases May Not Be Sufficient To Offset Cost Increases And Maintain Profitability Or May Result In Sales Volume Declines Associated With Pricing Elasticity.
We may be able to pass some or all raw material,materials, energy and other input cost increases to customers by increasing the selling prices of our products,, however, higher product prices may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices sufficiently, or in a timely manner, to offset increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our financial condition and results of operations.
The Availability and Price of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our Control.
Several of the principal ingredients used in our products, including chocolate and nuts, are subject to significant price fluctuations. Although cocoa beans, the primary raw material used in the production of chocolate, are grown commercially in Africa, Brazil and several other countries around the world, cocoa beans are traded in the commodities market, and their supply and price are subject to volatility. We believe our principal chocolate supplier purchases most of its beans at negotiated prices from African growers, often at a premium to commodity prices. The supply and price of cocoa beans, and in turn of chocolate, are affected by many factors, including monetary fluctuations and economic, political and weather conditions in countries in which cocoa beans are grown. We purchase most of our nut meats from domestic suppliers who procure their products from growers around the world. The price and supply of nuts are also affected by many factors, including weather conditions in the various regions in which the nuts we use are grown. Although we often enter into purchase contracts for these products, significant or prolonged increases in the prices of chocolate or of one or more types of nuts, or the unavailability of adequate supplies of chocolate or nuts of the quality sought by us, could have a material adverse effect on us and our results of operations.
We Now Own 100% of the Operations of U-Swirl, Which Has a History of Losses and May Continue to Report Losses in the Future.
In January 2013,, we obtained a controlling ownership interest in SWRL. This interest was the result of a transaction designed to create a self-serve frozen yogurt company through the combination of three formerly separate self-serve frozen yogurt retailers (U-Swirl, Yogurtini and Aspen Leaf Yogurt). SWRL has historically reported net losses. In February 2016, we foreclosed on the all of the outstanding common stock of U-Swirl (the operating subsidiary of SWRL) in full satisfaction of the obligations under the SWRL Loan Agreement, meaning thatpursuant to which U-Swirl is nowbecame a wholly-owned subsidiary of the Company. If U-Swirl continues to not be profitable, those operating losses of U-Swirl could have a material adverse effect on our overall results of operations.
We And Our Subsidiaries May Be Unable To Successfully Integrate The Operations Of Acquired Businesses And May Not Achieve The Cost Savings And Increased Revenues Anticipated As A Result Of These Acquisitions.
Over the past three years, U-Swirl has acquired a number of other yogurt franchising businesses. Achieving the anticipated benefits of acquisitions will depend in part upon our and our subsidiaries’ ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously operated independently may result in significant challenges, and we and our subsidiaries may be unable to accomplish the integration smoothly or successfully. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the Company. In addition, the process of integrating operations may cause an interruption of, or loss of momentum in, the activities of one or more of our or our subsidiaries’ businesses and the loss of key personnel from us or the acquired businesses. Our and our subsidiaries’ strategy is, in part, predicated on the ability to realize cost savings and to increase revenues through the acquisition of businesses that add to the breadth and depth of our products and services. Achieving these cost savings and revenue increases is dependent upon a number of factors, many of which are beyond our control.
The Seasonality of Our Sales and New Store Openings Can Have a Significant Impact on Our Financial Results from Quarter to Quarter.
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays and summer vacation season than at other times of the year, which causes fluctuations in our quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale 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 the results that may be achieved in other quarters or for a full fiscal year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The Retailing of Confectionery and Frozen Dessert Products is Highly Competitive and Many of Our Competitors Have Competitive Advantages Over Us.
The retailing of confectionery and frozen dessert products is highly competitive. We and our franchisees compete with numerous businesses that offer similar products. Many of these competitors have greater name recognition and financial, marketing and other resources than we do. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees. Competitive market conditions could have a material adverse effect on us and our results of operations and our ability to expand successfully.
Changes in Consumer Tastes and Trends Could Have a Material Adverse Effect on Our Operations.
The sale of our products is affected by changes in consumer tastes and eating habits, including views regarding consumption of chocolate and frozen yogurt. Numerous other factors that we cannot control, such as economic conditions, demographic trends, traffic patterns and weather conditions, influence the sale of our products. Changes in any of these factors could have a material adverse effect on us and our results of operations.
We Are Subject to Federal, State and Local Regulation.
We are subject to regulation by the Federal Trade Commission and must comply with certain state laws governing the offer, sale and termination of franchises and the refusal to renew franchises. Many state laws also regulate substantive aspects of the franchisor-franchisee relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees and regulating discrimination among franchisees in charges, royalties or fees. Franchise laws continue to develop and change, and changes in such laws could impose additional costs and burdens on franchisors. Our failure to obtain approvals to sell franchises and the adoption of new franchise laws, or changes in existing laws, could have a material adverse effect on us and our results of operations.
Each of our Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining required licenses or approvals from such agencies could delay or prevent the opening of a new store. We and our franchisees are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Because a significant number of our employees are paid at rates related to the federal minimum wage, increases in the minimum wage would increase our labor costs. The failure to obtain required licenses or approvals, or an increase in the minimum wage rate, employee benefits costs (including costs associated with mandated health insurance coverage) or other costs associated with employees, could have a material adverse effect on us and our results of operations.
Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time, and could have a material adverse effect on us and our results of operations.
Information Technology System Failures, Breaches of our Network Security or Inability to Upgrade or Expand our Technological Capabilities Could Interrupt our Operations and Adversely Affect our Business.
We and our franchisees rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our stores. Our and our franchisees’ operations depend upon our and our franchisees’ ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external cybersecurity breaches, viruses and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us or our franchisees to litigation or to actions by regulatory authorities.
A party who is able to compromise the security measures on our networks or the security of our infrastructure could, among other things, misappropriate our proprietary information and the personal information of our customers and employees, cause interruptions or malfunctions in our or our franchisee’s operations, cause delays or interruptions to our ability to operate, cause us to breach our legal, regulatory or contractual obligations, create an inability to access or rely upon critical business records or cause other disruptions in our operations. These breaches may result from human errors, equipment failure, or fraud or malice on the part of employees or third parties.
We expend financial resources to protect against such threats and may be required to further expend financial resources to alleviate problems caused by physical, electronic, and cyber security breaches. As techniques used to breach security are growing in frequency and sophistication and are generally not recognized until launched against a target, regardless of our expenditures and protection efforts, we may not be able to implement security measures in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.
In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks despite not handling the data. Further, the regulatory framework around data custody, data privacy and breaches varies by jurisdiction and is an evolving area of law. We may not be able to limit our liability or damages in the event of such a loss.
We are also continuing to expand, upgrade and develop our information technology capabilities, including our point-of-sale systems, as well as the adoption of cloud services for e-mail, intranet, and file storage. If we are unable to successfully upgrade or expand our technological capabilities, we may not be able to take advantage of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures. Additionally, unforeseen problems with our point-of-sale system may affect our operational abilities and internal controls and we may incur additional costs in connection with such upgrades and expansion.
If We, our Business Partners, or our Franchisees Are SubjectUnable to PeriodicProtect our Customers’ Data, We Could Be Exposed to Data Loss, Litigation, Which Could ResultLiability and Reputational Damage.
In connection with credit and debit card sales, we and our franchisees transmit confidential credit and debit card information by way of secure private retail networks. A number of retailers have experienced actual or potential security breaches in Unexpected Expensewhich credit and debit card information may have been stolen. Although we and our franchisees use private networks, third parties may have the technology or know-how to breach the security of Timethe customer information transmitted in connection with credit and Resources.debit card sales, and our and our franchisees’ security measures and those of our and our franchisees’ technology vendors may not effectively prohibit others from obtaining improper access to this information. If a person were able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our and our franchisees’ operations. Any security breach could expose us and our franchisees to risks of data loss and liability and could seriously disrupt our and our franchisees’ operations and any resulting negative publicity could significantly harm our reputation. We may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit and debit card information may be brought by payment card providers, banks, and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit), and federal and state regulators. Any such proceedings could harm our reputation, distract our management team members from running our business and cause us to incur significant unplanned liabilities, losses and expenses.
We also sell and accept for payment gift cards, and our customer loyalty program provides rewards that can be redeemed for purchases. Like credit and debit cards, gift cards, and rewards earned by our customers are vulnerable to theft, whether physical or electronic. We believe that, due to their electronic nature, rewards earned through our customer loyalty program are primarily vulnerable to hacking. Customers affected by any loss of data or funds could litigate against us, and security breaches or even unsuccessful attempts at hacking could harm our reputation, and guarding against or responding to hacks could require significant time and resources.
We also receive and maintain certain personal information about our customers, including information received through our marketing programs, franchisees and business partners. The use of this information by us is regulated at the federal and state levels. If our security and information systems are compromised or our employees fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as the results of operations, and could result in litigation against us or the imposition of penalties. In addition, our ability to accept credit and debit cards as payment in our stores and online depends on us maintaining our compliance status with standards set by the PCI Security Standards Council. These standards, set by a consortium of the major credit card companies, require certain levels of system security and procedures to protect our customers’ credit and debit card information as well as other personal information. Privacy and information security laws and regulations change over time, and compliance with those changes may result in cost increases due to necessary system and process changes.
We Are Subject to Periodic Litigation, Which Could Result in Unexpected Expense of Time and Resources.
From time to time, we are called upon to defend ourselves against lawsuits relating to our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. We are currently involved in one potentially adverse legal proceeding. For a detailed discussion of our current material legal proceedings, see Item 3. Legal Proceedings in Part I of this Form 10-K. An unfavorable outcome in any current or future legal proceedings could have an adverse impact on our business, and financial results. In addition, any significant litigation in the future, regardless of its merits, could divert management's attention from our operations and result in substantial legal fees. Any litigation could result in substantial costs and a diversion of management's attention and resources that are needed to successfully run our business.
Changes in Health Benefit Claims and Healthcare Reform Legislation Could Have a Material Adverse Effect on Our Operations.
We accrue for costs to provide self-insured benefits for our employee health benefits program. We accrue for self-insured health benefits based on historical claims experience and we maintain insurance coverage to prevent financial losses from catastrophic health benefit claims. We monitor pending and enacted legislation in an effort to evaluate the effects of such legislation upon our business. Our financial position or results of operations could be materially adversely impacted should we experience a material increase in claims costs or a change in healthcare legislation that impacts our business. Our accrued liability for self-insured employee health benefits at February 28, 20172019 and February 29, 201628, 2018 was $100,000$140,000 and $78,200,$158,000, respectively.
Our Expansion Into New Markets May Present Increased Risks Due To Our Unfamiliarity With Those Areas And Our Target Customers’ Unfamiliarity With Our Brands.
Consumers in any new markets we enter will not be familiar with our brands, and we will need to build brand awareness in those markets through significant investments in advertising and promotional activity. We may find it more difficult in our markets to secure desirable locations and to hire, motivate and keep qualified employees.
Issues Or Concerns Related To The Quality And Safety Of Our Products, Ingredients Or Packaging Could Cause A Product Recall And/Or Result In Harm To The Company’s Reputation, Negatively Impacting Our Results of Operations.
In order to sell our products, we need to maintain a good reputation with our customers and consumers. Issues related to the quality and safety of our products, ingredients or packaging could jeopardize our Company’s image and reputation. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, could decrease demand for our products or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. Costs associated with these potential actions could negatively affect our results of operations.
Disruption To Our Manufacturing Operations Or Supply Chain Could Impair Our Ability To Produce Or Deliver Finished Products, Resulting In A Negative Impact On Our Results of Operations.
All of our manufacturing operations are located in Durango, Colorado. Disruption to our manufacturing operations or our supply chain could result from a number of factors, including: natural disaster, pandemic outbreak of disease, weather, fire or explosion, terrorism or other acts of violence, labor strikes or other labor activities, unavailability of raw or packaging materials, and operational and/or financial instability of key suppliers and other vendors or service providers. We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if they were to occur. However, if we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted.
If We Face Labor Shortages or Increased Labor Costs, our Results of Operations and our Growth Could Be Adversely Affected.
Labor is a primary component of operating our business. If we experience labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, or increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), operating expenses could increase and our growth could be adversely affected.
We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum wage and increases in the minimum wage will increase our labor costs. The federal minimum wage has been $7.25 per hour since July 24, 2009. Federally-mandated, state-mandated or locally-mandated minimum wages may be raised in the future. As of the date hereof, many states and the District of Columbia have set a minimum wage level higher than the federal minimum wage, including Colorado, where we employ the majority of our employees and minimum wage as of the date hereof is $11.10. We may be unable to increase our prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected.
Our Financial Results May Be Adversely Impacted By The Failure To Successfully Execute Or Integrate Acquisitions, Divestitures And Joint Ventures.
From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our results of operations.
Anti-Takeover Provisions In Our Certificate Of Incorporation And Bylaws May Delay Or Prevent A Third Party Acquisition Of The Company, Which Could Decrease The Value Of Our Common Stock.
As described above, effectiveEffective March 1, 2015, we reorganized to create a holding company structure and the new holding company is organized in the State of Delaware. Our new certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions will:
● | limit the business at special meetings to the purpose stated in the notice of the meeting; |
● | authorize the issuance of “blank check” preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover attempt and that the Board of Directors can create and issue without prior stockholder approval; |
● | establish advance notice requirements for submitting nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting; |
● | require the affirmative vote of the “disinterested” holders of a majority of our common stock to approve certain business combinations involving an “interested stockholder” or its affiliates, unless either minimum price criteria and procedural requirements are met, or the transaction is approved by a majority of our “continuing directors” (known as “fair price provisions”). |
Although we believe all of these provisions will make a higher third-party bid more likely by requiring potential acquirers to negotiate with the Board of Directors, these provisions will apply even if an initial offer may be considered beneficial by some stockholders and therefore could delay and/or prevent a deemed beneficial offer from being considered. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of us. Any delay or prevention of a change of control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.
Issues Or Concerns Related To The Quality And Safety Of Our Products, Ingredients Or Packaging Could Cause A Product Recall And/Or Result In Harm To The Company’s Reputation, Negatively Impacting Our Results of Operations.
In order to sell our products, we need to maintain a good reputation with our customers and consumers. Issues related to the quality and safety of our products, ingredients or packaging could jeopardize our Company’s image and reputation. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, could decrease demand for our products or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. Costs associated with these potential actions could negatively affect our results of operations.
Disruption To Our Manufacturing Operations Or Supply Chain Could Impair Our Ability To Produce Or Deliver Finished Products, Resulting In A Negative Impact On Our Results of Operations.
All of our manufacturing operations are located in Durango, Colorado. Disruption to our manufacturing operations or our supply chain could result from a number of factors, including: natural disaster, pandemic outbreak of disease, weather, fire or explosion, terrorism or other acts of violence, labor strikes or other labor activities, unavailability of raw or packaging materials, and operational and/or financial instability of key suppliers and other vendors or service providers. We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if they were to occur. However, if we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted.
Our FCommon Stock Price May Be Voinancial Resultslatile or May BDeecline ARdversely Impacted By The Failure To Successfully Executeegardless of our Orperating IPntegrate erformance.Acquisitions, Divestitures And Joint Ventures.
From timeVolatility in the market price of our common stock may prevent you from being able to time, wesell your shares at or above the price you paid for such shares. Many factors, which are outside our control, may evaluate potential acquisitions, divestiturescause the market price of our common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section and this Annual Report, as well as the following:
● | our operating and financial performance and prospects; |
● | our quarterly or annual earnings or those of other companies in our industry compared to market expectations; |
● | conditions that impact demand at our stores and for our products; |
● | future announcements concerning our business or our competitors’ businesses; |
● | the public’s reaction to our press releases, other public announcements and filings with the SEC; |
● | the size of our public float, and the trading volume of our common stock; |
● | coverage by or changes in financial estimates by securities analysts or failure to meet their expectations; |
● | market and industry perception of our success, or lack thereof, in pursuing our growth strategy; |
● | strategic actions by us or our competitors, such as acquisitions or restructurings; |
● | changes in laws or regulations which adversely affect our industry or us; |
● | changes in accounting standards, policies, guidance, interpretations or principles; |
● | changes in senior management or key personnel; |
● | issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock; |
● | changes in our dividend policy; |
● | adverse resolution of new or pending litigation against us; and |
● | changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events. |
As a result, volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or joint ventures that align withabove the price they paid for such shares. These broad market and industry factors may materially reduce the market price of our strategic objectives. The successcommon stock, regardless of such activity depends,our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low. As a result, you may suffer a loss on your investment.
Our Ability to Pay Dividends on our Common Stock is Subject to the Discretion of our Board of Directors.
We have in part, uponthe past made a regular quarterly cash dividend to our abilitycommon stockholders. However, the payment of future dividends on our common stock will be subject to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms;the discretion of our Board of Directors and if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impactwill depend on, among other things, our results of operations.operations, financial condition, capital requirements, and on such other factors as our Board of Directors may in its discretion consider relevant and in the best long-term interest of stockholders. Additionally, any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our common stock. For additional information on our payments of dividends, see "Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividends" under Part II of this Annual Report.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.None.
Our manufacturing operations and corporate headquarters are located at a 53,000 square foot manufacturing facility, which we own, in Durango, Colorado. During FY 2017,2019, our factory produced approximately 2.562.19 million pounds of chocolate candies, which was a decrease of 6%approximately 13.9% from the approximately 2.742.55 million pounds produced in FY 2016.2018. During FY 2008, we conducted a study of factory capacity. As a result of this study, we believe the factory has the capacity to produce approximately 5.3 million pounds per year, subject to certain assumptions about product mix. In January 1998, we acquired a two-acre parcel adjacent to our factory to ensure the availability of adequate space to expand the factory as volume demands.
U-Swirl’sU-Swirl’s principal offices are the same as the Company’s and located at 265 Turner Drive, Durango, Colorado 81303. U-Swirl also has an office located at 1175 American Pacific, Suite C, Henderson, Nevada 89074, in approximately 5,200 square feet of space leased for a term of five years expiring in July 2018. The rent is approximately $2,800 per month. As of May 1, 2015, we have a signed sublease agreement for this location.
As of February 28, 2017, all four Rocky Mountain Chocolate Factory Company-owned stores were occupied pursuant to2019, the Company had obligations for three non-cancelable leases of five to ten years for Rocky Mountain Chocolate Factory Company-owned stores having varying expiration dates from August 2018July 2019 to January 2026, some of which contain optional five or ten-year renewal rights. We do not deem any individual store lease to be significant in relation to our overall operations.
The leases for our U-Swirl Company-owned cafés range from approximately 1,600 to 3,000 square feet and have varying expiration dates from MarchAugust 2019 to February 2020,September 2024, some of which contain optional five or ten-year10-year renewal rights. We currently have 5five café leases in place, which range between $3,400$3,500 and $7,600$8,100 per month, exclusive of common area maintenance charges and taxes.
We act as primary lessee of some franchised store premises, which we then sublease to franchisees, but the majority of existing locations are leased by the franchisee directly. Our current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we were the primary lessee at five of our 332 franchised stores and one office location. The subleases for such locations are on the same terms as the Company's leases of the premises. For information as to the amount of our rental obligations under leases on both Company-owned and franchised stores, see Note 5 “Commitments and Contingencies” to our consolidated financial statements included in Item 8 of this Annual Report.
From timeThe Company is party to time, we may become involved invarious other legal proceedings arising in the ordinary course of our business. Except as described below, we arebusiness from time to time. Management believes that the resolution of these matters will not presently a party to any litigation that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operatingthe Company’s financial position, results financial conditionof operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (together with the CherryBerry Entities, the “CherryBerry Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling Parties. Pursuant to the CherryBerry Purchase Agreement, if the proceeds from the sale of any of the CB Shares on the open market was less than $0.50 per share and the CherryBerry Selling Parties complied with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint from the Colorado District Court, and thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion). On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May 9, 2016, the Oklahoma Court granted that application and we filed an answer to this action in on June 6, 2016. All parties are currently involved in discovery proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. MARKET FOR REGISTRANT’SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the NASDAQNasdaq Global Market under the trading symbol “RMCF.” The table below sets forth high and low sales price information and dividends declared for our common stock for each quarter of FY 2017 and FY 2016.
Fiscal Year Ended February 28, 2017 | HIGH | LOW | Dividends declared | |||||||||
Fourth Quarter | $ | 12.17 | $ | 9.95 | $ | 0.1200 | ||||||
Third Quarter | $ | 10.97 | $ | 9.65 | $ | 0.1200 | ||||||
Second Quarter | $ | 11.28 | $ | 9.50 | $ | 0.1200 | ||||||
First Quarter | $ | 10.69 | $ | 9.84 | $ | 0.1200 |
Fiscal Year Ended February 29, 2016 | HIGH | LOW | Dividends declared | |||||||||
Fourth Quarter | $ | 11.05 | $ | 9.30 | $ | 0.1200 | ||||||
Third Quarter | $ | 12.35 | $ | 10.75 | $ | 0.1200 | ||||||
Second Quarter | $ | 13.39 | $ | 11.56 | $ | 0.1200 | ||||||
First Quarter | $ | 15.40 | $ | 12.65 | $ | 0.1200 |
Holders
On May 12, 2017,10, 2019, there were approximately 308300 record holders of our common stock. We believe that there are more than 800 beneficial owners of our common stock.
Dividends
The Company paid a quarterly cash dividend of $0.12 per common share on March 10, 201715, 2019 to stockholders of record on February 24, 2017. The dividends paid by the Company for the past two fiscal years are outlined in the table above.March 5, 2019. Future declarations of dividends will depend on, among other things, our results of operations, financial condition, cash flows and capital requirements, and on such other factors as the Board of Directors may in its discretion consider relevant and in the best long termlong-term interest of stockholders. We are subject to various financial covenants related to our line of credit and other long-term debt, however, those covenants do not restrict the Board of Director’s discretion of the future declaration of cash dividends.
Stock Repurchase Program
On July 15, 2014, the Company publicly announced a plan to purchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During FY 2017, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any common stock under the repurchase plan during the fourth quarter of FY 2017.2019. As of February 28, 2017,2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended February 28 or 29, 20132015 through 2017,2019, are derived from the consolidated financial statements of the Company, which have been audited by Plante & Moran, PLLC, our independent registered public accounting firm during the fiscal year ended February 28, 2019 or EKS&H LLLP, our independent registered public accounting firm.firm for the fiscal years ended February 28 or 29, 2015 through 2018. The selected financial data should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report and in Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” below.
All material inter-Company balances have been eliminated upon consolidation.
(Amounts(Amounts in thousands, except per share data)
YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||||||||||
Selected Statement of Operations Data | 2017 |
2016 |
2015 |
2014 |
2013 | |||||||||||||||
Total revenues | $ | 38,296 | $ | 40,457 | $ | 41,508 | $ | 39,185 | $ | 36,315 | ||||||||||
Operating income | 5,524 | 3,713 | 5,965 | 5,236 | 2,540 | |||||||||||||||
Net income | $ | 3,450 | $ | 4,426 | $ | 3,938 | $ | 4,392 | $ | 1,478 | ||||||||||
Basic Earnings per Common Share | $ | 0.59 | $ | 0.75 | $ | 0.64 | $ | 0.72 | $ | 0.24 | ||||||||||
Diluted Earnings per Common Share | $ | 0.58 | $ | 0.73 | $ | 0.61 | $ | 0.68 | $ | 0.24 | ||||||||||
Weighted average common shares outstanding | 5,843 | 5,894 | 6,144 | 6,100 | 6,079 | |||||||||||||||
Weighted average common shares outstanding, assuming dilution | 5,994 | 6,095 | 6,413 | 6,437 | 6,219 | |||||||||||||||
Selected Balance Sheet Data | ||||||||||||||||||||
Working capital | $ | 7,091 | $ | 7,433 | $ | 9,371 | $ | 8,884 | $ | 8,981 | ||||||||||
Total assets | 29,418 | 30,316 | 34,138 | 35,153 | 23,834 | |||||||||||||||
Long-term debt | 2,529 | 3,831 | 5,083 | 6,292 | - | |||||||||||||||
Stockholders’ equity | 18,829 | 18,479 | 19,738 | 19,852 | 17,389 | |||||||||||||||
Cash Dividend Declared per Common Share | $ | 0.480 | $ | 0.480 | $ | 0.450 | $ | 0.440 | $ | 0.440 |
Fiscal Years Ended February 28 or 29, | ||||||||||||||||||||
Selected Statement of Operations Data | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Total revenues | $ | 34,545 | $ | 38,075 | $ | 38,296 | $ | 40,457 | $ | 41,508 | ||||||||||
Operating income | 3,006 | 5,221 | 5,524 | 3,713 | 5,965 | |||||||||||||||
Net income | $ | 2,239 | $ | 2,964 | $ | 3,450 | $ | 4,426 | $ | 3,938 | ||||||||||
Basic Earnings per Common Share | $ | 0.38 | $ | 0.50 | $ | 0.59 | $ | 0.75 | $ | 0.64 | ||||||||||
Diluted Earnings per Common Share | $ | 0.37 | $ | 0.50 | $ | 0.58 | $ | 0.73 | $ | 0.61 | ||||||||||
Weighted average common shares outstanding | 5,931 | 5,884 | 5,843 | 5,894 | 6,144 | |||||||||||||||
Weighted average common shares outstanding, assuming dilution | 5,983 | 5,980 | 5,994 | 6,095 | 6,413 | |||||||||||||||
Selected Balance Sheet Data | ||||||||||||||||||||
Working capital | $ | 9,530 | $ | 7,364 | $ | 7,091 | $ | 7,433 | $ | 9,371 | ||||||||||
Total Assets | 26,222 | 28,941 | 29,418 | 30,316 | 34,138 | |||||||||||||||
Long-term debt | - | 1,176 | 2,529 | 3,831 | 5,083 | |||||||||||||||
Stockholders' equity | 20,390 | 19,557 | 18,829 | 18,479 | 19,738 | |||||||||||||||
Cash Dividend Declared per Common Share | $ | 0.48 | $ | 0.48 | $ | 0.48 | $ | 0.48 | $ | 0.45 |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.”
Overview
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation)corporation (“RMCF”) (collectively, the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our wholly-owned subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates self-serve frozen yogurt stores. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products. We also sell our candy in selected locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of March 31, 2017,2019, there were fourtwo Company-owned, 8390 licensee-owned and 283245 franchised Rocky Mountain Chocolate Factory stores operating in 4037 states, Canada, Japan, South Korea, the Philippines,Panama, and the United Arab Emirates.Philippines. As of March 31, 2017,2019, U-Swirl operated fivefour Company-owned stores and 10568 franchised and 4030 licensed stores located in 3326 states and Canada.Qatar. U-Swirl operates self-serve frozen yogurt cafes under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
Effective March 1, 2015, we reorganized to create a holding company structure. Our operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF were exchanged on a one-for-one basis for shares of common stock of Newco. Our new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), we entered into two agreements to sell all of the assets of our ALY frozen yogurt stores, along with our interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which we also acquired in January 2013, to U-Swirl, Inc., a publicly traded company (OTCQB: SWRL) (“SWRL”), in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of February 28, 2017 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned Aspen Leaf Yogurt locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, we issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, we foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. (“U-Swirl”) becoming a wholly-owned subsidiary of the Company as of February 29, 2016.
Current Trends and Outlook
Our business was significantly affected by the global recession during 2008-2009. We continued to experience this difficult environment throughout FY 2010 and FY 2011. The environment somewhat improved from FY 2012 to FY 2017,2019, though we do not believe that the challenges have fully reversed. The economic recovery has had a lesserless positive impact upon retail as consumers shift shopping to online. Locations that have historically been favorable locations for our franchisees, such as regional malls and outlet centers, have continued to struggle in the current environment. As a result, we intend to continue to focus on managing the business in a seasoned, disciplined and controlled manner.
The financing that our franchisees have historically relied upon was substantially affected by the changes in banking and lending requirements in the years after the global recession. LimitedLimited financing alternatives for domestic franchise growth have led us to pursue a strategy of expansion through co-branding with complimentary concepts such as ice cream and frozen yogurt, international development, sale of our products to specialty markets, licensing the Rocky Mountain Chocolate Factory brand for use with other appropriate consumer products, and selected entry of Rocky Mountain Chocolate Factory branded products into other wholesale channels, along with business acquisitions as primary drivers of growth. This is a trend that continued in FY 20172019 and we expect to continue into the foreseeable future.
GoingGoing forward in FY 2018,2020, we are taking a conservative view of market conditions in the United States. We intend to continue to focus on our long-term objectives while seeking to maintain flexibility to respond to market conditions, including the pursuit of international growth opportunities to reduce our dependence on the domestic economy.
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in resort or tourist locations, and the nature of the products we sell, which are highly seasonal. As we expanded our geographical diversity to include regional centers and our franchise offerings to include frozen desserts, we have seen some moderation to our seasonal sales mix. Seasonal fluctuation in sales causes fluctuations in quarterly results of operations. Historically, the strongest sales of our products have occurred during key holidays and summer vacation seasons. Additionally, 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.
The most important factors in continued growth in our earnings are ongoing unit growth, increased same store sales and increased same store pounds purchased from the factory.
Our ability to successfully achieve expansion of our franchise systems depends on many factors not within our control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion.
Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depend on many factors, including new store openings,, competition, the receptivity of our franchise system to our product introductions and promotional programs. In FY 2017,2019, same store pounds purchased from the factory by franchised and co-branded licensed stores declined approximately 5.8%1.2% in the first quarter, declined approximately 2.1%2.2% in the second quarter, declined approximately 0.8%1.9% in the third quarter, declinedincreased approximately 11.3%1.7% in the fourth quarter, and declined 4.7%0.5% overall in FY 20172019 as compared to the same periods in FY 2016.2018.
In May 2009, we announced the expansion of the co-branding test relationship with Cold Stone Creamery. The CompanyWe and Cold Stone Creamery, Inc. have agreed to expand the co-branding relationship to more than a hundred potential locations, based upon the performance of several test locations, operating under the test agreement announced in October 2008. We have additionally agreed to develop co-branded locations through U-Swirl and their associated brands. We believe that if this co-branding strategy continues to prove financially viable it could represent a significant future growth opportunity. As of February 28, 2017,2019, Cold Stone licensees operated 8391 co-branded locations, our U-Swirl franchisees operated 169 co-branded locations and we have co-branded 3 of our Company-owned cafés.
In April 2012, we announced the execution of a Master Licensing Agreement covering the country of Japan. Under the terms of the agreement, the licensee will pay the Company a Master License Fee for the rightour intent to open Rocky Mountain Chocolate Factory stores for its own account and for the account of franchisees throughout the country of Japan.pursue growth through international licensing. Since 2012, we have continued to develop internationally through the execution of license agreements in the countries of South Korea, the Republic of Panama, Vietnam, and the Republic of the Philippines. Through our U-Swirl subsidiary we have an additional international development agreementagreements covering Canada.Canada and Qatar.
Results of Operations
Fiscal 20179 Compared To Fiscal 20168
Results Summary
Basic earnings per share decreased 21.3%24.0% from $0.75$0.50 per share in FY 20162018 to $0.59$0.38 per share in FY 2017.2019. Revenues decreased 5.3%9.3% from $40.5$38.1 million for FY 20162018 to $38.3$34.5 million for FY 2017.2019. Operating income increased 48.8%decreased 42.4% from $3.7$5.2 million in FY 20162018 to $5.5$3.0 million in FY 2017.2019. Net income decreased 22.0%24.5% from $4.4$3.0 million in FY 20162018 to $3.5$2.2 million in FY 2017.2019. The increasedecrease in operating income for FY 2017 compared to FY 2016 isand net income was due primarily to lower revenue and lower margins partially offset by a decrease in costs for impairment of long-lived assetsoperating expenses and goodwill. The decrease in net income is primarily the result ofa lower effective income tax expense recognized in FY 2017, compared with FY 2016.rate.
Revenues
For the Year Ended | For the Year Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(
Factory Sales
The decrease in factory sales for FY
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY
COSTS AND EXPENSES
Cost of Sales
Factory Sales
The decrease in factory sales for FY
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY
COSTS AND EXPENSES
Cost of Sales
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased
Franchise Costs
The decrease in franchise costs for FY
Sales and Marketing
The
General and Administrative
The decrease in general and administrative costs during FY
Retail Operating Expenses
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was
Other Income (Expense)
Net interest expense was
Income Tax Expense
We realized an income tax expense of
Fiscal 2018 Compared To Fiscal 2017 A discussion of our Liquidity and Capital Resources
As of February
Cash and
During FY
During FY
Financing activities used cash of
The Company has a
The
(Amounts in thousands)
For FY
Off-Balance Sheet Arrangements
Operating leases: Our Company-owned stores are occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, some of which contain optional renewal rights. We also lease warehouse facilities to support our manufacturing operations and we lease most of our transportation equipment. We do not deem any individual lease to be significant in relation to our overall operations. Purchase obligations: As of February
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria. We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we ordinarily extend credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
We recorded an average expense of approximately
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28,
Consolidation – The consolidated financial statements in this Annual Report include the accounts of the Company and its subsidiaries. On January 14, 2013 we acquired a controlling interest in U-Swirl. Prior to January 14, 2013, our consolidated financial statements exclude the financial information of U-Swirl. Beginning on January 14, 2013 and continuing through February 28,
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. We previously entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with acquisitions of SWRL (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. On February 29, 2016, RMCF repossessed all stock in U-Swirl pledged as collateral on the SWRL Loan
Franchise Rights – Franchise rights consists of the purchase price paid in consideration of certain rights associated with franchise agreements. These franchise agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.
Other accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with its evaluation of the recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28,
The Company has a
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of February 28,
INDEX TO FINANCIAL STATEMENTS
Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance As discussed in Note 1 to the financial statements, Basis for Opinion The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on
We conducted our Our audit
Change in Accounting Principle As discussed in Note 1 and 17 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on March 1, 2018. We have audited the impact to the 2018 financial statements as disclosed under the modified retrospective method as a result of the adoption of ASC Topic 606, “Revenue from Contracts with Customers”, as described in Note 1 and 17 to the financial statements. In our opinion, the /s/ Plante & Moran, PLLC Denver, Colorado May 8, 2019 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2018, the related statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Basis for Opinion The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ EKS&H LLLP
Denver, Colorado
May 15, 2018
ROCKY CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
1 As revised. Refer to Note 2 Refer to Note 17 for information on the adoption of ASC 606.
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS 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)
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
The The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28,
Consolidation
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business,
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The
Income Taxes
Gift Card Breakage
The Company and
There are no expiration dates on ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale. Rebates
Rebates received from purveyors that supply products to
Shipping Fees
Shipping fees charged to customers by the
Franchise and Royalty Fees
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain instances,
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of
Stock-Based Compensation
At February
The Company recognized
During FY
During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to
Fair Value of Financial Instruments
The
Recent Accounting Pronouncements
In August
In June 2016, the
In
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers
ROCKY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard. NOTE 2 - INVENTORIES
Inventories consist of the following at February
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following at February
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under
The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
The following is a schedule of lease expense for all retail operating leases for the three years ended February
In FY
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28,
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes at February 28
The following table summarizes deferred income tax valuation allowances as of February
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY
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. Management believes that, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28,
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28, 2019 or ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash
Future
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes stock awards under the 2007 Plan as of February 28,
Information with respect to stock option awards outstanding under the 2007 Plan at February 28,
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28,
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
Revenue from one customer of the
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the
NOTE
Following is a summary of the quarterly results of operations for the
NOTE
Intangible assets consist of the following at February
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
Amortization expense related to intangible assets totaled During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.
ROCKY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February
NOTE 14 –
NOTE 15
On May
In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period. NOTE
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) As described in Note 1, effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be 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. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement. Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Gift Cards The Company’s franchisees sell gift cards which do not have either 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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. Impact to Prior Periods The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
On February 28, 2019, 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:
NOTE 18 – DISAGGREGATION OF REVENUE The following table presents disaggregated revenue by the method of recognition and segment:
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systems to future periods are subject to the risk that such controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all errors or all fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These reports by management, including the CEO and CFO, on the effectiveness of the Company’s Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Management, under the supervision and with the participation of the CEO and CFO, has evaluated the
Changes in Internal Control over Financial Reporting —There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended February 28,
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to the
(1) Awards outstanding under the 2007 Equity Incentive Plan as of February 28,
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our
ITEM 14. PRINCIPAL
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SCHEDULE II - Valuation and Qualifying Accounts
The following exhibits
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| |||
| ||||
| ||||
Date: May | /s/ Bryan J. Merryman | |||
BRYAN J. MERRYMAN | ||||
Chief Executive Officer, Chief | ||||
Financial Officer, Treasurer and | ||||
Director | ||||
(Principal Executive, Financial | ||||
and Accounting Officer) | ||||
Date: May 29, 2019 | /s/ Brett P. Seabert | |||
Brett P. Seabert, Director | ||||
Date: May | ||||
/s/ Clyde Wm. Engle | ||||
CLYDE Wm. ENGLE, Director | ||||
Date: May | /s/ Scott G. Capdevielle | |||
SCOTT G. CAPDEVIELLE, Director |
EXHIBIT INDEX
|
|
| ||||||||||
|
|
| ||||||||||
Date: May 29, 2019 | ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
| ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
/s/ Franklin E. Crail | ||||||||||||
6361
2019
2018
Change
Change
Factory gross margin
Retail
Retail gross margin
Total
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 24.6 | % | 27.3 | % | (2.7% | ) | (9.9 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6% | ) | (0.9 | %) | ||||||||
Total | 30.6 | % | 33.5 | % | (2.9% | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28, | % | % | ||||||||||||||
(Percent) | 2019 | 2018 | Change | Change | ||||||||||||
| ||||||||||||||||
Factory gross margin | 19.9 | % | 24.4 | % | (4.5 | )% | (18.4 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total | 25.3 | % | 29.8 | % | (4.5 | )% | (15.1 | )% |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 6,242.8 | $ | 7,204.1 | $ | ( 961.3 | ) | (13.3 | %) | |||||||
Plus: depreciation and amortization | 447.7 | 404.4 | 43.3 | 10.7 | % | |||||||||||
Factory adjusted gross margin | 6,609.5 | 7,608.5 | (999.0 | ) | (13.1 | %) | ||||||||||
Retail | 2,897.9 | 3,290.2 | (392.3 | ) | (11.9 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 9,507.4 | $ | 10,898.7 | $ | (1,391.3 | ) | (12.8 | %) | |||||||
Factory adjusted gross margin | 26.0 | % | 28.9 | % | (2.9 | %) | (10.0 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6 | %) | (0.9 | %) | ||||||||
Total Adjusted Gross Margin | 31.8 | % | 34.8 | % | (3.0 | %) | (8.6 | %) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,819.0 | $ | 6,353.0 | $ | (1,534.0 | ) | (24.1 | )% | |||||||
Plus: depreciation and amortization | 555.9 | 523.0 | 32.9 | 6.3 | % | |||||||||||
Factory adjusted gross margin | 5,374.9 | 6,876.0 | (1,501.1 | ) | (21.8 | )% | ||||||||||
Retail gross margin | 2,145.3 | 2,638.1 | (492.8 | ) | (18.7 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 7,520.2 | $ | 9,514.1 | $ | (1,993.9 | ) | (21.0 | )% | |||||||
Factory adjusted gross margin | 22.2 | % | 26.4 | % | (4.2 | )% | (15.9 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 31.5 | % | (4.2 | )% | (13.3 | )% |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 270450 basis points during FY 20172019 compared to FY 20162018 due primarily to increasedlower efficiencies associated with a 13.9% decrease in production volume and higher costs associated with inventory obsolescence. Costs associated with inventory obsolescence were generally the result of laborthe initiation of product rationalization resulting from lower volume and overhead related to maintenance, equipment issues and product mix shift, partially offset by lower costs of certain materials.underperforming products. The decrease in Company-owned store margin is due primarily to product mix shift primarily resultinga decrease in Company-owned café revenue from the sale or closure of certain underperforming Company-owned storesyogurt and Cafés.the associated higher margins.
Franchise Costs
The decrease in franchise costs for FY 20172019 compared to FY 20162018 is due primarily to a decrease in professional fees and lower franchise costs associated with supporting U-Swirl franchise unitslower international development in FY 20172019 compared to FY 2016 as a result of fewer store openings in FY 2017.2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreasedincreased to 24.6%28.4% during FY 20172019 from 27.0%26.5% during FY 2016.2018. This decreaseincrease as a percentage of royalty, marketing and franchise fees is primarily a result of a 15.7%an 11.7% decrease in total royalty and marketing fees and franchise costsfee revenue during FY 20172019 compared to FY 2016.2018.
Sales and Marketing
The increasedecrease in sales and marketing costs during FY 20172019 compared to FY 20162018 is primarily due to higher marketing relatedlower marketing-related compensation and professional fees partially offset by lower marketing-related costs associated with U-Swirl franchise locations. Marketing costs for U-Swirl franchise locations declined because of lower marketing fee revenues resulting from fewer franchise stores in operation.
General and Administrative
The decrease in general and administrative costs during FY 20172019 compared to FY 20162018 is due primarily to lower professional fees, the foreclosureresult of U-Swirl in the prior yearresolving legal proceedings, and the associated focus on reduction of duplicative general and administrativelower compensation costs. During FY 2017,2019, approximately $460,000$103,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,291,000$307,000 during FY 2016.2018. As a percentage of total revenues, general and administrative expenses decreased to 10.5%9.9% in FY 20172019 compared to 11.5%10.3% in FY 2016.2018.
Retail Operating Expenses
The decrease in retailRetail operating expenses decreased during FY 20172019 compared to FY 2016 was2018 due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of a certain underperforming Company-owned units.location, offset by the acquisition of a franchised location. Retail operating expenses, as a percentage of retail sales, decreased to 54.0%57.2% during FY 20172019 from 59.0%58.1% during FY 2016.2018. This is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $841,000$1,154,000 during FY 2017, a decrease2019, an increase of 17.2%45.0% from $1,016,000$796,000 incurred during FY 2016.2018. This decreaseincrease was the result of fewer Company-owned store assetsa change in service duemanagement’s estimates related to the sale or closurefuture value of U-Swirl intangibles and the associated acceleration of amortization expense. During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain Company-owned stores and cafés.intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Depreciation and amortization included in cost of sales increased 10.7%6.3% from $404,000$523,000 during FY 20162018 to $448,000$556,000 during FY 2017.2019. This increase was the result of an increase in production assets in service.
Other Income (Expense)
Net interest expense was $128,800$50,300 in FY 20172019 compared to net interest expense of $167,900$96,700 in FY 2016.2018. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions by U-Swirl.
Income Tax Expense
We realized an income tax expense of $1,946,000$717,000 in FY 20172019 compared to an income tax benefitexpense of $261,400$2,160,000 during FY 2016. As described further in Note 6 to the consolidated financial statements, the increase in the effective tax rate is primarily due to the tax consequences of acquiring a 100% controlling interest in U-Swirl during FY 2016.
Fiscal 2016 Compared To Fiscal 2015
Results Summary
Basic earnings per share increased 17.2% from $0.64 in FY 2015 to $0.75 in FY 2016. Revenues decreased 2.5% from $41.5 million for FY 2015 to $40.5 million for FY 2016. Operating income decreased 5.4% from $6.0 million in FY 2015 to $5.6 million in FY 2016. Net income increased 12.4% from $3.9 million in FY 2015 to $4.4 million in FY 2016. The decrease in operating income for FY 2016 compared to FY 2015 is due primarily to a decrease in revenues. The increase in net income is primarily the result of an impairment charge associated with U-Swirl goodwill and certain long lived assets more than offset by income tax benefit recognized.
Revenues
For the Year Ended | ||||||||||||||||
February 29 or 28, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory sales | $ | 26,355.8 | $ | 25,894.6 | $ | 461.2 | 1.8 | % | ||||||||
Retail sales | 5,005.0 | 6,206.0 | (1,201.0 | ) | (19.4% | ) | ||||||||||
Royalty and marketing fees | 8,547.6 | 8,821.0 | (273.4 | ) | (3.1% | ) | ||||||||||
Franchise fees | 548.5 | 586.8 | (38.3 | ) | (6.5% | ) | ||||||||||
Total | $ | 40,456.9 | $ | 41,508.4 | $ | (1,051.5 | ) | (2.5% | ) |
Factory Sales
The increase in factory sales for FY 2016 compared to FY 2015 was primarily due to an 8.1% increase in shipments of product to customers outside our network of franchised retail stores. This increase was partially offset by a 5.3% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation and a 1.5% decrease in same-store pounds purchased by franchise and co-branded license locations during FY 2016 compared with FY 2015.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of five Company-owned locations and the closure of two underperforming Company-owned cafés. Same store sales at all Company-owned stores and cafés decreased 0.8% during FY 2016 compared with FY 2015. Same-store sales at U-Swirl cafés decreased 1.0% during FY 2016 compared to FY 2015.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 2016 compared to FY 2015 resulted from an 11.1% decrease in franchise units in operation and lower same store sales. The average number of total franchise stores in operation decreased from 476 during FY 2015 to 423 during FY 2016. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation increased 0.7% during FY 2016 compared to FY 2015. Franchise fee revenues decreased as a result of fewer international license fees during FY 2016 compared to FY 2015.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2016, U-Swirl revenue decreased 15.7% to $6,535,600 compared with $7,753,000 of U-Swirl revenue consolidated within our results for FY 2015. The decrease resulted from a 15.1% decrease in average domestic U-Swirl franchise cafés in operation during FY 2016 compared to FY 2015, primarily as a result of store closings exceeding store openings and acquired franchisees.
COSTS AND EXPENSES
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Cost of sales – factory adjusted | $ | 19,151.7 | $ | 18,432.3 | $ | 719.4 | 3.9 | % | ||||||||
Cost of sales – retail | 1,714.8 | 2,177.3 | (462.5 | ) | (21.2 | %) | ||||||||||
Franchise costs | 2,452.6 | 2,264.1 | 188.5 | 8.3 | % | |||||||||||
Sales and marketing | 2,466.5 | 2,474.0 | (7.5 | ) | (0.3 | %) | ||||||||||
General and administrative | 4,663.9 | 4,831.9 | (168.0 | ) | (3.5 | %) | ||||||||||
Retail operating | 2,951.8 | 3,509.6 | (557.8 | ) | (15.9 | %) | ||||||||||
Total | $ | 33,401.3 | $ | 33,689.2 | $ | ( 287.9 | ) | (0.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total | $ | 10,494.3 | $ | 11,491.0 | $ | ( 996.7 | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 27.3 | % | 28.8 | % | (1.5% | ) | (5.2% | ) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total | 33.5 | % | 35.8 | % | (2.3% | ) | (6.4% | ) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Plus: depreciation and amortization | 404.4 | 393.8 | 10.6 | 2.7 | % | |||||||||||
Factory adjusted gross margin | 7,608.5 | 7,856.1 | (247.6 | ) | (3.2 | %) | ||||||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 10,898.7 | $ | 11,884.8 | $ | ( 986.1 | ) | (8.3 | %) | |||||||
Factory adjusted gross margin | 28.9 | % | 30.3 | % | (1.4 | %) | (4.6 | %) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total Adjusted Gross Margin | 34.8 | % | 37.0 | % | (2.2 | %) | (5.9 | %) |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 150 basis points during FY 2016 compared to FY 2015 due primarily to increased costs of certain materials and a shift in product and customer mix. The increase in Company-owned store margin is due primarily to the sale or closure of certain underperforming Company-owned stores and cafés.
Franchise Costs
The increase in franchise costs for FY 2016 compared to FY 2015 is due primarily to franchise costs associated with supporting U-Swirl franchise units. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.0% during FY 2016 from 24.1% during FY 2015. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of a 3.3% decrease in royalty, marketing and franchise fee revenue as a result of a decrease in the number of domestic franchise stores during FY 2016 compared to FY 2015.
Sales and Marketing
Sales and marketing costs were approximately unchanged during FY 2016 compared to FY 2015.
General and Administrative
The decrease in general and administrative costs during FY 2016 compared to FY 2015 is due primarily to the reorganization of U-Swirl in the prior year and the associated focus on reduction of duplicative general and administrative costs, partially offset by an increase in professional fees. During FY 2016, approximately $1,291,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,651,000 during FY 2015. As a percentage of total revenues, general and administrative expenses decreased to 11.5% in FY 2016 compared to 11.6% in FY 2015.
Retail Operating Expenses
The decrease in retail operating expense was due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of certain underperforming Company-owned units. The average number of Company-owned stores in operation decreased from 16 during FY 2015 to 12 units during FY 2016. Retail operating expenses, as a percentage of retail sales, increased from 56.6% during FY 2015 to 59.0% in FY 2016. This increase is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $1,016,000 during FY 2016, a decrease of 3.0% from $1,047,000 incurred during FY 2015. This decrease is due to a decrease in amortization related to franchise rights, trademark and intangible assets. Depreciation and amortization included in cost of sales increased 2.5% from $394,000 during FY 2015 to $404,000 during FY 2016. This increase was the result of an increase in production assets in service.
Other Income
Net interest expense was $167,900 in FY 2016 compared to net interest expense of $184,500 in FY 2015. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions of U-Swirl.
Income Tax Expense
We realized an income tax benefit of $261,400 in FY 2016 compared to expense of $2,037,695, an effective rate of 35.3%, during FY 2015.2018. As described further in Note 6 to the consolidated financial statements, the decrease in the effective tax rate is primarily due to the revaluation of deferred tax consequencesassets and liabilities to the lower enacted U.S. corporate tax rate of 21% under the recent Tax Cuts and Jobs Act recognized during FY 2018, with no comparable revaluation recognized during FY 2019. Additionally, the decrease in the effective tax rate during FY 2019 compared to 2018 was due to the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act being effective for all of FY 2019 and only two months of FY 2018.
Fiscal 2018 Compared To Fiscal 2017
A discussion of our controlling interestresults of operations for FY 2018 in U-Swirl.comparison to FY 2017 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Fiscal Year Ended February 28, 2018.
Liquidity and Capital Resources
As of February 28, 2017,28, 2019, working capital was $7.1$9.5 million compared with $7.2$7.4 million as of February 29, 2016.28, 2018. The decreaseincrease in working capital was due primarily to the impact of the adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 and our operating results less the payment of $2.8 million in cash dividends, $1.4 million in debt repayments and the purchase of $1.2 million$614,000 of property and equipment and $1.3 million in debt repayments.equipment. We have historically generated excess operating cash flow. We review our working capital needs and projections and when we believe that we have greater working capital than necessary we have historically utilized that excess working capital to repurchase common stock and pay dividends to our stockholders. This trend continued during FY 2017, resulting in the decrease in working capital at February 28, 2017 compared with February 29, 2016.
Cash and cashcash equivalent balances decreased from $6.2 million as of February 29, 2016 to $5.8$6.1 million as of February 28, 20172018 to $5.4 million as of February 28, 2019 as a result of cash flows generated by operating activities being less than cash flows used in financing and investing activities. The Company’sOur current ratio was 3.0 to 1.0 at February 28, 2019 compared to 1.9 to 1.0 at February 28, 2017, which was the same at February 29, 2016. The Company monitors2018. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2017,2019, we had net income of $3.45$2.2 million. Operating activities provided cash of $5.3$4.0 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.7 million and stock compensation expense of $520,000. During FY 2018, we had net income of $3.0 million. Operating activities provided cash of $4.8 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock compensation expense of $0.6 million. During FY 2016, we had net income of $3.8 million, and operating activities provided cash of $6.8 million. The principal adjustment to reconcile the net income to net cash provided by operating activities was asset impairments of $2.3 million, depreciation and amortization of $1.4 million and stock compensation expense of $0.8 million.
During FY 2017,2019, investing activities used cash of $1.3 million,$506,000, primarily due to the purchases of property and equipment of $1.2 million$614,000 the result of investment in factory infrastructure improvements.improvements, partially offset by proceeds received on notes receivable of $102,000. In comparison, investing activities used cash of $0.7 million$340,000 during FY 20162018 primarily due to the purchases of property and equipment of $0.7 million.$545,000 the result of investment in factory infrastructure improvements, partially offset by proceeds received on notes receivable of $231,000.
Financing activities used cash of $4.4$4.2 million during FY 20172019 and used cash of $7.1$4.1 million during the prior year. ThisThe increase in cash used in financing activities was primarily due to a decreasean increase in the amount of common stock repurchased during FY 2017.debt service being applied to principal, the result of lower interest expense.
The Company has a $5$5.0 million credit line for general corporate and working capital purposes, of which $5$5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2017,2019. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (4.7% at February 28, 2019). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2017.2019 and the Company believes it is likely to be renewed on terms similar to the current terms.
The Company’sCompany’s long-term debt is comprised of a promissory note used to finance prior business acquisitions of U-Swirlby SWRL (unpaid balance as of February 28, 2017, $3.82019, $1.2 million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. This promissory note matures in January 2020. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of February 28, 2017,2019, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets
TheThe table below presents significant contractual obligations of the Company at February 28, 2017.2019.
(Amounts in thousands)
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | 3,832 | 1,303 | 2,529 | - | - | |||||||||||||||
Operating leases | 2,166 | 817 | 980 | 176 | 193 | |||||||||||||||
Other long-term obligations | 472 | 189 | 171 | 112 | - | |||||||||||||||
Total | 6,470 | 2,309 | 3,680 | 288 | 193 |
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | $ | 1,176 | $ | 1,176 | $ | - | $ | - | $ | - | ||||||||||
Operating leases | 2,949 | 758 | 1,333 | 683 | 175 | |||||||||||||||
Purchase contracts | 880 | 880 | - | - | - | |||||||||||||||
Other long-term obligations | 231 | 135 | 96 | - | - | |||||||||||||||
Total | $ | 5,236 | $ | 2,949 | $ | 1,429 | $ | 683 | $ | 175 |
For FY 2018,2020, the Company anticipates making capital expenditures of approximately $1.0 million,$900,000, which will be used to maintain and improve existing factory and administrative infrastructure. The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2018.2020. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
Operating leases: Our Company-owned stores are occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, some of which contain optional renewal rights. We also lease warehouse facilities to support our manufacturing operations and we lease most of our transportation equipment. We do not deem any individual lease to be significant in relation to our overall operations.
Purchase obligations: As of February 28, 2017,28, 2019, we had no off-balance sheet arrangements or obligations.purchase obligations of approximately $880,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’sCompany’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s 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 the Company’s 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria. We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we ordinarily extend credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
We recorded an average expense of approximately $174,300$149,000 per year for potential uncollectible accounts over the three-year period ended February 28, 2017.2019. Write-offs of uncollectible accounts net of recoveries averaged approximately $195,900$209,500 over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over the past three years, the allowances for doubtful notes and accounts have ranged from 10.7%10.0% to 12.6%10.7% of gross receivables.
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. FranchiseBeginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of the associated agreement, which is generally a period of 10-15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon the opening of the store. International license fees are recognizedfranchise store, or upon the execution of thean international license agreement and payment of the license fee.agreement. We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with franchise store openings in the third quarter of FY 2004, we modified our royalty structure. Under the current structure, we recognizeThe Company recognizes no royalty on Rocky Mountain Chocolate Factory franchised stores’ retail sales of products purchased from usthe Company and recognizerecognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. ForRoyalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise stores opened priorrights and range from 2.5% to the third quarter6% of FY 2004 we recognize a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28, 2017,2019, the Company recorded expense averaging $110,600$228,900 per year for potential inventory losses, or approximately 0.5%1.1% of total cost of sales for that period.
Consolidation – The consolidated financial statements in this Annual Report include the accounts of the Company and its subsidiaries. On January 14, 2013 we acquired a controlling interest in U-Swirl. Prior to January 14, 2013, our consolidated financial statements exclude the financial information of U-Swirl. Beginning on January 14, 2013 and continuing through February 28, 2017,2019, the results of operations, assets and liabilities of U-Swirl have been included in our consolidated financial statements. All material inter-Company balances have been eliminated upon consolidation.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. We previously entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with acquisitions of SWRL (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. On February 29, 2016, RMCF repossessed all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement with SWRL. As described in Note 1 below, this was the result of SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants.Agreement. As of February 29, 2016 U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. RMCFWe performed a test of impairment as a result of the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the financial statements.
Franchise Rights – Franchise rights consists of the purchase price paid in consideration of certain rights associated with franchise agreements. These franchise agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.
Other accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with its evaluation of the recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrumentsinstruments for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 2017,2019, based on future contractual obligations for chocolate products, we estimate that a 10% increase or decrease in the prices of contracted ingredients would result in a $259,000an $88,000 favorable or unfavorable price benefit or cost resulting from our commodity purchase contracts.
The Company has a $5$5 million bank line of credit that bears interest at a variable rate. As of February 28, 2017,2019, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of February 28, 2017, $3.82019, $1.2 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.
ITEMITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page | |
|
|
35 | |
36 | |
37 | |
38 | |
39 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders of
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Durango, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Rocky Mountain Chocolate Factory, Inc. and Subsidiaries (the “Company”) as of February 28, 2017 and February 29, 2016, and28, 2019, the related consolidated statementsstatement of income, changes in stockholders’stockholders' equity, and cash flows for each of the years in the three-year periodyear ended February 28, 2017. Our audits also included2019, and the consolidatedrelated notes (collectively referred to as the “financial statements”). In our opinion, the financial statement schedule listedstatements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and the results of its operations and its cash flows for the year ended February 28, 2019, in conformity with accounting principles generally accepted in the Index at Item 15. These consolidatedUnited States of America.
As discussed in Note 1 to the financial statements, and schedule are the responsibility ofCompany adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the Company’s management.modified retrospective adoption method on March 1, 2018.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements and schedule based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting (“Internal Control”). Ourreporting. As part of our audit included considerationwe are required to obtain an understanding of Internal Control as a basis for designing audit procedures that are appropriate in the circumstances,internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s Internal Control.Company's internal control over financial reporting. Accordingly, we express no such opinion. An
Our audit also includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidatedpresentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 and 17 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on March 1, 2018.
We have audited the impact to the 2018 financial statements as disclosed under the modified retrospective method as a result of the adoption of ASC Topic 606, “Revenue from Contracts with Customers”, as described in Note 1 and 17 to the financial statements. In our opinion, the consolidatedimpacts are appropriate and have been properly disclosed. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the impacts disclosed and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements taken as a whole.
/s/ Plante & Moran, PLLC
Denver, Colorado
May 8, 2019
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2018, the related statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. and Subsidiariesthe Company as of February 28,28, 2018 and 2017, and February 29, 2016, and the results of theirits operations and theirits cash flows for each of the years in the three-yeartwo-year period ended February 28, 20172018, in conformity with accounting principles generally accepted in the United States of America. Also, in
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our opinion,audits. We are a public accounting firm registered with the related financial statement schedule, when considered in relationPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the basic consolidatedCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements taken as a whole, presents fairly in allare free of material respects,misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the information set forth therein.purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EKS&H LLLP
May 23, 2017
Denver, Colorado
May 15, 2018
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 29,876,507 | $ | 31,360,745 | $ | 32,100,824 | ||||||
Franchise and royalty fees | 8,419,870 | 9,096,150 | 9,407,552 | |||||||||
Total revenues | 38,296,377 | 40,456,895 | 41,508,376 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,735,739 | 20,866,482 | 20,609,609 | |||||||||
Franchise costs | 2,067,530 | 2,452,609 | 2,264,138 | |||||||||
Sales & marketing | 2,658,421 | 2,466,469 | 2,474,027 | |||||||||
General and administrative | 4,005,142 | 4,663,914 | 4,831,903 | |||||||||
Retail operating | 2,404,003 | 2,951,783 | 3,509,584 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $447,651, $404,391 and $393,776, respectively, included in cost of sales | 841,058 | 1,015,910 | 1,046,672 | |||||||||
Impairment of long-lived assets and goodwill | - | 2,326,742 | - | |||||||||
Restructuring and acquisition related charges | 60,000 | - | 807,476 | |||||||||
Total costs and expenses | 32,771,893 | 36,743,909 | 35,543,409 | |||||||||
Operating Income | 5,524,484 | 3,712,986 | 5,964,967 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (170,351 | ) | (216,600 | ) | (243,188 | ) | ||||||
Interest income | 41,572 | 48,745 | 58,662 | |||||||||
Other, net | (128,779 | ) | (167,855 | ) | (184,526 | ) | ||||||
Income Before Income Taxes | 5,395,705 | 3,545,131 | 5,780,441 | |||||||||
Income Tax Expense (Benefit) | 1,945,589 | (261,400 | ) | 2,037,695 | ||||||||
Net Income | 3,450,116 | 3,806,531 | 3,742,746 | |||||||||
Less: Net loss attributable to non-controlling interest | - | (619,376 | ) | (195,094 | ) | |||||||
Net Income attributable to RMCF stockholders | $ | 3,450,116 | $ | 4,425,907 | $ | 3,937,840 | ||||||
Basic Earnings per Common Share | $ | 0.59 | $ | 0.75 | $ | 0.64 | ||||||
Diluted Earnings per Common Share | $ | 0.58 | $ | 0.73 | $ | 0.61 | ||||||
Weighted Average Common Shares Outstanding | 5,843,245 | 5,893,618 | 6,144,426 | |||||||||
Dilutive Effect of Employee Stock Awards | 150,447 | 201,856 | 268,913 | |||||||||
Weighted Average Common Shares Outstanding, Assuming Dilution | 5,993,692 | 6,095,474 | 6,413,339 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 27,563,794 | $ | 30,167,760 | $ | 29,876,507 | ||||||
Franchise and royalty fees | 6,981,653 | 7,906,935 | 8,419,870 | |||||||||
Total Revenue | 34,545,447 | 38,074,695 | 38,296,377 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,599,551 | 21,176,711 | 20,735,739 | |||||||||
Franchise costs | 1,980,781 | 2,097,555 | 2,067,530 | |||||||||
Sales and marketing | 2,210,800 | 2,489,483 | 2,658,421 | |||||||||
General and administrative | 3,432,618 | 3,904,560 | 4,005,142 | |||||||||
Retail operating | 1,934,891 | 2,389,296 | 2,404,003 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $555,926, $523,034, and $447,651, respectively, included in cost of sales | 1,153,873 | 796,221 | 841,058 | |||||||||
Costs associated with Company-owned store closures | 226,981 | - | 60,000 | |||||||||
Total costs and expenses | 31,539,495 | 32,853,826 | 32,771,893 | |||||||||
Income from Operations | 3,005,952 | 5,220,869 | 5,524,484 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (70,787 | ) | (121,244 | ) | (170,351 | ) | ||||||
Interest income | 20,496 | 24,578 | 41,572 | |||||||||
Other expense, net | (50,291 | ) | (96,666 | ) | (128,779 | ) | ||||||
Income Before Income Taxes | 2,955,661 | 5,124,203 | 5,395,705 | |||||||||
Income Tax Provision | 716,862 | 2,160,295 | 1,945,589 | |||||||||
Consolidated Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Basic Earnings per Common Share | $ | 0.38 | $ | 0.50 | $ | 0.59 | ||||||
Diluted Earnings per Common Share | $ | 0.37 | $ | 0.50 | $ | 0.58 | ||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Basic | 5,931,431 | 5,884,337 | 5,843,245 | |||||||||
Dilutive Effect of Employee | ||||||||||||
Stock Awards | 51,207 | 96,099 | 150,447 | |||||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Diluted | 5,982,638 | 5,980,436 | 5,993,692 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28 or 29, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,779,195 | $ | 6,194,948 | ||||
Accounts receivable, less allowance for doubtful accounts of $487,446 and $595,471, respectively | 3,855,823 | 3,799,691 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $22,147 and $0, respectively | 235,612 | 317,248 | ||||||
Refundable income taxes | 47,863 | - | ||||||
Inventories, less reserve for slow moving inventory of $249,051 and $261,346, respectively | 4,975,779 | 4,840,108 | ||||||
Other | 256,548 | 286,859 | ||||||
Total current assets | 15,150,820 | 15,438,854 | ||||||
Property and Equipment, Net | 6,457,931 | 6,010,303 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and allowance for doubtful accounts of $26,500 and $75,000, respectively | 370,769 | 530,446 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights | 4,826,172 | 5,153,363 | ||||||
Intangible assets, net | 632,207 | 419,042 | ||||||
Deferred income taxes | 858,874 | 1,421,655 | ||||||
Other | 74,639 | 295,118 | ||||||
Total other assets | 7,809,605 | 8,866,568 | ||||||
Total Assets | $ | 29,418,356 | $ | 30,315,725 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,302,501 | $ | 1,254,007 | ||||
Accounts payable | 1,820,470 | 1,663,245 | ||||||
Accrued salaries and wages | 608,510 | 683,863 | ||||||
Gift card liabilities | 2,921,585 | 2,835,943 | ||||||
Other accrued expenses | 253,497 | 364,955 | ||||||
Dividend payable | 702,525 | 700,728 | ||||||
Deferred income | 451,171 | 502,950 | ||||||
Total current liabilities | 8,060,259 | 8,005,691 | ||||||
Long-Term Debt, Less Current Maturities | 2,529,240 | 3,831,126 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock, authorized 50,000 shares | - | - | ||||||
Undesignated series, authorized 200,000 shares | - | - | ||||||
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,854,372 and 5,839,396 issued, and 5,854,372 and 5,839,396 outstanding, respectively | 5,854 | 5,839 | ||||||
Additional paid-in capital | 5,539,357 | 5,340,190 | ||||||
Retained earnings | 13,283,646 | 13,132,879 | ||||||
Total stockholders’ equity | 18,828,857 | 18,478,908 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 29,418,356 | $ | 30,315,725 |
AS OF FEBRUARY 28, | ||||||||
2019 | 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,384,027 | $ | 6,072,984 | ||||
Accounts receivable, less allowance for doubtful accounts of $489,502 and $479,472, respectively | 3,993,262 | 3,897,334 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $0 and $9,000, respectively | 110,162 | 105,540 | ||||||
Refundable income taxes | 190,201 | 342,863 | ||||||
Inventories, less reserve for slow moving inventory of $371,147 and $357,706, respectively | 4,270,357 | 4,842,474 | ||||||
Other | 318,126 | 310,173 | ||||||
Total current assets | 14,266,135 | 15,571,368 | ||||||
Property and Equipment, Net | 5,786,139 | 6,166,240 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and valuation allowance of $0 and $17,500, respectively | 281,669 | 235,983 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights, net | 3,678,920 | 4,433,927 | ||||||
Intangible assets, net | 498,337 | 587,377 | ||||||
Deferred income taxes | 607,421 | 835,463 | ||||||
Other | 56,576 | 63,333 | ||||||
Total other assets | 6,169,867 | 7,203,027 | ||||||
Total Assets | $ | 26,222,141 | $ | 28,940,635 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,176,488 | $ | 1,352,893 | ||||
Accounts payable | 897,074 | 1,647,991 | ||||||
Accrued salaries and wages | 655,853 | 644,005 | ||||||
Gift card liabilities | 742,289 | 3,057,131 | ||||||
Other accrued expenses | 293,094 | 325,034 | ||||||
Dividend payable | 714,939 | 708,652 | ||||||
Contract liabilities | 256,094 | 471,910 | ||||||
Total current liabilities | 4,735,831 | 8,207,616 | ||||||
Long-Term Debt, Less Current Maturities | - | 1,176,416 | ||||||
Contract Liabilities, Less Current Portion | 1,096,478 | - | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock; 50,000 authorized; -0- shares issued and outstanding | - | - | ||||||
Undesignated series; 200,000 shares authorized; -0- shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 5,957,827 shares and 5,903,436 shares issued and outstanding, respectively | 5,958 | 5,903 | ||||||
Additional paid-in capital | 6,650,864 | 6,131,147 | ||||||
Retained earnings | 13,733,010 | 13,419,553 | ||||||
Total stockholders' equity | 20,389,832 | 19,556,603 | ||||||
Total Liabilities and Stockholders' Equity | $ | 26,222,141 | $ | 28,940,635 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,839 | $ | 180,384 | $ | 184,206 | ||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | (174,371 | ) | - | ||||||||
Repurchase and retirement of common stock | (35 | ) | (233 | ) | (7,383 | ) | ||||||
Issuance of common stock | 2 | 4 | 120 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48 | 55 | 3,441 | |||||||||
Balance at end of year | 5,854 | 5,839 | 180,384 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 5,340,190 | 7,163,092 | 8,921,723 | |||||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | 174,371 | - | |||||||||
Repurchase and retirement of common stock | (351,548 | ) | (3,030,475 | ) | (3,120,241 | ) | ||||||
Issuance of common stock | 20,418 | 61,036 | 47,360 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 564,425 | 602,498 | 731,400 | |||||||||
Transfers from non-controlling interest | - | 349,800 | 382,306 | |||||||||
Tax (expense) benefit from employee stock transactions | (34,128 | ) | 19,868 | 200,544 | ||||||||
Balance at end of year | 5,539,357 | 5,340,190 | 7,163,092 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,132,879 | 11,524,708 | 10,344,794 | |||||||||
Net income attributable to RMCF stockholders | 3,450,116 | 4,425,907 | 3,937,840 | |||||||||
Cash dividends declared | (2,806,583 | ) | (2,817,736 | ) | (2,757,926 | ) | ||||||
Correction of immaterial error1 | (492,766 | ) | - | - | ||||||||
Balance at end of year | 13,283,646 | 13,132,879 | 11,524,708 | |||||||||
Non-controlling Interest in Equity of Subsidiary | ||||||||||||
Balance at beginning of year | - | 869,671 | 401,655 | |||||||||
Net loss | - | (619,376 | ) | (195,094 | ) | |||||||
Deductions | - | (310,995 | ) | - | ||||||||
Contributions | - | 60,700 | 663,110 | |||||||||
Balance at end of year | - | - | 869,671 | |||||||||
Total Stockholders’ Equity | $ | 18,828,857 | $ | 18,478,908 | $ | 19,737,855 | ||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,839,396 | 6,012,799 | 6,140,200 | |||||||||
Repurchase and retirement of common stock | (35,108 | ) | (233,302 | ) | (246,106 | ) | ||||||
Issuance of common stock | 2,000 | 4,000 | 4,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48,084 | 55,899 | 114,705 | |||||||||
Balance at end of year | 5,854,372 | 5,839,396 | 6,012,799 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,903 | $ | 5,854 | $ | 5,839 | ||||||
Repurchase and retirement of common stock | - | - | (35 | ) | ||||||||
Issuance of common stock | 6 | 5 | 2 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49 | 44 | 48 | |||||||||
Balance at end of year | 5,958 | 5,903 | 5,854 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 6,131,147 | 5,539,357 | 5,340,190 | |||||||||
Repurchase and retirement of common stock | - | - | (351,548 | ) | ||||||||
Issuance of common stock | 55,971 | 59,095 | 20,418 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 463,746 | 532,695 | 564,425 | |||||||||
Tax (expense) benefit from employee stock transactions | - | - | (34,128 | ) | ||||||||
Balance at end of year | 6,650,864 | 6,131,147 | 5,539,357 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,419,553 | 13,283,646 | 13,132,879 | |||||||||
Net income attributable to RMCF stockholders | 2,238,799 | 2,963,908 | 3,450,116 | |||||||||
Cash dividends declared | (2,851,271 | ) | (2,828,001 | ) | (2,806,583 | ) | ||||||
Correction of immaterial error1 | - | - | (492,766 | ) | ||||||||
Adoption of ASC 6062 | 925,929 | - | - | |||||||||
Balance at end of year | 13,733,010 | 13,419,553 | 13,283,646 | |||||||||
Total Stockholders' Equity | 20,389,832 | 19,556,603 | 18,828,857 | |||||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,903,436 | 5,854,372 | 5,839,396 | |||||||||
Repurchase and retirement of common stock | - | - | (35,108 | ) | ||||||||
Issuance of common stock | 5,333 | 5,000 | 2,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49,058 | 44,064 | 48,084 | |||||||||
Balance at end of year | 5,957,827 | 5,903,436 | 5,854,372 |
1 As revised. Refer to Note 1716 for information on immaterial correction of errors in prior period.
2 Refer to Note 17 for information on the adoption of ASC 606.
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 3,450,116 | $ | 3,806,531 | $ | 3,742,746 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,288,709 | 1,420,301 | 1,440,448 | |||||||||
Provision for loss on accounts and notes receivable | 138,125 | 171,000 | 214,600 | |||||||||
Provision for inventory loss | 100,049 | 76,695 | 58,836 | |||||||||
Asset impairment and store closure losses | - | 2,319,003 | 225,640 | |||||||||
(Gain) loss on sale of assets | 37,112 | 90,149 | (46,857 | ) | ||||||||
Expense recorded for stock compensation | 584,893 | 763,094 | 865,240 | |||||||||
Deferred income taxes | 262,248 | (1,878,205 | ) | (55,068 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (128,404 | ) | 364,767 | 662,625 | ||||||||
Refundable income taxes | (47,863 | ) | 172,945 | (12,055 | ) | |||||||
Inventories | (2,735 | ) | 144,454 | (202,333 | ) | |||||||
Other assets | 29,442 | 24,415 | (16,087 | ) | ||||||||
Accounts payable | (87,657 | ) | (310,533 | ) | (451,080 | ) | ||||||
Accrued liabilities | (293,402 | ) | 154,800 | 325,544 | ||||||||
Deferred income | (9,619 | ) | (531,331 | ) | (880,684 | ) | ||||||
Net cash provided by operating activities | 5,321,014 | 6,788,085 | 5,871,515 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Additions to notes receivable | (133,202 | ) | (46,489 | ) | (179,569 | ) | ||||||
Proceeds received on notes receivable | 318,219 | 368,122 | 488,691 | |||||||||
Proceeds from sale or distribution of assets | 39,045 | 23,692 | 530,175 | |||||||||
Intangible assets | (312,947 | ) | (83,103 | ) | - | |||||||
Decrease (increase) in other assets | 34,479 | (212,860 | ) | (2,395 | ) | |||||||
Purchase of property and equipment | (1,238,472 | ) | (743,251 | ) | (626,744 | ) | ||||||
Net cash (used in) provided by investing activities | (1,292,878 | ) | (693,889 | ) | 210,158 | |||||||
Cash Flows From Financing Activities: | ||||||||||||
Payments on long-term debt | (1,253,392 | ) | (1,207,234 | ) | (107,633 | ) | ||||||
Repurchase of common stock | (351,583 | ) | (3,030,708 | ) | (3,127,624 | ) | ||||||
Issuance of common stock | - | - | 69,599 | |||||||||
Proceeds from issuance of common stock in subsidiary | - | - | 892,895 | |||||||||
Tax (expense) benefit of stock option exercise | (34,128 | ) | 19,868 | 200,544 | ||||||||
Dividends paid | (2,804,786 | ) | (2,838,545 | ) | (2,711,812 | ) | ||||||
Net cash used in financing activities | (4,443,889 | ) | (7,056,619 | ) | (4,784,031 | ) | ||||||
Net (Decrease) Increase In Cash And Cash Equivalents | (415,753 | ) | (962,423 | ) | 1,297,642 | |||||||
Cash And Cash Equivalents At Beginning Of Year | 6,194,948 | 7,157,371 | 5,859,729 | |||||||||
Cash And Cash Equivalents At End Of Year | $ | 5,779,195 | $ | 6,194,948 | $ | 7,157,371 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,709,799 | 1,319,255 | 1,288,709 | |||||||||
Provision for obsolete inventory | 325,478 | 166,868 | 138,125 | |||||||||
Provision for loss on accounts and notes receivable | 155,600 | 225,858 | 100,049 | |||||||||
Asset impairment and store closure losses | 67,822 | - | - | |||||||||
Loss on sale or disposal of property and equipment | 36,024 | 38,496 | 37,112 | |||||||||
Expense recorded for stock compensation | 519,772 | 591,839 | 584,893 | |||||||||
Deferred income taxes | (78,934 | ) | 23,411 | 262,248 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (390,663 | ) | (229,948 | ) | (128,404 | ) | ||||||
Refundable income taxes | 157,544 | (295,000 | ) | (47,863 | ) | |||||||
Inventories | 41,310 | (365,323 | ) | (2,735 | ) | |||||||
Other current assets | (8,225 | ) | (54,091 | ) | 29,442 | |||||||
Accounts payable | (545,588 | ) | 96,491 | (87,657 | ) | |||||||
Accrued liabilities | (84,191 | ) | 242,578 | (293,402 | ) | |||||||
Contract Liabilities | (129,527 | ) | 33,270 | (9,619 | ) | |||||||
Net cash provided by operating activities | 4,015,020 | 4,757,612 | 5,321,014 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Addition to notes receivable | - | (14,293 | ) | (133,202 | ) | |||||||
Proceeds received on notes receivable | 102,256 | 230,637 | 318,219 | |||||||||
Purchase of intangible assets | - | (8,508 | ) | (312,947 | ) | |||||||
Proceeds from (cost of) sale or distribution of assets | 13,498 | (7,926 | ) | 39,045 | ||||||||
Purchases of property and equipment | (613,786 | ) | (544,956 | ) | (1,238,472 | ) | ||||||
(Increase) decrease in other assets | (8,140 | ) | 5,529 | 34,479 | ||||||||
Net cash used in investing activities | (506,172 | ) | (339,517 | ) | (1,292,878 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Payments on long-term debt | (1,352,821 | ) | (1,302,432 | ) | (1,253,392 | ) | ||||||
Repurchase of common stock | - | - | (351,583 | ) | ||||||||
Tax expense of stock option exercise | - | - | (34,128 | ) | ||||||||
Dividends paid | (2,844,984 | ) | (2,821,874 | ) | (2,804,786 | ) | ||||||
Net cash used in financing activities | (4,197,805 | ) | (4,124,306 | ) | (4,443,889 | ) | ||||||
Net Decrease in Cash and Cash Equivalents | (688,957 | ) | 293,789 | (415,753 | ) | |||||||
Cash and Cash Equivalents, Beginning of Period | 6,072,984 | 5,779,195 | 6,194,948 | |||||||||
Cash and Cash Equivalents, End of Period | $ | 5,384,027 | $ | 6,072,984 | $ | 5,779,195 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS 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) and, Aspen Leaf Yogurt, LLC (“ALY”), its 39%-owned subsidiary, U-Swirl, Inc. (“SWRL”), and U-Swirl International, Inc. (“U-Swirl”), a wholly-ownedand its 46%-owned subsidiary, as of February 29, 2016U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.
Effective March 1, 2015, the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03 per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001, of Newco. The new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), the Company entered into two agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to SWRL, in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of February 29, 2016 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. As of February 28, 2017, the Company held a 39% interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving as the Company’s Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. becoming a wholly-owned subsidiary of the Company as of February 29, 2016. As of February 29, 2016 U-Swirl, Inc. had no assets.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’sCompany’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2017:2019:
Sold, Not Yet Open |
Open |
Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 4 | 4 | |||||||||
Franchise stores – Domestic stores and kiosks | 6 | 189 | 195 | |||||||||
International License Stores | - | 94 | 94 | |||||||||
Cold Stone Creamery – co-branded | 5 | 83 | 88 | |||||||||
U-Swirl cafés (Including all associated brands) | ||||||||||||
Company-owned cafés | - | 2 | 2 | |||||||||
Company-owned cafés – co-branded | - | 3 | 3 | |||||||||
Franchise stores – North American cafés | * | 129 | 129 | |||||||||
Franchise stores – North American – co-branded | * | 16 | 16 | |||||||||
International License cafés | - | 2 | 2 | |||||||||
Total | 11 | 522 | 533 |
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Sold, Not Yet Open | Open | Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 2 | 2 | |||||||||
Franchise stores - Domestic stores and kiosks | 4 | 183 | 187 | |||||||||
International license stores | 1 | 64 | 65 | |||||||||
Cold Stone Creamery - co-branded | 11 | 91 | 102 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores | - | 1 | 1 | |||||||||
Company-owned stores - co-branded | - | 3 | 3 | |||||||||
Franchise stores - Domestic stores | - | 87 | 87 | |||||||||
Franchise stores - Domestic - co-branded | - | 9 | 9 | |||||||||
International license stores | - | 2 | 2 | |||||||||
Total | 16 | 442 | 458 |
Consolidation
ManagementManagement accounts for the activities of the Company and its subsidiaries, and the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As described above, on January 14, 2013, the Company acquired a controlling interest in SWRL. Prior to January 14, 2013, the Company’s consolidated financial statements excludeexcluded the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets and liabilities of SWRL have been included in these consolidated financial statements. The Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under a loan and security agreement with SWRL to cover the SWRLpurchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement.Agreement”). This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February 29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $5.3$4.9 million at February 28, 2017.2019.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business, we extendthe Company extends credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At February 28, 2017,2019, the Company has $655,028had $391,831 of notes receivable outstanding and an allowance for doubtful accounts of $48,647$0 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through September, 2022November 2023 and approximately $579,000$375,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’sCompany’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.
Income Taxes
We provideThe 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 bases 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. Due to historical U-Swirl losses, prior to FY 2016 wethe Company established a full valuation allowance on ourthe Company’s deferred tax assets. During FY 2016 wethe Company took possession of the outstanding equity in U-Swirl International, Inc.U-Swirl. As a result of ourthe Company’s ownership increasing to 100%, wethe Company began filing consolidated income tax returns in FY 2017. Because of this change, we havethe Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 wethe Company further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The correction of this immaterial error to ourthe Company’s balance sheet is further described in Note 17.16. The Company's temporary differences are listed in Note 6.
Gift Card Breakage
The Company and ourits franchisees sell gift cards that are redeemable for product in our stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on ourthe Company’s gift cards, and we dothe Company does not charge any service fees. While ourthe Company’s franchisees continue to honor all gift cards presented for payment, wethe Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is inredeemed by the processcustomer or the Company determines the likelihood of accumulating sufficient historical redemption patterns to calculate breakage estimates related to unredeemedthe gift cards. Thiscard being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based on a percentage of sales when the likelihood of the redemption of the gift card becomes remote. When the Company has sufficientupon Company-specific historical redemption patterns to calculate breakage estimates, the gift card breakage will be recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. As the Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage estimates, the Company did not recognize gift card breakage during the year ended February 28 or 29, 2017 or 2016.patterns. Accrued gift card liability was $2,921,585$742,289 and $2,835,943$3,057,131 at February 28, or 29, 20172019 and 2016,2018, respectively. The Company recognized breakage of $139,188 and $0 during FY 2019 and FY 2018, respectively. See Note 17 to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC 606.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of ourthe Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the SWRL Loan Agreement with SWRL.Agreement. This was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of goodwill recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership and the result of ourthe Company’s test indicated a full impairment of the U-Swirl goodwill. OurThe Company’s testing and impairment is described in Note 13 to the financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under the acquisition method, the purchase price of the acquisition is allocated to the underlying tangible and intangible assets acquired based on their respective fair values. Fair values are derived from various observable and unobservable inputs and assumptions. The Company utilizes third-party valuation specialists to assist in the allocation. Initial purchase price allocations are preliminary and are subject to revision within the measurement period, not to exceed one year from the date of acquisition. The costs of the business acquisitions are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Moreover, unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to ourthe Company’s franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’sCompany’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
FranchiseBeginning in FY 2019, upon adoption of adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with Rocky Mountain Chocolate Factory franchise store openings in the third quarter of FY 2004, the Company modified its royalty structure. Under the current structure, theThe Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 the Company recognizes a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain instances, we arethe Company is required to pay a portion of franchise fee revenue, or royalty fees to parties we’vethe Company has contracted with to assist in developing and growing a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the ongoing royalty fees, or both. When such agreements exist, we reportthe Company reports franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of the Company’s Manufacturingour manufacturing segment represented approximately $4.1$3.1 million or 11%9% of the Company’sour total revenues during the year ended February 28, 2017. The Company’s2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by a changefurther decreases in the purchases of this customer.customer or the loss of this customer entirely.
Stock-Based Compensation
At February 28, 2017,28, 2019, the Company had one stock-based compensation plans, which currently consists solely ofplan, the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $584,893, $763,094,$519,772, $591,839, and $865,240$584,893 related to equity-based compensation expense during the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
TaxBeginning March 1, 2017, the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement. Prior to March 1, 2017 tax benefits or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the accompanying Statements of Cash Flows. The excess tax benefit or (expense)expense included in net cash provided by financing activities for the years ended February 28, or 29, 2017 2016 and 2015 was $(34,128), $19,868 and $200,544, respectively.$34,128.
During FY 20172019 and 2016,2018, the Company granted no restricted stock units. There were no stock options granted to employees during FY 20172019 or FY 2016.2018. The restricted stock unit grants generally vest 17-20%17 to 20% annually over a period of five to six years. The Company recognized $564,473$463,795 of consolidated stock-based compensation expense related to these grants made in prior years during FY 20172019 compared with $602,554$532,739 in FY 2016.2018 and $564,473 in FY 2017. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 20172019 was $1,179,492,$114,183, which is expected to be recognized over the weighted average period of 2.20.4 years.
During FY 2017, theThe Company issued 2,000 fully-vested, unrestricted shares to non-employee directors compared with 4,000 fully-vested,fully vested, unrestricted shares of stock to non-employee directors in FY 2016.during the year ended February 28, 2019 compared to no shares issued during the year ended February 28, 2018 and 2,000 issued during the year ended February 28, 2017. In connection with these non-employee director stock issuances, the Company recognized $20,420$24,480, $0 and $61,040$20,420 of stock-based compensation expense during FYyear ended February 28, 2019, 2018 and 2017, respectively.
During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and FY 2016, respectively.based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized $31,497 in stock-based compensation expense during the year ended February 28, 2019.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. DuringFollowing the expiration of all outstanding options, during FY 2017, FY 2016 and FY 2015, 0, 12,936, and 12,936, respectively, ofno stock options were excluded from diluted shares as their effect was anti-dilutive.shares.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $279,698, $215,314,$275,441, $355,678, and $244,946$279,698 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Total advertising expense for U-Swirl and its brands amounted to $335,771, $460,034,$168,000, $222,093, and $399,414$335,771 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The Company’sCompany’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable and notes receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, FASB issued ASU 2016-15, Statement2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 clarifies and provides specific guidancechanges in stockholders’ equity in the interim financial statements included in Quarterly Reports on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduceForm 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current diversity in practice. ASU No. 2016-15 isand comparative quarter and year-to-date interim periods. The amendments are effective for public business entities for annual periods, including interim periods within those annual periods, beginningall filings made on or after December 15, 2017, with early application permitted. This guidance is applicableNovember 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the Company's fiscal year beginning March 1, 2018.filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Quarterly Report on Form 10-Q. The Company does not anticipate that this guidancethe adoption of these SEC amendments will have a material impacteffect on its consolidatedthe Company’s financial statements.position, results of operations, cash flows or stockholders’ equity.
In June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting 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- 132016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU No. 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2017. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the process of assessing the impact of the adoption of ASU No. 2016-09 on its consolidated financial statements. During the fiscal years ended February 28, 2017 and February 29, 2016 the Company would have realized additional expense of $34,000 and additional income of $20,000, respectively, if this guidance had been applied.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are requiredThe Company will adopt this guidance effective with the three month period ending May 31, 2019 (the first quarter of Fiscal Year 2020). The Company can elect to apply the amendments atrecord a cumulative-effect adjustment as of the beginning of the earliest period presented usingyear of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments (see note 5) will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, The Company anticipates ASU 2016-02 will have a material impact on the FASB issuedconsolidated balance sheet. The impact of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The cumulative adjustment to be recorded as right-of-use assets and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 willoperating lease liabilities, upon adoption, is expected to be effective for us in the first quarterrange of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.$3,500,000 to $3,900,000.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASC 606”). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in TopicASC 605 Revenue“Revenue Recognition.” ASC 606 provides that revenues are to be 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. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early applicationnew standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in Company-owned stores as those sales are recognized at the time of the guidance is permittedunderlying sale and are presented net of sales taxes and discounts. The standard also did not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard changed the timing in which the Company recognizes initial fees from franchisees and licensees for annual reporting periods beginning after December 31, 2016. This guidance is applicablenew franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store opening and renewals that impact the Company's fiscal year beginning March 1, 2018. The Company expectsterm of the adoption offranchise agreement upon renewal. In accordance with the new guidance, to change the timinginitial franchise services are not distinct from the continuing rights or services offered during the term of recognition ofthe franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees including master license and territory fees for our international business, and renewal fees. Currently, these fees are generallybeing recognized upfront upon either opening ofas the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognizedCompany satisfies the performance obligation over the term of the relatedfranchise agreement, which we expect will result in a material impactis generally 10 to revenue recognized for franchise fees, license fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. 15 years.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Ingredients and supplies | $ | 3,021,220 | $ | 2,868,157 | ||||
Finished candy | 2,137,609 | 2,138,952 | ||||||
U-Swirl food and packaging | 66,001 | 94,345 | ||||||
Reserve for slow moving inventory | (249,051 | ) | (261,346 | ) | ||||
Total inventories | $ | 4,975,779 | $ | 4,840,108 |
2019 | 2018 | |||||||
Ingredients and supplies | $ | 2,612,954 | $ | 2,764,727 | ||||
Finished candy | 1,983,854 | 2,371,610 | ||||||
U-Swirl food and packaging | 44,696 | 63,843 | ||||||
Reserve for slow moving inventory | (371,147 | ) | (357,706 | ) | ||||
Total inventories | $ | 4,270,357 | $ | 4,842,474 |
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 4,787,855 | 4,784,272 | ||||||
Machinery and equipment | 10,598,355 | 9,987,906 | ||||||
Furniture and fixtures | 1,047,319 | 1,169,475 | ||||||
Leasehold improvements | 1,531,112 | 1,862,603 | ||||||
Transportation equipment | 418,402 | 438,601 | ||||||
Asset impairment | (47,891 | ) | (568,803 | ) | ||||
18,848,770 | 18,187,672 | |||||||
Less accumulated depreciation | 12,390,839 | 12,177,369 | ||||||
Property and equipment, net | $ | 6,457,931 | $ | 6,010,303 |
2019 | 2018 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 5,031,395 | 4,905,103 | ||||||
Machinery and equipment | 10,263,119 | 10,686,631 | ||||||
Furniture and fixtures | 864,944 | 1,067,788 | ||||||
Leasehold improvements | 1,131,659 | 1,568,260 | ||||||
Transportation equipment | 422,458 | 434,091 | ||||||
Asset impairment | (30,000 | ) | (62,891 | ) | ||||
18,197,193 | 19,112,600 | |||||||
Less accumulated depreciation | (12,411,054 | ) | (12,946,360 | ) | ||||
Property and equipment, net | $ | 5,786,139 | $ | 6,166,240 |
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2017,28, 2019, the Company had a $5$5.0 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (3.0%(4.7% at February 28, 2017)2019). At February 28, 2017, $52019, $5.0 million was available for borrowings under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 20172019 and we believethe Company believes it is likely to be renewed on terms similar to current terms. At February 28, 2019 and 2018 there was no amount outstanding under this line of credit.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets, including the SWRL Loan Agreement.assets. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. As of February 28, 2019, the Company was in compliance with all such covenants. The Wells Fargo Loan Agreement also contains customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by substantially all business assets. | $ | 3,831,741 | $ | 5,085,133 | ||||
Less current maturities | 1,302,501 | 1,254,007 | ||||||
Long-term obligations | $ | 2,529,240 | $ | 3,831,126 |
The following is a schedule by year of maturities of long-term debt for the years ending February 28 or 29:
2018 | $ | 1,302,501 | ||
2019 | 1,352,900 | |||
2020 | 1,176,340 | |||
Total | $ | 3,831,741 |
2019 | 2018 | ||||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by sustantially all business assets | $ | 1,176,488 | $ | 2,529,309 | |||||
Less current maturities | 1,176,488 | 1,352,893 | |||||||
Long-term obligations | $ | - | $ | 1,176,416 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under fivenon-cancelable operating leases of up to ten-year non-cancelable operating leases.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 following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 603,000 | ||
2019 | 561,000 | |||
2020 | 272,000 | |||
2021 | 49,000 | |||
2022 | 49,000 | |||
Thereafter | 194,000 | |||
Total | $ | 1,728,000 |
2020 | $ | 318,000 | ||
2021 | 259,000 | |||
2022 | 249,000 | |||
2023 | 243,000 | |||
2024 | 249,000 | |||
Thereafter | 175,000 | |||
Total | $ | 1,493,000 |
We actThe Company acts as primary lessee of some franchised store premises, which wethe Company then subleasesubleases to franchisees, but the majority of existing locations are leased by the franchisee directly. OurThe Company’s current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we wereFebruary 28, 2019, the Company was the primary lessee at fivefour of our 332the Company’s 313 domestic franchised stores and 1 former office space.stores.
InIn 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's liability as primary lessee on sublet franchise outlets, all of which is fully offset by sublease rentals, is as follows for the years ending February 28 or 29:
2018 | $ | 189,000 | ||
2019 | 90,000 | |||
2020 | 81,000 | |||
2021 | 83,000 | |||
2022 | 29,000 | |||
Total | $ | 472,000 |
2020 | $ | 92,000 | ||
2021 | 75,000 | |||
2022 | 21,000 | |||
Total | $ | 188,000 |
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Minimum rentals | $ | 944,938 | $ | 1,187,003 | $ | 1,282,363 | ||||||
Less sublease rentals | (318,000 | ) | (479,000 | ) | (468,000 | ) | ||||||
Contingent rentals | 25,200 | 22,200 | 22,200 | |||||||||
$ | 652,138 | $ | 730,203 | $ | 836,563 |
2019 | 2018 | 2017 | ||||||||||
Minimum rentals | $ | 1,030,536 | $ | 1,270,240 | $ | 944,938 | ||||||
Less sublease rentals | (572,000 | ) | (603,000 | ) | (318,000 | ) | ||||||
Contingent rentals | 22,800 | 26,100 | 25,200 | |||||||||
$ | 481,336 | $ | 693,340 | $ | 652,138 |
In FY 2013,2019, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule, by year, of future minimum rental payments required under such lease for the years ending February 28:28 or 29:
2018 | $ | 28,000 | ||
Total | $ | 28,000 |
2020 | $ | 116,000 | ||
2021 | 121,000 | |||
2022 | 125,000 | |||
2023 | 129,000 | |||
2024 | 33,000 | |||
Total | $ | 524,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 185,700 | ||
2019 | 84,300 | |||
2020 | 62,100 | |||
2021 | 62,100 | |||
2022 | 15,500 | |||
Total | $ | 409,700 |
2020 | $ | 323,000 | ||
2021 | 323,000 | |||
2022 | 257,000 | |||
2023 | 29,000 | |||
Total | $ | 932,000 |
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | |||||||
220,791 | 182,006 | 185,703 |
2019 | 2018 | 2017 | |||||||
325,229 | 225,992 | 220,791 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 20172019, the Company was contracted for approximately $2,595,000$880,000 of raw materials under such agreements.
Contingencies
The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (collectively, the “CherryBerry Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB Shares, they must first offer such shares to SWRL and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint in the Colorado District Court, and thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion). On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May 9, 2016, the Oklahoma Court granted that application and we filed an answer to this action on June 6, 2016. All parties are currently involved in discovery proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this lawsuit.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Current | ||||||||||||
Federal | $ | 1,411,126 | $ | 1,420,811 | $ | 1,846,365 | ||||||
State | 272,214 | 195,993 | 246,398 | |||||||||
Total Current | 1,683,340 | 1,616,804 | 2,092,763 | |||||||||
Deferred | ||||||||||||
Federal | 240,234 | (1,725,918 | ) | (50,603 | ) | |||||||
State | 22,015 | (152,286 | ) | (4,465 | ) | |||||||
Total Deferred | 262,249 | (1,878,204 | ) | (55,068 | ) | |||||||
Total | $ | 1,945,589 | $ | (261,400 | ) | $ | 2,037,695 |
2019 | 2018 | 2017 | ||||||||||
Current | ||||||||||||
Federal | $ | 653,226 | $ | 1,916,720 | $ | 1,411,127 | ||||||
State | 142,570 | 220,164 | 272,214 | |||||||||
Total Current | 795,796 | 2,136,884 | 1,683,341 | |||||||||
Deferred | ||||||||||||
Federal | (67,410 | ) | 55,658 | 240,233 | ||||||||
State | (11,524 | ) | (32,247 | ) | 22,015 | |||||||
Total Deferred | (78,934 | ) | 23,411 | 262,248 | ||||||||
Total | $ | 716,862 | $ | 2,160,295 | $ | 1,945,589 |
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years endedended February 28 or 29:
2017 | 2016 | 2015 | ||||||||||
Statutory rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.6 | % | 0.8 | % | 2.8 | % | ||||||
Domestic production deduction | (1.1 | %) | (3.0 | %) | (1.6 | %) | ||||||
Work opportunity tax credits | (0.4 | %) | - | - | ||||||||
Statutory rate change | - | (1.6 | %) | - | % | |||||||
Other | 0.0 | % | 0.5 | % | 0.1 | % | ||||||
U-Swirl loss carryforward recognized | - | (1.8 | %) | (3.0 | %) | |||||||
Valuation allowance, U-Swirl Consolidated loss | - | (36.3 | %) | 3.0 | % | |||||||
Effective rate – provision (benefit) | 36.1 | % | (7.4 | %) | 35.3 | % |
2019 | 2018 | 2017 | ||||||||||
Statutory rate | 21.0 | % | 31.9 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.4 | % | 2.4 | % | 3.6 | % | ||||||
Domestic production deduction | 0.0 | % | (0.9 | )% | (1.1 | )% | ||||||
Work opportunity tax credits | (0.7 | )% | (0.2 | )% | (0.4 | )% | ||||||
Other | 0.5 | % | 0.8 | % | 0.0 | % | ||||||
Impact of tax reform | 0.0 | % | 8.2 | % | 0.0 | % | ||||||
Effective rate - provision (benefit) | 24.2 | % | 42.2 | % | 36.1 | % |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes at February 28 or 29 are as follows:
Deferred Tax Assets | 2017 | 2016 | ||||||
Allowance for doubtful accounts and notes | $ | 198,354 | $ | 248,537 | ||||
Inventories | 90,027 | 96,698 | ||||||
Accrued compensation | 188,002 | 183,898 | ||||||
Loss provisions and deferred income | 1,175,351 | 1,299,191 | ||||||
Self-insurance accrual | 37,000 | 28,923 | ||||||
Amortization | 782,683 | 861,594 | ||||||
Restructuring charges | 148,494 | 148,494 | ||||||
U-Swirl accumulated net loss | 164,035 | 346,605 | ||||||
Valuation allowance | (148,494 | ) | (148,494 | ) | ||||
Net deferred tax assets | 2,635,452 | 3,065,446 | ||||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (1,683,778 | ) | (1,537,653 | ) | ||||
Prepaid expenses | (92,800 | ) | (106,138 | ) | ||||
Deferred tax liabilities | $ | (1,776,578 | ) | $ | (1,643,791 | ) | ||
Net deferred tax assets | $ | 858,874 | $ | 1,421,655 |
2019 | 2018 | |||||||
Deferred Tax Assets | ||||||||
Allowance for doubtful accounts and notes | $ | 120,368 | $ | 124,469 | ||||
Inventories | 91,265 | 86,938 | ||||||
Accrued compensation | 87,930 | 130,049 | ||||||
Loss provisions and deferred income | 492,468 | 817,945 | ||||||
Self-insurance accrual | 34,426 | 38,868 | ||||||
Amortization | 217,481 | 520,379 | ||||||
Restructuring charges | 98,693 | 98,728 | ||||||
U-Swirl accumulated net loss | 325,253 | 258,173 | ||||||
Valuation allowance | (98,693 | ) | (98,728 | ) | ||||
Net deferred tax assets | $ | 1,369,191 | $ | 1,976,821 | ||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (682,542 | ) | (1,066,113 | ) | ||||
Prepaid expenses | (79,228 | ) | (75,245 | ) | ||||
Deferred Tax Liabilities | (761,770 | ) | (1,141,358 | ) | ||||
Net deferred tax assets | $ | 607,421 | $ | 835,463 |
The following table summarizes deferred income tax valuation allowances as of February 28 or 29:28:
2017 | 2016 | |||||||
Valuation allowance at beginning of period | $ | 148,494 | $ | 349,010 | ||||
Tax expense (benefits) realized by valuation allowance | - | 81,340 | ||||||
Tax benefits released from valuation allowance | - | (281,856 | ) | |||||
Valuation allowance at end of period | $ | 148,494 | $ | 148,494 |
2019 | 2018 | |||||||
Valuation allowance at beginning of period | $ | 98,728 | $ | 148,494 | ||||
Tax expense (benefits) realized by valuation allowance | (35 | ) | - | |||||
Tax benefits released from valuation allowance | - | - | ||||||
Impact of tax reform | - | (49,766 | ) | |||||
Valuation allowance at end of period | $ | 98,693 | $ | 98,728 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Income tax benefit realizedexpense and the effective income tax rate for the year ended February 29, 2016, compared to the tax expense in the prior years, is primarily due to the tax consequences of a change in the controlling interest in U-Swirl and foreclosure upon the stock of U-Swirl International, Inc. In FY 2014 we did not realize a tax benefit28, 2019 decreased from the SWRL taxable loss causing our effective rate to increase for the year. During FY 2015 the taxable loss at SWRL was lower, resulting in a decrease to our effective rate. During FY 2016 an income tax benefit of approximately $2,149,000 was recognizedyear ended February 28, 2018, primarily as a result of the company foreclosing upon the interest in U-Swirl and recognizingrevaluation of deferred tax assets and loss carry forwards that previously had full valuation allowances when RMCF had less than an 80% ownership interest. Resulting from this foreclosure, RMCF will consolidate U-Swirl International, Inc. resulting in realizationliabilities to the lower enacted U.S. corporate tax rate of U-Swirl International, Inc. deferred tax assets that previously had a full valuation allowance when filed with SWRL income tax returns. U-Swirl International, Inc.21% under the Tax Cuts and RMCF will file consolidated income tax returns beginning with FY 2017. SWRL will continue to file separate tax returns.
ForJobs Act recognized during the year ended February 29, 201628, 2018 and prior periods, the financial statements presented representlower enacted U.S. corporate tax rate of 21% under the consolidated statementsTax Cuts and Jobs Act effective for the year ended February 28, 2019. The revaluation of two separate consolidated groups fordeferred tax assets and liabilities resulted in income tax purposes. RMCF has filed income tax returns consolidatingexpense of approximately $421,000 recognized in consideration of the results of Rocky Mountain Chocolate Factory and its wholly owned subsidiary, Aspen Leaf Yogurt, LLC. U-Swirl Inc. has filed a separate consolidated income tax returnlower enacted rate for the results of U-Swirl, Inc. and its wholly owned subsidiary, U-Swirl International, Inc. RMCF and SWRL have filed separate income tax returns because RMCF owned only 39% of SWRL. Beginning on March 1, 2016 the results of U-Swirl International, Inc. will be included in RMCF’s consolidated income tax return, and on the same date, will be removed from U-Swirl, Inc.’s consolidated tax return. This is a result of the foreclosure of RMCF on the outstanding stock of U-Swirl in satisfaction of debt between RMCF and SWRL. The consolidated tax return for RMCF for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL.year ended February 28, 2018.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2012.2013. The Company’s federal income tax returns have been examined for the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years. The Company’s federal income tax returns are being examined for the years ended February 28 or 29, 2017 and 2016.
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. Management believes that, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2017.2019.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28, 2019 or 29, 2016 or 2015.2018. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28, or 29, 20172019 and 2016.2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 29,29, 2016, we hadthe Company foreclosed on the outstanding equity of U-Swirl International, Inc. and U-Swirl International, Inc. was consolidated for income tax purposes. SWRL, along with U-Swirl International, Inc., has historically filed its own consolidated federal income tax return and reported its own Federal net operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets. This full valuation allowance was eliminated asAs of February 29, 2016, in recognitiona portion of the likelihoodU-Swirl deferred tax assets were recognized as a result of it becoming more likely than not that the loss carry forwardssome of these assets would be realized in the future as a result of RMCF and U-Swirl International, Inc. filing a consolidated income tax return.
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl International, Inc.’sU-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. We haveThe Company has performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest in January 2013.2013 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl International Inc.’sU-Swirl’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
We estimateThe Company estimates that the potential future tax deductions of U-Swirl International, Inc.’sU-Swirl’s Federal net operating losses, limited by section 382, to be approximately $443,000$1,323,000 with a resulting deferred tax asset of approximately $164,000. U-Swirl International Inc.’s$325,000. U-Swirl’s Federal net operating loss carryovers will expire at various dates beginning in 2026.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash dividendsdividend of $0.12 per common share on March 11, 2016, June 17, 2016, September 16, 2016 and December 9, 20162018 to stockholders of record on February 26, 2016,March 6, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 15, 2018 to stockholders of record on June 5, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 14, 2018 to stockholders of record on September 4, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 7, 2016, September 6, 2016 and2018 to stockholders of record on November 25, 2016, respectively.23, 2018. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 9, 2017 payable14, 2019, which was paid on March 10, 201715, 2019 to stockholders of record on February 24, 2017.March 5, 2019.
Future declarationsdeclarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long termlong-term interest of the Company’s stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the nine months ended November 30, 2016,FY 2017, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the three monthsyears ended February 28, 2017.2019 or 2018. As of February 28, 2017,2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (the(as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock awards under the 2007 Plan as of February 28, 2017:2019:
Original share authorization: | 300,000 | |||
Prior plan shares authorized and incorporated in the 2007 | 85,340 | |||
Additional shares authorized through 2007 Plan amendment: | 300,000 | |||
Available for | 685,340 | |||
Cancelled/ | ||||
Shares awarded as unrestricted shares, stock options or restricted stock | ( | ) | ||
Shares available for award: |
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding stock options at beginning of year: | 12,936 | 12,936 | 155,880 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | (142,944 | ) | ||||||||
Cancelled/forfeited | (12,936 | ) | - | - | ||||||||
Outstanding stock options as of February 28 or 29: | - | 12,936 | 12,936 | |||||||||
Weighted average exercise price | n/a | $ | 12.94 | $ | 12.94 | |||||||
Weighted average remaining contractual term (in years) | n/a | 0.04 | 1.04 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding stock options at beginning of year: | - | - | 12,936 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Cancelled/forfeited | - | - | (12,936 | ) | ||||||||
Outstanding stock options as of February 28: | - | - | - | |||||||||
Weighted average exercise price | n/a | n/a | n/a | |||||||||
Weighted average remaining contractual term (in years) | n/a | n/a | n/a |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 181,742 | 237,641 | 295,040 | |||||||||
Granted | - | - | - | |||||||||
Vested | (48,084 | ) | (55,899 | ) | (56,199 | ) | ||||||
Cancelled/forfeited | (10,000 | ) | - | (1,200 | ) | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 123,658 | 181,742 | 237,641 | |||||||||
Weighted average grant date fair value | $ | 12.21 | $ | 12.22 | $ | 12.13 | ||||||
Weighted average remaining vesting period (in years) | 2.23 | 3.22 | 4.08 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 77,594 | 123,658 | 181,742 | |||||||||
Granted | - | - | - | |||||||||
Vested | (49,058 | ) | (44,064 | ) | (48,084 | ) | ||||||
Cancelled/forfeited | (3,534 | ) | (2,000 | ) | (10,000 | ) | ||||||
Outstanding non-vested restricted stock units as of February 28: | 25,002 | 77,594 | 123,658 | |||||||||
Weighted average grant date fair value | $ | 12.05 | $ | 12.16 | $ | 12.21 | ||||||
Weighted average remaining vesting period (in years) | 0.38 | 1.27 | 2.23 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
FY 2019 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,361,528 | $ | 25,324,024 | $ | 1,272,009 | $ | 3,737,606 | $ | - | $ | 35,695,167 | ||||||||||||
Intersegment revenues | (5,236 | ) | (1,144,484 | ) | - | - | - | (1,149,720 | ) | |||||||||||||||
Revenue from external customers | 5,356,292 | 24,179,540 | 1,272,009 | 3,737,606 | - | 34,545,447 | ||||||||||||||||||
Segment profit (loss) | 2,288,871 | 4,310,722 | (52,009 | ) | (32,391 | ) | (3,559,532 | ) | 2,955,661 | |||||||||||||||
Total assets | 1,182,355 | 12,267,458 | 1,001,419 | 5,264,989 | 6,505,920 | 26,222,141 | ||||||||||||||||||
Capital expenditures | 3,548 | 526,402 | 9,617 | 16,512 | 57,707 | 613,786 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,369 | $ | 573,846 | $ | 32,762 | $ | 952,178 | $ | 104,644 | $ | 1,709,799 |
FY 2016 |
Franchising |
Manufacturing |
Retail |
U-Swirl |
Other |
Total | ||||||||||||||||||
Total revenues | $ | 5,947,769 | $ | 27,726,443 | $ | 1,622,906 | $ | 6,535,646 | $ | - | $ | 41,832,764 | ||||||||||||
Intersegment revenues | (5,185 | ) | (1,370,684 | ) | - | - | - | (1,375,869 | ) | |||||||||||||||
Revenue from external customers | 5,942,584 | 26,355,759 | 1,622,906 | 6,535,646 | - | 40,456,895 | ||||||||||||||||||
Segment profit (loss) | 2,608,351 | 6,731,221 | (2,591 | ) | (2,128,649 | ) | (3,663,201 | ) | 3,545,131 | |||||||||||||||
Total assets | 1,205,616 | 11,980,933 | 1,008,783 | 10,126,209 | 5,994,184 | 30,315,725 | ||||||||||||||||||
Capital expenditures | 76,762 | 432,473 | 3,306 | 66,476 | 164,234 | 743,251 | ||||||||||||||||||
Total depreciation & amortization | $ | 36,908 | $ | 406,082 | $ | 18,236 | $ | 802,953 | $ | 156,122 | $ | 1,420,301 |
FY 2018 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 6,004,897 | $ | 27,491,089 | $ | 1,876,021 | $ | 4,142,085 | $ | - | $ | 39,514,092 | ||||||||||||
Intersegment revenues | (4,882 | ) | (1,434,515 | ) | - | - | - | (1,439,397 | ) | |||||||||||||||
Revenue from external customers | 6,000,015 | 26,056,574 | 1,876,021 | 4,142,085 | - | 38,074,695 | ||||||||||||||||||
Segment profit (loss) | 2,623,081 | 5,791,980 | (37,102 | ) | 542,073 | (3,795,829 | ) | 5,124,203 | ||||||||||||||||
Total assets | 1,157,158 | 12,729,659 | 1,134,876 | 8,125,171 | 5,793,771 | 28,940,635 | ||||||||||||||||||
Capital expenditures | 15,429 | 429,545 | 33,056 | 11,899 | 55,027 | 544,956 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,087 | $ | 540,033 | $ | 32,567 | $ | 576,162 | $ | 124,406 | $ | 1,319,255 |
FY 2015 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,976,964 | $ | 27,459,828 | $ | 2,134,976 | $ | 7,501,943 | $ | - | $ | 43,073,711 | ||||||||||||
Intersegment revenues | (342 | ) | (1,564,993 | ) | - | - | - | (1,565,335 | ) | |||||||||||||||
Revenue from external customers | 5,976,622 | 25,894,835 | 2,134,976 | 7,501,943 | - | 41,508,376 | ||||||||||||||||||
Segment profit (loss) | 2,783,734 | 6,993,693 | (51,803 | ) | (245,546 | ) | (3,699,637 | ) | 5,780,441 | |||||||||||||||
Total assets | 1,193,407 | 12,155,004 | 1,157,674 | 12,424,801 | 7,207,327 | 34,138,213 | ||||||||||||||||||
Capital expenditures | 28,806 | 378,060 | 41,361 | 61,053 | 117,464 | 626,744 | ||||||||||||||||||
Total depreciation & amortization | $ | 41,228 | $ | 395,864 | $ | 35,531 | $ | 813,172 | $ | 154,653 | $ | 1,440,448 |
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
Revenue from one customer of the Company’sCompany’s Manufacturing segment represented approximately $4.1$3.1 million, or 10.69.1 percent, of the Company’s revenues from external customers during the year ended February 28, 2017,2019, compared to $5.2$5.1 million, or 12.813.4 percent of the Company’s revenues from external customers during the year ended February 29, 2016.28, 2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For thethe three years ended February 28 or 29:
Cash paid (received) for: | 2017 | 2016 | 2015 | |||||||||
Income taxes paid | $ | 1,997,751 | $ | 1,383,805 | $ | 1,896,274 | ||||||
Interest | 129,927 | 170,709 | 193,022 | |||||||||
Accrued Inventory | 531,017 | 298,032 | 245,183 | |||||||||
Non-Cash Financing Activities: | ||||||||||||
Dividend payable | 702,525 | 700,728 | 721,536 | |||||||||
Non-Cash Investing Activities: | ||||||||||||
Sale or distribution of assets in exchange for notes receivable | ||||||||||||
Long-lived assets | 20,989 | 127,500 | 414,353 | |||||||||
Other assets | $ | - | $ | 75,000 | $ | - |
Cash paid for: | 2019 | 2018 | 2017 | |||||||||
Interest, net | $ | 52,102 | $ | 102,640 | $ | 129,927 | ||||||
Income taxes | 638,252 | 2,431,884 | 1,997,751 | |||||||||
Non-cash Operating Activities | ||||||||||||
Accrued Inventory | 52,918 | 258,247 | 531,017 | |||||||||
Non-cash Financing Activities | ||||||||||||
Dividend payable | $ | 714,939 | $ | 708,652 | 702,525 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’semployee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, the Company’s contribution was approximately $66,000, $62,000,$70,000, $68,000, and $60,000,$66,000, respectively, to the plan.
NOTE 1212 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscalfiscal years ended February 28, or 29, 20172019 and 2016:2018:
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2017 | ||||||||||||||||||||
Total revenue | $ | 9,376,199 | $ | 8,601,962 | $ | 9,955,239 | $ | 10,362,977 | $ | 38,296,377 | ||||||||||
Gross margin | 2,222,405 | 2,289,011 | 2,706,456 | 1,922,896 | 9,140,768 | |||||||||||||||
Net income | 731,834 | 974,813 | 1,011,799 | 731,670 | 3,450,116 | |||||||||||||||
Basic earnings per share | 0.13 | 0.17 | 0.17 | 0.13 | 0.59 | |||||||||||||||
Dilute earnings per share | $ | 0.12 | $ | 0.16 | $ | 0.17 | $ | 0.12 | $ | 0.58 |
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2016 | ||||||||||||||||||||
Total revenue | $ | 10,364,022 | $ | 9,274,554 | $ | 9,807,313 | $ | 11,011,006 | $ | 40,456,895 | ||||||||||
Gross margin | 2,470,383 | 2,536,811 | 2,723,841 | 2,763,228 | 10,494,263 | |||||||||||||||
Net income | 762,959 | 779,796 | 440,801 | 2,442,351 | 4,425,907 | |||||||||||||||
Basic earnings per share | 0.13 | 0.13 | 0.08 | 0.42 | 0.75 | |||||||||||||||
Diluted earnings per share | $ | 0.12 | $ | 0.13 | $ | 0.07 | $ | 0.41 | $ | 0.73 |
Fiscal Quarter | ||||||||||||||||||||
2019 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 8,366,085 | $ | 7,800,088 | $ | 8,949,747 | $ | 9,429,527 | $ | 34,545,447 | ||||||||||
Gross margin | 1,916,807 | 1,852,435 | 1,882,975 | 1,312,026 | 6,964,243 | |||||||||||||||
Net income | 576,944 | 750,815 | 525,361 | 385,679 | 2,238,799 | |||||||||||||||
Basic earnings per share | 0.10 | 0.13 | 0.09 | 0.06 | 0.38 | |||||||||||||||
Diluted earnings per share | $ | 0.10 | $ | 0.13 | $ | 0.09 | $ | 0.06 | $ | 0.37 |
Fiscal Quarter | ||||||||||||||||||||
2018 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 9,346,447 | $ | 8,266,691 | $ | 9,961,572 | $ | 10,499,985 | $ | 38,074,695 | ||||||||||
Gross margin | 2,191,974 | 2,210,910 | 2,311,579 | 2,276,586 | 8,991,049 | |||||||||||||||
Net income | 813,672 | 928,284 | 751,056 | 470,896 | 2,963,908 | |||||||||||||||
Basic earnings per share | 0.14 | 0.16 | 0.13 | 0.08 | 0.50 | |||||||||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.16 | $ | 0.13 | $ | 0.08 | $ | 0.50 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1313 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28 or 29:28:
| 2017 | 2016 | |||||||||||||||||||
Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 211,152 | $ | 220,778 | $ | 209,653 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 92,758 | 459,340 | 51,423 | ||||||||||||||
Franchise Rights | 20 | 5,971,129 | 1,144,957 | 5,914,181 | 760,818 | ||||||||||||||||
Total | 7,459,049 | 2,000,670 | 7,146,102 | 1,573,697 | |||||||||||||||||
Intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment | |||||||||||||||||||||
Company stores goodwill | 1,099,328 | 267,020 | 1,099,328 | 267,020 | |||||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Manufacturing segment-Goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Trademark-indefinite life | 20,000 | - | 20,000 | - | |||||||||||||||||
Total | 1,709,328 | 662,384 | 1,709,328 | 662,384 | |||||||||||||||||
Total intangible assets | $ | 9,168,377 | $ | 2,663,054 | $ | 8,855,430 | $ | 2,236,081 |
2019 | 2018 | |||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 214,152 | $ | 220,778 | $ | 212,653 | |||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | |||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | |||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 223,628 | 715,339 | 136,087 | |||||||||||||||
Franchise rights | 20 | 5,979,637 | 2,300,717 | 5,979,637 | 1,545,710 | |||||||||||||||||
Total | 7,467,557 | 3,290,300 | 7,467,557 | 2,446,253 | ||||||||||||||||||
Intangible assets not subject to amortization | ||||||||||||||||||||||
Franchising segment- | ||||||||||||||||||||||
Company stores goodwill | $ | 1,099,328 | $ | 267,020 | $ | 1,099,328 | $ | 267,020 | ||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Manufacturing segment-goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Trademark | 20,000 | - | 20,000 | - | ||||||||||||||||||
Total goodwill | 1,709,328 | 662,384 | 1,709,328 | 662,384 | ||||||||||||||||||
Total Intangible Assets | $ | 9,176,885 | $ | 3,952,684 | $ | 9,176,885 | $ | 3,108,637 |
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
On February 29, 2016, RMCF foreclosed on all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. As described in Note 1, this was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. We performed a test of impairment in conjunction with the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. We recognized an impairment loss of $1,930,529 to reduce the carrying value of Goodwill to the fair value. In making this determination we reviewed the fair value of U-Swirl compared to its carrying value. In performing this testing we focused on the actual performance of the acquired businesses that created the initial recognition of the goodwill, as well as U-Swirl’s past performance and future expected performance. Because of the significant underperformance of the acquired businesses as well as U-Swirl we determined that the carrying value of the reporting unit exceeded its fair value.
The following are events that have indicated that it is more likely than not that the fair value of goodwill is less than the carrying amount:
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets totaled $427,840, $378,373,$844,320, $446,050, and $361,723$427,840 during the fiscal years ended February 28 or 29, 2019, 2018 and 2017, 2016 and 2015, respectively.
During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 28, 2017,28, 2019, annual amortization of intangible assets, based upon ourthe Company’s existing intangible assets and current useful lives, is estimated to be the following:
2018 | $ | 445,214 | ||
2019 | 451,644 | |||
2020 | 438,487 | |||
2021 | 426,778 | |||
2022 | 403,596 | |||
Thereafter | 3,292,660 | |||
Total | $ | 5,458,379 |
2020 | $ | 706,177 | ||
2021 | 594,229 | |||
2022 | 490,060 | |||
2023 | 411,607 | |||
2024 | 345,642 | |||
Thereafter | 1,629,542 | |||
Total | $ | 4,177,257 |
NOTE 14 – IMPAIRMENT OF LONG-LIVED RETAIL ASSETS, RESTRUCTURING AND ACQUISITION RELATED CHARGESCOSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
In 2014, SWRL entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, SWRL purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store. SWRL also entered into an Asset Purchase Agreement with Yogli Mogli, which was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, SWRL purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February 20, 2014, SWRL entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rightsCosts associated with 17 Fuzzy Peach Frozen Yogurt stores. Associated with these transactions, the Company recorded net restructuring charges of $124,551 during the year ended February 28, 2015. No restructuring charges were incurred during the year ended February 29, 2016.
On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of SWRL. In addition, Messrs. Conte, H. Cartwright and T. Cartwright resigned as officers of U-Swirl. Also on September 4, 2014, the SWRL Board of Directors appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.
In connection with these management changes, SWRL announced an operational restructuring designed to enhance SWRL’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements with the named officers, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement, property and equipment. The Company recorded restructuring charges of $503,526 during year ended February 28, 2015 associated with this operational restructuring.
As described in Note 1 above, effective March 1, 2015, the Company was reorganized to create a holding company structure pursuant to the Agreement and Plan of Merger, dated as of November 10, 2014, among Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and RKB Merger Corp. In connection with the holding company reorganization, the Company recorded restructuring fees of $179,399 during the year ended February 28, 2015.
During the year ended February 29, 2016, we closed an underperforming Company-owned café resulting in an impairment charge of $39,933. As described in Note 1, on February 29, 2016 the Company foreclosed on 100% of the outstanding equity of U-Swirl in full satisfaction of the obligations owed under the SWRL Loan Agreement. The Company reviewed all operating assets possessed as a part of this transaction and made the determination to offer for sale certain retail assets below their carrying value. This determination was made after a review of expected future cash flow. As a result of this review and determination an impairment charge of $356,280 was recorded to reflect these assets at their fair value.
Impairment of long-lived assets and goodwill, restructuring and acquisition charges incurredstore closures at February 28, or 29,2019, 2018 and 2017 2016 and 2015 were comprised of the following:
2017 | 2016 | 2015 | ||||||||||
Professional fees | $ | - | $ | - | $ | 284,275 | ||||||
Severance/transitional compensation | - | - | 212,027 | |||||||||
Leasehold improvements, property and equipment impairment of long-lived assets and goodwill | - | 2,326,742 | 243,000 | |||||||||
Provision for termination of contractual obligations | 60,000 | - | - | |||||||||
Acceleration of restricted stock unit vesting | - | - | 65,049 | |||||||||
Other | - | - | 3,125 | |||||||||
Total | $ | 60,000 | $ | 2,326,742 | $ | 807,476 |
2019 | 2018 | 2017 | ||||||||||
Loss on distribution of assets | $ | 81,981 | $ | - | $ | - | ||||||
Lease settlement costs | 145,000 | - | 60,000 | |||||||||
Total | $ | 226,981 | $ | - | $ | 60,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – RELATED PARTY TRANSACTIONS
Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have, on occasion, provided services to the Company and may provide services in the future. For the year ended February 28, 2017, the Company paid $47,822 and no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of operations.
NOTE 16 – SUBSEQUENT EVENTS
On May 22, 2017,28, 2019, the Company announced that its Board of Directors has declared a first quarter FY2018FY2020 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 16, 201714, 2019 to shareholders of record at the close of business June 6, 2017.4, 2019.
In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period.
NOTE 1716 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company’sCompany’s prior annual consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233 and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.
NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”)
As described in Note 1, effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be 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. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gift Cards
The Company’s franchisees sell gift cards which do not have either 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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
Impact to Prior Periods
The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:
Amount | ||||
Increase in deferred revenue | $ | (1,022,720 | ) | |
Reduction in gift card liabilities | 2,250,743 | |||
Adjustment to deferred income tax assets | (302,094 | ) | ||
Cumulative increase to retained earnings | $ | 925,929 |
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:
CONSOLIDATED BALANCE SHEET | ||||||||||||
AS OF FEBRUARY 28, 2018 | ||||||||||||
Previously Reported | Adjustments | Restated | ||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 6,072,984 | $ | - | $ | 6,072,984 | ||||||
Accounts receivable, net | 3,897,334 | - | 3,897,334 | |||||||||
Notes receivable, current portion, net | 105,540 | - | 105,540 | |||||||||
Refundable income taxes | 342,863 | - | 342,863 | |||||||||
Inventories, net | 4,842,474 | - | 4,842,474 | |||||||||
Other | 310,173 | - | 310,173 | |||||||||
Total current assets | 15,571,368 | - | 15,571,368 | |||||||||
Property and Equipment, Net | 6,166,240 | - | 6,166,240 | |||||||||
Other Assets | ||||||||||||
Notes receivable, less current portion, net | 235,983 | - | 235,983 | |||||||||
Goodwill, net | 1,046,944 | - | 1,046,944 | |||||||||
Franchise rights, net | 4,433,927 | - | 4,433,927 | |||||||||
Intangible assets, net | 587,377 | - | 587,377 | |||||||||
Deferred income taxes | 835,463 | (302,094 | ) | 533,369 | ||||||||
Other | 63,333 | - | 63,333 | |||||||||
Total other assets | 7,203,027 | (302,094 | ) | 6,900,933 | ||||||||
Total Assets | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 | |||||
Liabilities and Stockholders' Equity | ||||||||||||
Current Liabilities | ||||||||||||
Current maturities of long-term debt | $ | 1,352,893 | - | $ | 1,352,893 | |||||||
Accounts payable | 1,647,991 | - | 1,647,991 | |||||||||
Accrued salaries and wages | 644,005 | - | 644,005 | |||||||||
Gift card liabilities | 3,057,131 | (2,250,743 | ) | 806,388 | ||||||||
Other accrued expenses | 325,034 | - | 325,034 | |||||||||
Dividend payable | 708,652 | - | 708,652 | |||||||||
Deferred revenue | 471,910 | (143,445 | ) | 328,465 | ||||||||
Total current liabilities | 8,207,616 | (2,394,188 | ) | 5,813,428 | ||||||||
Long-Term Debt, Less Current Maturities | 1,176,416 | - | 1,176,416 | |||||||||
Deferred Revenue, Less Current Portion | - | 1,166,165 | 1,166,165 | |||||||||
Commitments and Contingencies | ||||||||||||
Stockholders' Equity | ||||||||||||
Preferred stock | ||||||||||||
Common stock | 5,903 | - | 5,903 | |||||||||
Additional paid-in capital | 6,131,147 | - | 6,131,147 | |||||||||
Retained earnings | 13,419,553 | 925,929 | 14,345,482 | |||||||||
Total stockholders' equity | 19,556,603 | 925,929 | 20,482,532 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
For the Years Ended February 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Franchise Fees contained within the Statement of Income: | $ | 335,028 | $ | 681,613 | $ | 324,718 | ||||||
Adjustment required to conform revenue to prior period method: | (53,528 | ) | - | - | ||||||||
Comparable franchise fees: | $ | 281,500 | $ | 681,613 | $ | 324,718 |
On February 28, 2019, 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:
2020 | $ | 256,093 | ||
2021 | 204,071 | |||
2022 | 190,524 | |||
2023 | 176,394 | |||
2024 | 137,477 | |||
Thereafter | 388,013 | |||
Total | $ | 1,352,572 |
NOTE 18 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2019 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchise fees | $ | 199,362 | $ | - | $ | - | $ | 135,666 | $ | 335,028 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 24,179,540 | - | - | 24,179,540 | |||||||||||||||
Retail sales | - | - | 1,272,009 | 2,112,245 | 3,384,254 | |||||||||||||||
Royalty and marketing fees | 5,156,930 | - | - | 1,489,695 | 6,646,625 | |||||||||||||||
Total | $ | 5,356,292 | $ | 24,179,540 | $ | 1,272,009 | $ | 3,737,606 | $ | 34,545,447 |
ITEMITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systems to future periods are subject to the risk that such controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all errors or all fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These reports by management, including the CEO and CFO, on the effectiveness of the Company’s Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act), that are designed to ensure that material information relating to the Company is made known to the officers who certify the Company’s 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 the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’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.
Management, under the supervision and with the participation of the CEO and CFO, has evaluated the effectiveness,effectiveness, as of February 28, 2017,2019, of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of February 28, 2017.2019.
Management’sManagement’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed under supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2017,2018, of the Company’s internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its publication Internal Control-Integrated Framework (2013). Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of February 28, 2017.2019.
Changes in Internal Control over Financial Reporting —There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended February 28, 20172019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to the Company’sCompany’s equity compensation plansplan, as of February 28, 2017,2019, which consists solely of the Company’s 2007 Equity Incentive Plan.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) | ||||||||
(a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 123,658 |
n/a | 332,589 | ||||||||
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- | ||||||||
Total | 123,658 | n/a | 332,589 |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | 25,002 |
n/a | 327,790 |
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- |
Total | 25,002 | n/a | 327,790 |
(1) Awards outstanding under the 2007 Equity Incentive Plan as of February 28, 20172019 consist of 123,65825,002 unvested restricted stock units. The weighted-average exercise price is calculated solely with respect to the outstanding stock options.
(2)(2) Represents shares remaining available under the Company’s 2007 Equity Incentive Plan. Shares available for future issuances under the 2007 Equity Incentive Plan may be issued in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and performance units, and other stock- and cash-based awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | The following documents are filed as part of this Annual Report: |
1. |
|
Page | |
| 33-34 |
Consolidated Statements of Income | 35 |
Consolidated Balance Sheets | 36 |
Consolidated Statements of Changes in | 37 |
Consolidated Statements of Cash Flows | 38 |
Notes to Consolidated Financial Statements | 39 |
2. | Financial Statement Schedule |
2. Financial Statement Schedule
SCHEDULE II - Valuation and Qualifying Accounts
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |||||||||||||
Year Ended February 28, 2017 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 137,316 | 271,694 | 536,093 | ||||||||||||
Year Ended February 29, 2016 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 729,060 | 171,000 | 229,589 | 670,471 | ||||||||||||
Year Ended February 28, 2015 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 600,930 | 214,600 | 86,470 | 729,060 |
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |
Year Ended February 28, 2019 | ||||
Valuation Allowance for Accounts and Notes Receivable | 505,972 | 143,214 | 159,684 | 489,502 |
Year Ended February 29, 2018 | ||||
Valuation Allowance for Accounts and Notes Receivable | 536,093 | 166,868 | 196,989 | 505,972 |
Year Ended February 28, 2017 | ||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 138,125 | 272,503 | 536,093 |
3. |
|
The following exhibits listed in the Exhibit Index are filed with, or incorporated by reference, in this Annual Report.
Exhibit Number | Description | Incorporated by Reference to | |||
3.1 | Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.2 | Certificate of Designations of Series A Junior Participating Preferred Stock, Par Value $0.001 Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.3 | Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.3 to the Current Report on Form 8-K filed on March 2, 2015 | |||
4.1 | Description of Capital Stock | Filed herewith | |||
10.1** | Form of Employment Agreement (Officers) | Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.2 | Form of Franchise Agreement for Rocky Mountain Chocolate Factory | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2010 (File No. 000-14749) | |||
10.3** | 2007 Equity Incentive Plan (As Amended and Restated) | Exhibit 10.1 to the Current Report on Form 8-K filed on August 9, 2013 (File No. 000-14749) | |||
10.4** | Form of Indemnification Agreement (Directors) | Exhibit 10.7 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.5** | Form of Indemnification Agreement (Officers) | Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.6* | Master License Agreement, dated August 17, 2009, between Kahala Franchise Corp. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2009 (File No. 000-14749) | |||
10.7 | Revolving Line of Credit Note, dated September 13, 2017, between Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank, National Association | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2017 | |||
10.8 | Business Loan Agreement, dated August 2, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2013 (File No. 000-14749) | |||
10.9 | Business Loan Agreement, dated December 27, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 99.3 to the Current Report on Form 8-K filed on January 22, 2014 (File No. 000-14749) | |||
10.10* | Master License Agreement, dated April 27, 2012, between RMCF Asia, Ltd. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2012 (File No. 000-14749) |
Exhibit Number | Description | Incorporated by Reference to | |||
10.11 | Exhibit 99.4 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.12 | Exhibit 99.5 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.13 | Investor Rights Agreement, dated January 14, 2013 between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC | Exhibit 99.6 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | |||
10.14** | Filed herewith | ||||
10.15** | Filed herewith | ||||
21.1 | Filed herewith | ||||
23.1 | Filed herewith | ||||
23.2 | Filed herewith | ||||
31.1 | Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | |||
32.1 | Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
101.INS | XBRL Instance Document | Filed herewith | |||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | |||
* | Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. | ||||
** | Management contract or compensatory plan. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. | ||||
|
|
|
| ||
|
|
|
| ||
Date: May | /s/ Bryan J. Merryman |
|
| ||
|
| BRYAN J. MERRYMAN | |||
Chief | |||||
Financial Officer, Treasurer and
| |||||
Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| |||
| ||||
| ||||
Date: May | /s/ Bryan J. Merryman | |||
BRYAN J. MERRYMAN | ||||
Chief Executive Officer, Chief | ||||
Financial Officer, Treasurer and | ||||
Director | ||||
(Principal Executive, Financial | ||||
and Accounting Officer) | ||||
Date: May 29, 2019 | /s/ Brett P. Seabert | |||
Brett P. Seabert, Director | ||||
Date: May | ||||
/s/ Clyde Wm. Engle | ||||
CLYDE Wm. ENGLE, Director | ||||
Date: May | /s/ Scott G. Capdevielle | |||
SCOTT G. CAPDEVIELLE, Director |
EXHIBIT INDEX
|
|
| ||||||||||
|
|
| ||||||||||
Date: May 29, 2019 | ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
| ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
/s/ Franklin E. Crail | ||||||||||||
6361
February 28,
%
February 29 or 28,
%
2019
2018
Change
Change
($’s in thousands)
2017
2016
Change
Change
Factory sales
Retail sales
Franchise fees
Royalty and marketing fees
Franchise fees
Total
Factory Sales
The decrease in factory sales for FY 20172019 compared to FY 20162018 was primarily due to an 5.6%a 23.1% decrease in shipments of product to customers outside our network of franchised retail stores, partially offset by a 1.0% increase in shipments to our network of franchised and a 4.7%licensed stores. The decrease in same-storeshipments of product to customers outside our network of franchised and licensed stores was primarily the result of a decrease in purchases by the Company’s largest customer during FY 2019, with revenue from such customer decreasing to approximately $3.1 million, or 9.1%, of the Company’s revenues during FY 2019, compared to $5.1 million, or 13.4% of the Company’s revenues during FY 2018 for this same customer. Same-store pounds purchased by franchise and co-branded license locations decreased 0.5% during FY 20172019 compared with FY 2016, and a 3.0% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation.2018.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of certain Company-owned locations and the closure of a certain underperforming Company-owned location.locations. Same store sales at all Company-owned stores and cafés increased 0.5%1.4% during FY 20172019 compared with FY 2016. Same-store sales at U-Swirl cafés decreased 2.2% during FY 2017 compared to FY 2016.2018.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 20172019 compared to FY 20162018 resulted primarily from a 12.3%9.1% decrease in franchise units in operation and lower same store sales.operation. The average number of total franchise stores in operation decreased from 423317 during FY 20162018 to 371288 during FY 2017.2019. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation decreased 0.2%increased 0.6% during FY 20172019 compared to FY 2016.2018. Franchise fee revenues decreased in FY 2019 compared to FY 2018 primarily as a result of $9,000$359,000 in international license fees being recognized during FY 2017 compared2018 with $263,000no comparable fees recognized during FY 2016.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2017, U-Swirl revenue decreased 20.2% to $5,216,100 compared with $6,535,600 of U-Swirl revenue consolidated within our results for FY 2016. The decrease resulted from a 20.4% decrease in average domestic U-Swirl franchise cafés in operation during FY 2017 compared to FY 2016, primarily as a result of store closings exceeding store openings, in-line with expected industry trends. 2019.
COSTS AND EXPENSES
Cost of Sales
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Cost of sales – factory | $ | 19,181.0 | $ | 19,151.7 | $ | 29.3 | 0.2 | % | ||||||||
Cost of sales – retail | 1,554.8 | 1,714.8 | (160.0 | ) | (9.3 | %) | ||||||||||
Franchise costs | 2,067.5 | 2,452.6 | (385.1 | ) | (15.7 | %) | ||||||||||
Sales and marketing | 2,658.4 | 2,466.5 | 191.9 | 7.8 | % | |||||||||||
General and administrative | 4,005.1 | 4,663.9 | (658.8 | ) | (14.1 | %) | ||||||||||
Retail operating | 2,404.0 | 2,951.8 | (547.8 | ) | (18.6 | %) | ||||||||||
Total | $ | 31,870.8 | $ | 33,401.3 | $ | (1,530.5 | ) | (4.6 | %) |
For the Year Ended | ||||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 19,360.5 | $ | 19,703.6 | $ | (343.1 | ) | (1.7 | )% | |||||||
Cost of sales - retail | 1,239.0 | 1,473.1 | (234.1 | ) | (15.9 | )% | ||||||||||
Franchise costs | 1,980.8 | 2,097.6 | (116.8 | ) | (5.6 | )% | ||||||||||
Sales and marketing | 2,210.8 | 2,489.5 | (278.7 | ) | (11.2 | )% | ||||||||||
General and administrative | 3,432.6 | 3,904.6 | (472.0 | ) | (12.1 | )% | ||||||||||
Retail operating | 1,934.9 | 2,389.3 | (454.4 | ) | (19.0 | )% | ||||||||||
Total | $ | 30,158.6 | $ | 32,057.7 | $ | (1,899.1 | ) | (5.9 | )% |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 6,242.8 | $ | 7,204.1 | $ | ( 961.3 | ) | (13.3 | %) | |||||||
Retail | 2,897.9 | 3,290.2 | (392.3 | ) | (11.9 | %) | ||||||||||
Total | $ | 9,140.7 | $ | 10,494.3 | $ | (1,353.6 | ) | (12.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,819.0 | $ | 6,353.0 | $ | (1,534.0 | ) | (24.1 | )% | |||||||
Retail gross margin | 2,145.3 | 2,638.1 | (492.8 | ) | (18.7 | )% | ||||||||||
Total | $ | 6,964.3 | $ | 8,991.1 | $ | (2,026.8 | ) | (22.5 | )% |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 24.6 | % | 27.3 | % | (2.7% | ) | (9.9 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6% | ) | (0.9 | %) | ||||||||
Total | 30.6 | % | 33.5 | % | (2.9% | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28, | % | % | ||||||||||||||
(Percent) | 2019 | 2018 | Change | Change | ||||||||||||
| ||||||||||||||||
Factory gross margin | 19.9 | % | 24.4 | % | (4.5 | )% | (18.4 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total | 25.3 | % | 29.8 | % | (4.5 | )% | (15.1 | )% |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 6,242.8 | $ | 7,204.1 | $ | ( 961.3 | ) | (13.3 | %) | |||||||
Plus: depreciation and amortization | 447.7 | 404.4 | 43.3 | 10.7 | % | |||||||||||
Factory adjusted gross margin | 6,609.5 | 7,608.5 | (999.0 | ) | (13.1 | %) | ||||||||||
Retail | 2,897.9 | 3,290.2 | (392.3 | ) | (11.9 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 9,507.4 | $ | 10,898.7 | $ | (1,391.3 | ) | (12.8 | %) | |||||||
Factory adjusted gross margin | 26.0 | % | 28.9 | % | (2.9 | %) | (10.0 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6 | %) | (0.9 | %) | ||||||||
Total Adjusted Gross Margin | 31.8 | % | 34.8 | % | (3.0 | %) | (8.6 | %) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,819.0 | $ | 6,353.0 | $ | (1,534.0 | ) | (24.1 | )% | |||||||
Plus: depreciation and amortization | 555.9 | 523.0 | 32.9 | 6.3 | % | |||||||||||
Factory adjusted gross margin | 5,374.9 | 6,876.0 | (1,501.1 | ) | (21.8 | )% | ||||||||||
Retail gross margin | 2,145.3 | 2,638.1 | (492.8 | ) | (18.7 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 7,520.2 | $ | 9,514.1 | $ | (1,993.9 | ) | (21.0 | )% | |||||||
Factory adjusted gross margin | 22.2 | % | 26.4 | % | (4.2 | )% | (15.9 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 31.5 | % | (4.2 | )% | (13.3 | )% |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 270450 basis points during FY 20172019 compared to FY 20162018 due primarily to increasedlower efficiencies associated with a 13.9% decrease in production volume and higher costs associated with inventory obsolescence. Costs associated with inventory obsolescence were generally the result of laborthe initiation of product rationalization resulting from lower volume and overhead related to maintenance, equipment issues and product mix shift, partially offset by lower costs of certain materials.underperforming products. The decrease in Company-owned store margin is due primarily to product mix shift primarily resultinga decrease in Company-owned café revenue from the sale or closure of certain underperforming Company-owned storesyogurt and Cafés.the associated higher margins.
Franchise Costs
The decrease in franchise costs for FY 20172019 compared to FY 20162018 is due primarily to a decrease in professional fees and lower franchise costs associated with supporting U-Swirl franchise unitslower international development in FY 20172019 compared to FY 2016 as a result of fewer store openings in FY 2017.2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreasedincreased to 24.6%28.4% during FY 20172019 from 27.0%26.5% during FY 2016.2018. This decreaseincrease as a percentage of royalty, marketing and franchise fees is primarily a result of a 15.7%an 11.7% decrease in total royalty and marketing fees and franchise costsfee revenue during FY 20172019 compared to FY 2016.2018.
Sales and Marketing
The increasedecrease in sales and marketing costs during FY 20172019 compared to FY 20162018 is primarily due to higher marketing relatedlower marketing-related compensation and professional fees partially offset by lower marketing-related costs associated with U-Swirl franchise locations. Marketing costs for U-Swirl franchise locations declined because of lower marketing fee revenues resulting from fewer franchise stores in operation.
General and Administrative
The decrease in general and administrative costs during FY 20172019 compared to FY 20162018 is due primarily to lower professional fees, the foreclosureresult of U-Swirl in the prior yearresolving legal proceedings, and the associated focus on reduction of duplicative general and administrativelower compensation costs. During FY 2017,2019, approximately $460,000$103,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,291,000$307,000 during FY 2016.2018. As a percentage of total revenues, general and administrative expenses decreased to 10.5%9.9% in FY 20172019 compared to 11.5%10.3% in FY 2016.2018.
Retail Operating Expenses
The decrease in retailRetail operating expenses decreased during FY 20172019 compared to FY 2016 was2018 due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of a certain underperforming Company-owned units.location, offset by the acquisition of a franchised location. Retail operating expenses, as a percentage of retail sales, decreased to 54.0%57.2% during FY 20172019 from 59.0%58.1% during FY 2016.2018. This is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $841,000$1,154,000 during FY 2017, a decrease2019, an increase of 17.2%45.0% from $1,016,000$796,000 incurred during FY 2016.2018. This decreaseincrease was the result of fewer Company-owned store assetsa change in service duemanagement’s estimates related to the sale or closurefuture value of U-Swirl intangibles and the associated acceleration of amortization expense. During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain Company-owned stores and cafés.intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Depreciation and amortization included in cost of sales increased 10.7%6.3% from $404,000$523,000 during FY 20162018 to $448,000$556,000 during FY 2017.2019. This increase was the result of an increase in production assets in service.
Other Income (Expense)
Net interest expense was $128,800$50,300 in FY 20172019 compared to net interest expense of $167,900$96,700 in FY 2016.2018. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions by U-Swirl.
Income Tax Expense
We realized an income tax expense of $1,946,000$717,000 in FY 20172019 compared to an income tax benefitexpense of $261,400$2,160,000 during FY 2016. As described further in Note 6 to the consolidated financial statements, the increase in the effective tax rate is primarily due to the tax consequences of acquiring a 100% controlling interest in U-Swirl during FY 2016.
Fiscal 2016 Compared To Fiscal 2015
Results Summary
Basic earnings per share increased 17.2% from $0.64 in FY 2015 to $0.75 in FY 2016. Revenues decreased 2.5% from $41.5 million for FY 2015 to $40.5 million for FY 2016. Operating income decreased 5.4% from $6.0 million in FY 2015 to $5.6 million in FY 2016. Net income increased 12.4% from $3.9 million in FY 2015 to $4.4 million in FY 2016. The decrease in operating income for FY 2016 compared to FY 2015 is due primarily to a decrease in revenues. The increase in net income is primarily the result of an impairment charge associated with U-Swirl goodwill and certain long lived assets more than offset by income tax benefit recognized.
Revenues
For the Year Ended | ||||||||||||||||
February 29 or 28, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory sales | $ | 26,355.8 | $ | 25,894.6 | $ | 461.2 | 1.8 | % | ||||||||
Retail sales | 5,005.0 | 6,206.0 | (1,201.0 | ) | (19.4% | ) | ||||||||||
Royalty and marketing fees | 8,547.6 | 8,821.0 | (273.4 | ) | (3.1% | ) | ||||||||||
Franchise fees | 548.5 | 586.8 | (38.3 | ) | (6.5% | ) | ||||||||||
Total | $ | 40,456.9 | $ | 41,508.4 | $ | (1,051.5 | ) | (2.5% | ) |
Factory Sales
The increase in factory sales for FY 2016 compared to FY 2015 was primarily due to an 8.1% increase in shipments of product to customers outside our network of franchised retail stores. This increase was partially offset by a 5.3% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation and a 1.5% decrease in same-store pounds purchased by franchise and co-branded license locations during FY 2016 compared with FY 2015.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of five Company-owned locations and the closure of two underperforming Company-owned cafés. Same store sales at all Company-owned stores and cafés decreased 0.8% during FY 2016 compared with FY 2015. Same-store sales at U-Swirl cafés decreased 1.0% during FY 2016 compared to FY 2015.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 2016 compared to FY 2015 resulted from an 11.1% decrease in franchise units in operation and lower same store sales. The average number of total franchise stores in operation decreased from 476 during FY 2015 to 423 during FY 2016. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation increased 0.7% during FY 2016 compared to FY 2015. Franchise fee revenues decreased as a result of fewer international license fees during FY 2016 compared to FY 2015.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2016, U-Swirl revenue decreased 15.7% to $6,535,600 compared with $7,753,000 of U-Swirl revenue consolidated within our results for FY 2015. The decrease resulted from a 15.1% decrease in average domestic U-Swirl franchise cafés in operation during FY 2016 compared to FY 2015, primarily as a result of store closings exceeding store openings and acquired franchisees.
COSTS AND EXPENSES
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Cost of sales – factory adjusted | $ | 19,151.7 | $ | 18,432.3 | $ | 719.4 | 3.9 | % | ||||||||
Cost of sales – retail | 1,714.8 | 2,177.3 | (462.5 | ) | (21.2 | %) | ||||||||||
Franchise costs | 2,452.6 | 2,264.1 | 188.5 | 8.3 | % | |||||||||||
Sales and marketing | 2,466.5 | 2,474.0 | (7.5 | ) | (0.3 | %) | ||||||||||
General and administrative | 4,663.9 | 4,831.9 | (168.0 | ) | (3.5 | %) | ||||||||||
Retail operating | 2,951.8 | 3,509.6 | (557.8 | ) | (15.9 | %) | ||||||||||
Total | $ | 33,401.3 | $ | 33,689.2 | $ | ( 287.9 | ) | (0.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total | $ | 10,494.3 | $ | 11,491.0 | $ | ( 996.7 | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 27.3 | % | 28.8 | % | (1.5% | ) | (5.2% | ) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total | 33.5 | % | 35.8 | % | (2.3% | ) | (6.4% | ) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Plus: depreciation and amortization | 404.4 | 393.8 | 10.6 | 2.7 | % | |||||||||||
Factory adjusted gross margin | 7,608.5 | 7,856.1 | (247.6 | ) | (3.2 | %) | ||||||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 10,898.7 | $ | 11,884.8 | $ | ( 986.1 | ) | (8.3 | %) | |||||||
Factory adjusted gross margin | 28.9 | % | 30.3 | % | (1.4 | %) | (4.6 | %) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total Adjusted Gross Margin | 34.8 | % | 37.0 | % | (2.2 | %) | (5.9 | %) |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 150 basis points during FY 2016 compared to FY 2015 due primarily to increased costs of certain materials and a shift in product and customer mix. The increase in Company-owned store margin is due primarily to the sale or closure of certain underperforming Company-owned stores and cafés.
Franchise Costs
The increase in franchise costs for FY 2016 compared to FY 2015 is due primarily to franchise costs associated with supporting U-Swirl franchise units. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.0% during FY 2016 from 24.1% during FY 2015. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of a 3.3% decrease in royalty, marketing and franchise fee revenue as a result of a decrease in the number of domestic franchise stores during FY 2016 compared to FY 2015.
Sales and Marketing
Sales and marketing costs were approximately unchanged during FY 2016 compared to FY 2015.
General and Administrative
The decrease in general and administrative costs during FY 2016 compared to FY 2015 is due primarily to the reorganization of U-Swirl in the prior year and the associated focus on reduction of duplicative general and administrative costs, partially offset by an increase in professional fees. During FY 2016, approximately $1,291,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,651,000 during FY 2015. As a percentage of total revenues, general and administrative expenses decreased to 11.5% in FY 2016 compared to 11.6% in FY 2015.
Retail Operating Expenses
The decrease in retail operating expense was due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of certain underperforming Company-owned units. The average number of Company-owned stores in operation decreased from 16 during FY 2015 to 12 units during FY 2016. Retail operating expenses, as a percentage of retail sales, increased from 56.6% during FY 2015 to 59.0% in FY 2016. This increase is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $1,016,000 during FY 2016, a decrease of 3.0% from $1,047,000 incurred during FY 2015. This decrease is due to a decrease in amortization related to franchise rights, trademark and intangible assets. Depreciation and amortization included in cost of sales increased 2.5% from $394,000 during FY 2015 to $404,000 during FY 2016. This increase was the result of an increase in production assets in service.
Other Income
Net interest expense was $167,900 in FY 2016 compared to net interest expense of $184,500 in FY 2015. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions of U-Swirl.
Income Tax Expense
We realized an income tax benefit of $261,400 in FY 2016 compared to expense of $2,037,695, an effective rate of 35.3%, during FY 2015.2018. As described further in Note 6 to the consolidated financial statements, the decrease in the effective tax rate is primarily due to the revaluation of deferred tax consequencesassets and liabilities to the lower enacted U.S. corporate tax rate of 21% under the recent Tax Cuts and Jobs Act recognized during FY 2018, with no comparable revaluation recognized during FY 2019. Additionally, the decrease in the effective tax rate during FY 2019 compared to 2018 was due to the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act being effective for all of FY 2019 and only two months of FY 2018.
Fiscal 2018 Compared To Fiscal 2017
A discussion of our controlling interestresults of operations for FY 2018 in U-Swirl.comparison to FY 2017 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Fiscal Year Ended February 28, 2018.
Liquidity and Capital Resources
As of February 28, 2017,28, 2019, working capital was $7.1$9.5 million compared with $7.2$7.4 million as of February 29, 2016.28, 2018. The decreaseincrease in working capital was due primarily to the impact of the adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 and our operating results less the payment of $2.8 million in cash dividends, $1.4 million in debt repayments and the purchase of $1.2 million$614,000 of property and equipment and $1.3 million in debt repayments.equipment. We have historically generated excess operating cash flow. We review our working capital needs and projections and when we believe that we have greater working capital than necessary we have historically utilized that excess working capital to repurchase common stock and pay dividends to our stockholders. This trend continued during FY 2017, resulting in the decrease in working capital at February 28, 2017 compared with February 29, 2016.
Cash and cashcash equivalent balances decreased from $6.2 million as of February 29, 2016 to $5.8$6.1 million as of February 28, 20172018 to $5.4 million as of February 28, 2019 as a result of cash flows generated by operating activities being less than cash flows used in financing and investing activities. The Company’sOur current ratio was 3.0 to 1.0 at February 28, 2019 compared to 1.9 to 1.0 at February 28, 2017, which was the same at February 29, 2016. The Company monitors2018. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2017,2019, we had net income of $3.45$2.2 million. Operating activities provided cash of $5.3$4.0 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.7 million and stock compensation expense of $520,000. During FY 2018, we had net income of $3.0 million. Operating activities provided cash of $4.8 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock compensation expense of $0.6 million. During FY 2016, we had net income of $3.8 million, and operating activities provided cash of $6.8 million. The principal adjustment to reconcile the net income to net cash provided by operating activities was asset impairments of $2.3 million, depreciation and amortization of $1.4 million and stock compensation expense of $0.8 million.
During FY 2017,2019, investing activities used cash of $1.3 million,$506,000, primarily due to the purchases of property and equipment of $1.2 million$614,000 the result of investment in factory infrastructure improvements.improvements, partially offset by proceeds received on notes receivable of $102,000. In comparison, investing activities used cash of $0.7 million$340,000 during FY 20162018 primarily due to the purchases of property and equipment of $0.7 million.$545,000 the result of investment in factory infrastructure improvements, partially offset by proceeds received on notes receivable of $231,000.
Financing activities used cash of $4.4$4.2 million during FY 20172019 and used cash of $7.1$4.1 million during the prior year. ThisThe increase in cash used in financing activities was primarily due to a decreasean increase in the amount of common stock repurchased during FY 2017.debt service being applied to principal, the result of lower interest expense.
The Company has a $5$5.0 million credit line for general corporate and working capital purposes, of which $5$5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2017,2019. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (4.7% at February 28, 2019). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2017.2019 and the Company believes it is likely to be renewed on terms similar to the current terms.
The Company’sCompany’s long-term debt is comprised of a promissory note used to finance prior business acquisitions of U-Swirlby SWRL (unpaid balance as of February 28, 2017, $3.82019, $1.2 million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. This promissory note matures in January 2020. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of February 28, 2017,2019, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets
TheThe table below presents significant contractual obligations of the Company at February 28, 2017.2019.
(Amounts in thousands)
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | 3,832 | 1,303 | 2,529 | - | - | |||||||||||||||
Operating leases | 2,166 | 817 | 980 | 176 | 193 | |||||||||||||||
Other long-term obligations | 472 | 189 | 171 | 112 | - | |||||||||||||||
Total | 6,470 | 2,309 | 3,680 | 288 | 193 |
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | $ | 1,176 | $ | 1,176 | $ | - | $ | - | $ | - | ||||||||||
Operating leases | 2,949 | 758 | 1,333 | 683 | 175 | |||||||||||||||
Purchase contracts | 880 | 880 | - | - | - | |||||||||||||||
Other long-term obligations | 231 | 135 | 96 | - | - | |||||||||||||||
Total | $ | 5,236 | $ | 2,949 | $ | 1,429 | $ | 683 | $ | 175 |
For FY 2018,2020, the Company anticipates making capital expenditures of approximately $1.0 million,$900,000, which will be used to maintain and improve existing factory and administrative infrastructure. The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2018.2020. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
Operating leases: Our Company-owned stores are occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, some of which contain optional renewal rights. We also lease warehouse facilities to support our manufacturing operations and we lease most of our transportation equipment. We do not deem any individual lease to be significant in relation to our overall operations.
Purchase obligations: As of February 28, 2017,28, 2019, we had no off-balance sheet arrangements or obligations.purchase obligations of approximately $880,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’sCompany’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s 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 the Company’s 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria. We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we ordinarily extend credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
We recorded an average expense of approximately $174,300$149,000 per year for potential uncollectible accounts over the three-year period ended February 28, 2017.2019. Write-offs of uncollectible accounts net of recoveries averaged approximately $195,900$209,500 over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over the past three years, the allowances for doubtful notes and accounts have ranged from 10.7%10.0% to 12.6%10.7% of gross receivables.
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. FranchiseBeginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of the associated agreement, which is generally a period of 10-15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon the opening of the store. International license fees are recognizedfranchise store, or upon the execution of thean international license agreement and payment of the license fee.agreement. We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with franchise store openings in the third quarter of FY 2004, we modified our royalty structure. Under the current structure, we recognizeThe Company recognizes no royalty on Rocky Mountain Chocolate Factory franchised stores’ retail sales of products purchased from usthe Company and recognizerecognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. ForRoyalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise stores opened priorrights and range from 2.5% to the third quarter6% of FY 2004 we recognize a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28, 2017,2019, the Company recorded expense averaging $110,600$228,900 per year for potential inventory losses, or approximately 0.5%1.1% of total cost of sales for that period.
Consolidation – The consolidated financial statements in this Annual Report include the accounts of the Company and its subsidiaries. On January 14, 2013 we acquired a controlling interest in U-Swirl. Prior to January 14, 2013, our consolidated financial statements exclude the financial information of U-Swirl. Beginning on January 14, 2013 and continuing through February 28, 2017,2019, the results of operations, assets and liabilities of U-Swirl have been included in our consolidated financial statements. All material inter-Company balances have been eliminated upon consolidation.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. We previously entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with acquisitions of SWRL (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. On February 29, 2016, RMCF repossessed all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement with SWRL. As described in Note 1 below, this was the result of SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants.Agreement. As of February 29, 2016 U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. RMCFWe performed a test of impairment as a result of the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the financial statements.
Franchise Rights – Franchise rights consists of the purchase price paid in consideration of certain rights associated with franchise agreements. These franchise agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.
Other accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with its evaluation of the recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrumentsinstruments for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 2017,2019, based on future contractual obligations for chocolate products, we estimate that a 10% increase or decrease in the prices of contracted ingredients would result in a $259,000an $88,000 favorable or unfavorable price benefit or cost resulting from our commodity purchase contracts.
The Company has a $5$5 million bank line of credit that bears interest at a variable rate. As of February 28, 2017,2019, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of February 28, 2017, $3.82019, $1.2 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.
ITEMITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page | |
|
|
35 | |
36 | |
37 | |
38 | |
39 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders of
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Durango, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Rocky Mountain Chocolate Factory, Inc. and Subsidiaries (the “Company”) as of February 28, 2017 and February 29, 2016, and28, 2019, the related consolidated statementsstatement of income, changes in stockholders’stockholders' equity, and cash flows for each of the years in the three-year periodyear ended February 28, 2017. Our audits also included2019, and the consolidatedrelated notes (collectively referred to as the “financial statements”). In our opinion, the financial statement schedule listedstatements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and the results of its operations and its cash flows for the year ended February 28, 2019, in conformity with accounting principles generally accepted in the Index at Item 15. These consolidatedUnited States of America.
As discussed in Note 1 to the financial statements, and schedule are the responsibility ofCompany adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the Company’s management.modified retrospective adoption method on March 1, 2018.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements and schedule based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting (“Internal Control”). Ourreporting. As part of our audit included considerationwe are required to obtain an understanding of Internal Control as a basis for designing audit procedures that are appropriate in the circumstances,internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s Internal Control.Company's internal control over financial reporting. Accordingly, we express no such opinion. An
Our audit also includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidatedpresentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 and 17 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on March 1, 2018.
We have audited the impact to the 2018 financial statements as disclosed under the modified retrospective method as a result of the adoption of ASC Topic 606, “Revenue from Contracts with Customers”, as described in Note 1 and 17 to the financial statements. In our opinion, the consolidatedimpacts are appropriate and have been properly disclosed. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the impacts disclosed and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements taken as a whole.
/s/ Plante & Moran, PLLC
Denver, Colorado
May 8, 2019
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2018, the related statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. and Subsidiariesthe Company as of February 28,28, 2018 and 2017, and February 29, 2016, and the results of theirits operations and theirits cash flows for each of the years in the three-yeartwo-year period ended February 28, 20172018, in conformity with accounting principles generally accepted in the United States of America. Also, in
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our opinion,audits. We are a public accounting firm registered with the related financial statement schedule, when considered in relationPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the basic consolidatedCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements taken as a whole, presents fairly in allare free of material respects,misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the information set forth therein.purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EKS&H LLLP
May 23, 2017
Denver, Colorado
May 15, 2018
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 29,876,507 | $ | 31,360,745 | $ | 32,100,824 | ||||||
Franchise and royalty fees | 8,419,870 | 9,096,150 | 9,407,552 | |||||||||
Total revenues | 38,296,377 | 40,456,895 | 41,508,376 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,735,739 | 20,866,482 | 20,609,609 | |||||||||
Franchise costs | 2,067,530 | 2,452,609 | 2,264,138 | |||||||||
Sales & marketing | 2,658,421 | 2,466,469 | 2,474,027 | |||||||||
General and administrative | 4,005,142 | 4,663,914 | 4,831,903 | |||||||||
Retail operating | 2,404,003 | 2,951,783 | 3,509,584 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $447,651, $404,391 and $393,776, respectively, included in cost of sales | 841,058 | 1,015,910 | 1,046,672 | |||||||||
Impairment of long-lived assets and goodwill | - | 2,326,742 | - | |||||||||
Restructuring and acquisition related charges | 60,000 | - | 807,476 | |||||||||
Total costs and expenses | 32,771,893 | 36,743,909 | 35,543,409 | |||||||||
Operating Income | 5,524,484 | 3,712,986 | 5,964,967 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (170,351 | ) | (216,600 | ) | (243,188 | ) | ||||||
Interest income | 41,572 | 48,745 | 58,662 | |||||||||
Other, net | (128,779 | ) | (167,855 | ) | (184,526 | ) | ||||||
Income Before Income Taxes | 5,395,705 | 3,545,131 | 5,780,441 | |||||||||
Income Tax Expense (Benefit) | 1,945,589 | (261,400 | ) | 2,037,695 | ||||||||
Net Income | 3,450,116 | 3,806,531 | 3,742,746 | |||||||||
Less: Net loss attributable to non-controlling interest | - | (619,376 | ) | (195,094 | ) | |||||||
Net Income attributable to RMCF stockholders | $ | 3,450,116 | $ | 4,425,907 | $ | 3,937,840 | ||||||
Basic Earnings per Common Share | $ | 0.59 | $ | 0.75 | $ | 0.64 | ||||||
Diluted Earnings per Common Share | $ | 0.58 | $ | 0.73 | $ | 0.61 | ||||||
Weighted Average Common Shares Outstanding | 5,843,245 | 5,893,618 | 6,144,426 | |||||||||
Dilutive Effect of Employee Stock Awards | 150,447 | 201,856 | 268,913 | |||||||||
Weighted Average Common Shares Outstanding, Assuming Dilution | 5,993,692 | 6,095,474 | 6,413,339 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 27,563,794 | $ | 30,167,760 | $ | 29,876,507 | ||||||
Franchise and royalty fees | 6,981,653 | 7,906,935 | 8,419,870 | |||||||||
Total Revenue | 34,545,447 | 38,074,695 | 38,296,377 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,599,551 | 21,176,711 | 20,735,739 | |||||||||
Franchise costs | 1,980,781 | 2,097,555 | 2,067,530 | |||||||||
Sales and marketing | 2,210,800 | 2,489,483 | 2,658,421 | |||||||||
General and administrative | 3,432,618 | 3,904,560 | 4,005,142 | |||||||||
Retail operating | 1,934,891 | 2,389,296 | 2,404,003 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $555,926, $523,034, and $447,651, respectively, included in cost of sales | 1,153,873 | 796,221 | 841,058 | |||||||||
Costs associated with Company-owned store closures | 226,981 | - | 60,000 | |||||||||
Total costs and expenses | 31,539,495 | 32,853,826 | 32,771,893 | |||||||||
Income from Operations | 3,005,952 | 5,220,869 | 5,524,484 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (70,787 | ) | (121,244 | ) | (170,351 | ) | ||||||
Interest income | 20,496 | 24,578 | 41,572 | |||||||||
Other expense, net | (50,291 | ) | (96,666 | ) | (128,779 | ) | ||||||
Income Before Income Taxes | 2,955,661 | 5,124,203 | 5,395,705 | |||||||||
Income Tax Provision | 716,862 | 2,160,295 | 1,945,589 | |||||||||
Consolidated Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Basic Earnings per Common Share | $ | 0.38 | $ | 0.50 | $ | 0.59 | ||||||
Diluted Earnings per Common Share | $ | 0.37 | $ | 0.50 | $ | 0.58 | ||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Basic | 5,931,431 | 5,884,337 | 5,843,245 | |||||||||
Dilutive Effect of Employee | ||||||||||||
Stock Awards | 51,207 | 96,099 | 150,447 | |||||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Diluted | 5,982,638 | 5,980,436 | 5,993,692 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28 or 29, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,779,195 | $ | 6,194,948 | ||||
Accounts receivable, less allowance for doubtful accounts of $487,446 and $595,471, respectively | 3,855,823 | 3,799,691 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $22,147 and $0, respectively | 235,612 | 317,248 | ||||||
Refundable income taxes | 47,863 | - | ||||||
Inventories, less reserve for slow moving inventory of $249,051 and $261,346, respectively | 4,975,779 | 4,840,108 | ||||||
Other | 256,548 | 286,859 | ||||||
Total current assets | 15,150,820 | 15,438,854 | ||||||
Property and Equipment, Net | 6,457,931 | 6,010,303 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and allowance for doubtful accounts of $26,500 and $75,000, respectively | 370,769 | 530,446 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights | 4,826,172 | 5,153,363 | ||||||
Intangible assets, net | 632,207 | 419,042 | ||||||
Deferred income taxes | 858,874 | 1,421,655 | ||||||
Other | 74,639 | 295,118 | ||||||
Total other assets | 7,809,605 | 8,866,568 | ||||||
Total Assets | $ | 29,418,356 | $ | 30,315,725 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,302,501 | $ | 1,254,007 | ||||
Accounts payable | 1,820,470 | 1,663,245 | ||||||
Accrued salaries and wages | 608,510 | 683,863 | ||||||
Gift card liabilities | 2,921,585 | 2,835,943 | ||||||
Other accrued expenses | 253,497 | 364,955 | ||||||
Dividend payable | 702,525 | 700,728 | ||||||
Deferred income | 451,171 | 502,950 | ||||||
Total current liabilities | 8,060,259 | 8,005,691 | ||||||
Long-Term Debt, Less Current Maturities | 2,529,240 | 3,831,126 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock, authorized 50,000 shares | - | - | ||||||
Undesignated series, authorized 200,000 shares | - | - | ||||||
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,854,372 and 5,839,396 issued, and 5,854,372 and 5,839,396 outstanding, respectively | 5,854 | 5,839 | ||||||
Additional paid-in capital | 5,539,357 | 5,340,190 | ||||||
Retained earnings | 13,283,646 | 13,132,879 | ||||||
Total stockholders’ equity | 18,828,857 | 18,478,908 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 29,418,356 | $ | 30,315,725 |
AS OF FEBRUARY 28, | ||||||||
2019 | 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,384,027 | $ | 6,072,984 | ||||
Accounts receivable, less allowance for doubtful accounts of $489,502 and $479,472, respectively | 3,993,262 | 3,897,334 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $0 and $9,000, respectively | 110,162 | 105,540 | ||||||
Refundable income taxes | 190,201 | 342,863 | ||||||
Inventories, less reserve for slow moving inventory of $371,147 and $357,706, respectively | 4,270,357 | 4,842,474 | ||||||
Other | 318,126 | 310,173 | ||||||
Total current assets | 14,266,135 | 15,571,368 | ||||||
Property and Equipment, Net | 5,786,139 | 6,166,240 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and valuation allowance of $0 and $17,500, respectively | 281,669 | 235,983 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights, net | 3,678,920 | 4,433,927 | ||||||
Intangible assets, net | 498,337 | 587,377 | ||||||
Deferred income taxes | 607,421 | 835,463 | ||||||
Other | 56,576 | 63,333 | ||||||
Total other assets | 6,169,867 | 7,203,027 | ||||||
Total Assets | $ | 26,222,141 | $ | 28,940,635 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,176,488 | $ | 1,352,893 | ||||
Accounts payable | 897,074 | 1,647,991 | ||||||
Accrued salaries and wages | 655,853 | 644,005 | ||||||
Gift card liabilities | 742,289 | 3,057,131 | ||||||
Other accrued expenses | 293,094 | 325,034 | ||||||
Dividend payable | 714,939 | 708,652 | ||||||
Contract liabilities | 256,094 | 471,910 | ||||||
Total current liabilities | 4,735,831 | 8,207,616 | ||||||
Long-Term Debt, Less Current Maturities | - | 1,176,416 | ||||||
Contract Liabilities, Less Current Portion | 1,096,478 | - | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock; 50,000 authorized; -0- shares issued and outstanding | - | - | ||||||
Undesignated series; 200,000 shares authorized; -0- shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 5,957,827 shares and 5,903,436 shares issued and outstanding, respectively | 5,958 | 5,903 | ||||||
Additional paid-in capital | 6,650,864 | 6,131,147 | ||||||
Retained earnings | 13,733,010 | 13,419,553 | ||||||
Total stockholders' equity | 20,389,832 | 19,556,603 | ||||||
Total Liabilities and Stockholders' Equity | $ | 26,222,141 | $ | 28,940,635 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,839 | $ | 180,384 | $ | 184,206 | ||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | (174,371 | ) | - | ||||||||
Repurchase and retirement of common stock | (35 | ) | (233 | ) | (7,383 | ) | ||||||
Issuance of common stock | 2 | 4 | 120 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48 | 55 | 3,441 | |||||||||
Balance at end of year | 5,854 | 5,839 | 180,384 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 5,340,190 | 7,163,092 | 8,921,723 | |||||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | 174,371 | - | |||||||||
Repurchase and retirement of common stock | (351,548 | ) | (3,030,475 | ) | (3,120,241 | ) | ||||||
Issuance of common stock | 20,418 | 61,036 | 47,360 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 564,425 | 602,498 | 731,400 | |||||||||
Transfers from non-controlling interest | - | 349,800 | 382,306 | |||||||||
Tax (expense) benefit from employee stock transactions | (34,128 | ) | 19,868 | 200,544 | ||||||||
Balance at end of year | 5,539,357 | 5,340,190 | 7,163,092 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,132,879 | 11,524,708 | 10,344,794 | |||||||||
Net income attributable to RMCF stockholders | 3,450,116 | 4,425,907 | 3,937,840 | |||||||||
Cash dividends declared | (2,806,583 | ) | (2,817,736 | ) | (2,757,926 | ) | ||||||
Correction of immaterial error1 | (492,766 | ) | - | - | ||||||||
Balance at end of year | 13,283,646 | 13,132,879 | 11,524,708 | |||||||||
Non-controlling Interest in Equity of Subsidiary | ||||||||||||
Balance at beginning of year | - | 869,671 | 401,655 | |||||||||
Net loss | - | (619,376 | ) | (195,094 | ) | |||||||
Deductions | - | (310,995 | ) | - | ||||||||
Contributions | - | 60,700 | 663,110 | |||||||||
Balance at end of year | - | - | 869,671 | |||||||||
Total Stockholders’ Equity | $ | 18,828,857 | $ | 18,478,908 | $ | 19,737,855 | ||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,839,396 | 6,012,799 | 6,140,200 | |||||||||
Repurchase and retirement of common stock | (35,108 | ) | (233,302 | ) | (246,106 | ) | ||||||
Issuance of common stock | 2,000 | 4,000 | 4,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48,084 | 55,899 | 114,705 | |||||||||
Balance at end of year | 5,854,372 | 5,839,396 | 6,012,799 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,903 | $ | 5,854 | $ | 5,839 | ||||||
Repurchase and retirement of common stock | - | - | (35 | ) | ||||||||
Issuance of common stock | 6 | 5 | 2 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49 | 44 | 48 | |||||||||
Balance at end of year | 5,958 | 5,903 | 5,854 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 6,131,147 | 5,539,357 | 5,340,190 | |||||||||
Repurchase and retirement of common stock | - | - | (351,548 | ) | ||||||||
Issuance of common stock | 55,971 | 59,095 | 20,418 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 463,746 | 532,695 | 564,425 | |||||||||
Tax (expense) benefit from employee stock transactions | - | - | (34,128 | ) | ||||||||
Balance at end of year | 6,650,864 | 6,131,147 | 5,539,357 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,419,553 | 13,283,646 | 13,132,879 | |||||||||
Net income attributable to RMCF stockholders | 2,238,799 | 2,963,908 | 3,450,116 | |||||||||
Cash dividends declared | (2,851,271 | ) | (2,828,001 | ) | (2,806,583 | ) | ||||||
Correction of immaterial error1 | - | - | (492,766 | ) | ||||||||
Adoption of ASC 6062 | 925,929 | - | - | |||||||||
Balance at end of year | 13,733,010 | 13,419,553 | 13,283,646 | |||||||||
Total Stockholders' Equity | 20,389,832 | 19,556,603 | 18,828,857 | |||||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,903,436 | 5,854,372 | 5,839,396 | |||||||||
Repurchase and retirement of common stock | - | - | (35,108 | ) | ||||||||
Issuance of common stock | 5,333 | 5,000 | 2,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49,058 | 44,064 | 48,084 | |||||||||
Balance at end of year | 5,957,827 | 5,903,436 | 5,854,372 |
1 As revised. Refer to Note 1716 for information on immaterial correction of errors in prior period.
2 Refer to Note 17 for information on the adoption of ASC 606.
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 3,450,116 | $ | 3,806,531 | $ | 3,742,746 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,288,709 | 1,420,301 | 1,440,448 | |||||||||
Provision for loss on accounts and notes receivable | 138,125 | 171,000 | 214,600 | |||||||||
Provision for inventory loss | 100,049 | 76,695 | 58,836 | |||||||||
Asset impairment and store closure losses | - | 2,319,003 | 225,640 | |||||||||
(Gain) loss on sale of assets | 37,112 | 90,149 | (46,857 | ) | ||||||||
Expense recorded for stock compensation | 584,893 | 763,094 | 865,240 | |||||||||
Deferred income taxes | 262,248 | (1,878,205 | ) | (55,068 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (128,404 | ) | 364,767 | 662,625 | ||||||||
Refundable income taxes | (47,863 | ) | 172,945 | (12,055 | ) | |||||||
Inventories | (2,735 | ) | 144,454 | (202,333 | ) | |||||||
Other assets | 29,442 | 24,415 | (16,087 | ) | ||||||||
Accounts payable | (87,657 | ) | (310,533 | ) | (451,080 | ) | ||||||
Accrued liabilities | (293,402 | ) | 154,800 | 325,544 | ||||||||
Deferred income | (9,619 | ) | (531,331 | ) | (880,684 | ) | ||||||
Net cash provided by operating activities | 5,321,014 | 6,788,085 | 5,871,515 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Additions to notes receivable | (133,202 | ) | (46,489 | ) | (179,569 | ) | ||||||
Proceeds received on notes receivable | 318,219 | 368,122 | 488,691 | |||||||||
Proceeds from sale or distribution of assets | 39,045 | 23,692 | 530,175 | |||||||||
Intangible assets | (312,947 | ) | (83,103 | ) | - | |||||||
Decrease (increase) in other assets | 34,479 | (212,860 | ) | (2,395 | ) | |||||||
Purchase of property and equipment | (1,238,472 | ) | (743,251 | ) | (626,744 | ) | ||||||
Net cash (used in) provided by investing activities | (1,292,878 | ) | (693,889 | ) | 210,158 | |||||||
Cash Flows From Financing Activities: | ||||||||||||
Payments on long-term debt | (1,253,392 | ) | (1,207,234 | ) | (107,633 | ) | ||||||
Repurchase of common stock | (351,583 | ) | (3,030,708 | ) | (3,127,624 | ) | ||||||
Issuance of common stock | - | - | 69,599 | |||||||||
Proceeds from issuance of common stock in subsidiary | - | - | 892,895 | |||||||||
Tax (expense) benefit of stock option exercise | (34,128 | ) | 19,868 | 200,544 | ||||||||
Dividends paid | (2,804,786 | ) | (2,838,545 | ) | (2,711,812 | ) | ||||||
Net cash used in financing activities | (4,443,889 | ) | (7,056,619 | ) | (4,784,031 | ) | ||||||
Net (Decrease) Increase In Cash And Cash Equivalents | (415,753 | ) | (962,423 | ) | 1,297,642 | |||||||
Cash And Cash Equivalents At Beginning Of Year | 6,194,948 | 7,157,371 | 5,859,729 | |||||||||
Cash And Cash Equivalents At End Of Year | $ | 5,779,195 | $ | 6,194,948 | $ | 7,157,371 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,709,799 | 1,319,255 | 1,288,709 | |||||||||
Provision for obsolete inventory | 325,478 | 166,868 | 138,125 | |||||||||
Provision for loss on accounts and notes receivable | 155,600 | 225,858 | 100,049 | |||||||||
Asset impairment and store closure losses | 67,822 | - | - | |||||||||
Loss on sale or disposal of property and equipment | 36,024 | 38,496 | 37,112 | |||||||||
Expense recorded for stock compensation | 519,772 | 591,839 | 584,893 | |||||||||
Deferred income taxes | (78,934 | ) | 23,411 | 262,248 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (390,663 | ) | (229,948 | ) | (128,404 | ) | ||||||
Refundable income taxes | 157,544 | (295,000 | ) | (47,863 | ) | |||||||
Inventories | 41,310 | (365,323 | ) | (2,735 | ) | |||||||
Other current assets | (8,225 | ) | (54,091 | ) | 29,442 | |||||||
Accounts payable | (545,588 | ) | 96,491 | (87,657 | ) | |||||||
Accrued liabilities | (84,191 | ) | 242,578 | (293,402 | ) | |||||||
Contract Liabilities | (129,527 | ) | 33,270 | (9,619 | ) | |||||||
Net cash provided by operating activities | 4,015,020 | 4,757,612 | 5,321,014 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Addition to notes receivable | - | (14,293 | ) | (133,202 | ) | |||||||
Proceeds received on notes receivable | 102,256 | 230,637 | 318,219 | |||||||||
Purchase of intangible assets | - | (8,508 | ) | (312,947 | ) | |||||||
Proceeds from (cost of) sale or distribution of assets | 13,498 | (7,926 | ) | 39,045 | ||||||||
Purchases of property and equipment | (613,786 | ) | (544,956 | ) | (1,238,472 | ) | ||||||
(Increase) decrease in other assets | (8,140 | ) | 5,529 | 34,479 | ||||||||
Net cash used in investing activities | (506,172 | ) | (339,517 | ) | (1,292,878 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Payments on long-term debt | (1,352,821 | ) | (1,302,432 | ) | (1,253,392 | ) | ||||||
Repurchase of common stock | - | - | (351,583 | ) | ||||||||
Tax expense of stock option exercise | - | - | (34,128 | ) | ||||||||
Dividends paid | (2,844,984 | ) | (2,821,874 | ) | (2,804,786 | ) | ||||||
Net cash used in financing activities | (4,197,805 | ) | (4,124,306 | ) | (4,443,889 | ) | ||||||
Net Decrease in Cash and Cash Equivalents | (688,957 | ) | 293,789 | (415,753 | ) | |||||||
Cash and Cash Equivalents, Beginning of Period | 6,072,984 | 5,779,195 | 6,194,948 | |||||||||
Cash and Cash Equivalents, End of Period | $ | 5,384,027 | $ | 6,072,984 | $ | 5,779,195 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS 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) and, Aspen Leaf Yogurt, LLC (“ALY”), its 39%-owned subsidiary, U-Swirl, Inc. (“SWRL”), and U-Swirl International, Inc. (“U-Swirl”), a wholly-ownedand its 46%-owned subsidiary, as of February 29, 2016U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.
Effective March 1, 2015, the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03 per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001, of Newco. The new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), the Company entered into two agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to SWRL, in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of February 29, 2016 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. As of February 28, 2017, the Company held a 39% interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving as the Company’s Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. becoming a wholly-owned subsidiary of the Company as of February 29, 2016. As of February 29, 2016 U-Swirl, Inc. had no assets.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’sCompany’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2017:2019:
Sold, Not Yet Open |
Open |
Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 4 | 4 | |||||||||
Franchise stores – Domestic stores and kiosks | 6 | 189 | 195 | |||||||||
International License Stores | - | 94 | 94 | |||||||||
Cold Stone Creamery – co-branded | 5 | 83 | 88 | |||||||||
U-Swirl cafés (Including all associated brands) | ||||||||||||
Company-owned cafés | - | 2 | 2 | |||||||||
Company-owned cafés – co-branded | - | 3 | 3 | |||||||||
Franchise stores – North American cafés | * | 129 | 129 | |||||||||
Franchise stores – North American – co-branded | * | 16 | 16 | |||||||||
International License cafés | - | 2 | 2 | |||||||||
Total | 11 | 522 | 533 |
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Sold, Not Yet Open | Open | Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 2 | 2 | |||||||||
Franchise stores - Domestic stores and kiosks | 4 | 183 | 187 | |||||||||
International license stores | 1 | 64 | 65 | |||||||||
Cold Stone Creamery - co-branded | 11 | 91 | 102 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores | - | 1 | 1 | |||||||||
Company-owned stores - co-branded | - | 3 | 3 | |||||||||
Franchise stores - Domestic stores | - | 87 | 87 | |||||||||
Franchise stores - Domestic - co-branded | - | 9 | 9 | |||||||||
International license stores | - | 2 | 2 | |||||||||
Total | 16 | 442 | 458 |
Consolidation
ManagementManagement accounts for the activities of the Company and its subsidiaries, and the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As described above, on January 14, 2013, the Company acquired a controlling interest in SWRL. Prior to January 14, 2013, the Company’s consolidated financial statements excludeexcluded the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets and liabilities of SWRL have been included in these consolidated financial statements. The Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under a loan and security agreement with SWRL to cover the SWRLpurchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement.Agreement”). This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February 29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $5.3$4.9 million at February 28, 2017.2019.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business, we extendthe Company extends credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At February 28, 2017,2019, the Company has $655,028had $391,831 of notes receivable outstanding and an allowance for doubtful accounts of $48,647$0 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through September, 2022November 2023 and approximately $579,000$375,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’sCompany’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.
Income Taxes
We provideThe 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 bases 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. Due to historical U-Swirl losses, prior to FY 2016 wethe Company established a full valuation allowance on ourthe Company’s deferred tax assets. During FY 2016 wethe Company took possession of the outstanding equity in U-Swirl International, Inc.U-Swirl. As a result of ourthe Company’s ownership increasing to 100%, wethe Company began filing consolidated income tax returns in FY 2017. Because of this change, we havethe Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 wethe Company further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The correction of this immaterial error to ourthe Company’s balance sheet is further described in Note 17.16. The Company's temporary differences are listed in Note 6.
Gift Card Breakage
The Company and ourits franchisees sell gift cards that are redeemable for product in our stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on ourthe Company’s gift cards, and we dothe Company does not charge any service fees. While ourthe Company’s franchisees continue to honor all gift cards presented for payment, wethe Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is inredeemed by the processcustomer or the Company determines the likelihood of accumulating sufficient historical redemption patterns to calculate breakage estimates related to unredeemedthe gift cards. Thiscard being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based on a percentage of sales when the likelihood of the redemption of the gift card becomes remote. When the Company has sufficientupon Company-specific historical redemption patterns to calculate breakage estimates, the gift card breakage will be recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. As the Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage estimates, the Company did not recognize gift card breakage during the year ended February 28 or 29, 2017 or 2016.patterns. Accrued gift card liability was $2,921,585$742,289 and $2,835,943$3,057,131 at February 28, or 29, 20172019 and 2016,2018, respectively. The Company recognized breakage of $139,188 and $0 during FY 2019 and FY 2018, respectively. See Note 17 to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC 606.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of ourthe Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the SWRL Loan Agreement with SWRL.Agreement. This was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of goodwill recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership and the result of ourthe Company’s test indicated a full impairment of the U-Swirl goodwill. OurThe Company’s testing and impairment is described in Note 13 to the financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under the acquisition method, the purchase price of the acquisition is allocated to the underlying tangible and intangible assets acquired based on their respective fair values. Fair values are derived from various observable and unobservable inputs and assumptions. The Company utilizes third-party valuation specialists to assist in the allocation. Initial purchase price allocations are preliminary and are subject to revision within the measurement period, not to exceed one year from the date of acquisition. The costs of the business acquisitions are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Moreover, unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to ourthe Company’s franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’sCompany’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
FranchiseBeginning in FY 2019, upon adoption of adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with Rocky Mountain Chocolate Factory franchise store openings in the third quarter of FY 2004, the Company modified its royalty structure. Under the current structure, theThe Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 the Company recognizes a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain instances, we arethe Company is required to pay a portion of franchise fee revenue, or royalty fees to parties we’vethe Company has contracted with to assist in developing and growing a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the ongoing royalty fees, or both. When such agreements exist, we reportthe Company reports franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of the Company’s Manufacturingour manufacturing segment represented approximately $4.1$3.1 million or 11%9% of the Company’sour total revenues during the year ended February 28, 2017. The Company’s2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by a changefurther decreases in the purchases of this customer.customer or the loss of this customer entirely.
Stock-Based Compensation
At February 28, 2017,28, 2019, the Company had one stock-based compensation plans, which currently consists solely ofplan, the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $584,893, $763,094,$519,772, $591,839, and $865,240$584,893 related to equity-based compensation expense during the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
TaxBeginning March 1, 2017, the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement. Prior to March 1, 2017 tax benefits or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the accompanying Statements of Cash Flows. The excess tax benefit or (expense)expense included in net cash provided by financing activities for the years ended February 28, or 29, 2017 2016 and 2015 was $(34,128), $19,868 and $200,544, respectively.$34,128.
During FY 20172019 and 2016,2018, the Company granted no restricted stock units. There were no stock options granted to employees during FY 20172019 or FY 2016.2018. The restricted stock unit grants generally vest 17-20%17 to 20% annually over a period of five to six years. The Company recognized $564,473$463,795 of consolidated stock-based compensation expense related to these grants made in prior years during FY 20172019 compared with $602,554$532,739 in FY 2016.2018 and $564,473 in FY 2017. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 20172019 was $1,179,492,$114,183, which is expected to be recognized over the weighted average period of 2.20.4 years.
During FY 2017, theThe Company issued 2,000 fully-vested, unrestricted shares to non-employee directors compared with 4,000 fully-vested,fully vested, unrestricted shares of stock to non-employee directors in FY 2016.during the year ended February 28, 2019 compared to no shares issued during the year ended February 28, 2018 and 2,000 issued during the year ended February 28, 2017. In connection with these non-employee director stock issuances, the Company recognized $20,420$24,480, $0 and $61,040$20,420 of stock-based compensation expense during FYyear ended February 28, 2019, 2018 and 2017, respectively.
During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and FY 2016, respectively.based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized $31,497 in stock-based compensation expense during the year ended February 28, 2019.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. DuringFollowing the expiration of all outstanding options, during FY 2017, FY 2016 and FY 2015, 0, 12,936, and 12,936, respectively, ofno stock options were excluded from diluted shares as their effect was anti-dilutive.shares.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $279,698, $215,314,$275,441, $355,678, and $244,946$279,698 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Total advertising expense for U-Swirl and its brands amounted to $335,771, $460,034,$168,000, $222,093, and $399,414$335,771 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The Company’sCompany’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable and notes receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, FASB issued ASU 2016-15, Statement2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 clarifies and provides specific guidancechanges in stockholders’ equity in the interim financial statements included in Quarterly Reports on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduceForm 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current diversity in practice. ASU No. 2016-15 isand comparative quarter and year-to-date interim periods. The amendments are effective for public business entities for annual periods, including interim periods within those annual periods, beginningall filings made on or after December 15, 2017, with early application permitted. This guidance is applicableNovember 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the Company's fiscal year beginning March 1, 2018.filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Quarterly Report on Form 10-Q. The Company does not anticipate that this guidancethe adoption of these SEC amendments will have a material impacteffect on its consolidatedthe Company’s financial statements.position, results of operations, cash flows or stockholders’ equity.
In June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting 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- 132016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU No. 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2017. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the process of assessing the impact of the adoption of ASU No. 2016-09 on its consolidated financial statements. During the fiscal years ended February 28, 2017 and February 29, 2016 the Company would have realized additional expense of $34,000 and additional income of $20,000, respectively, if this guidance had been applied.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are requiredThe Company will adopt this guidance effective with the three month period ending May 31, 2019 (the first quarter of Fiscal Year 2020). The Company can elect to apply the amendments atrecord a cumulative-effect adjustment as of the beginning of the earliest period presented usingyear of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments (see note 5) will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, The Company anticipates ASU 2016-02 will have a material impact on the FASB issuedconsolidated balance sheet. The impact of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The cumulative adjustment to be recorded as right-of-use assets and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 willoperating lease liabilities, upon adoption, is expected to be effective for us in the first quarterrange of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.$3,500,000 to $3,900,000.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASC 606”). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in TopicASC 605 Revenue“Revenue Recognition.” ASC 606 provides that revenues are to be 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. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early applicationnew standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in Company-owned stores as those sales are recognized at the time of the guidance is permittedunderlying sale and are presented net of sales taxes and discounts. The standard also did not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard changed the timing in which the Company recognizes initial fees from franchisees and licensees for annual reporting periods beginning after December 31, 2016. This guidance is applicablenew franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store opening and renewals that impact the Company's fiscal year beginning March 1, 2018. The Company expectsterm of the adoption offranchise agreement upon renewal. In accordance with the new guidance, to change the timinginitial franchise services are not distinct from the continuing rights or services offered during the term of recognition ofthe franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees including master license and territory fees for our international business, and renewal fees. Currently, these fees are generallybeing recognized upfront upon either opening ofas the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognizedCompany satisfies the performance obligation over the term of the relatedfranchise agreement, which we expect will result in a material impactis generally 10 to revenue recognized for franchise fees, license fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. 15 years.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Ingredients and supplies | $ | 3,021,220 | $ | 2,868,157 | ||||
Finished candy | 2,137,609 | 2,138,952 | ||||||
U-Swirl food and packaging | 66,001 | 94,345 | ||||||
Reserve for slow moving inventory | (249,051 | ) | (261,346 | ) | ||||
Total inventories | $ | 4,975,779 | $ | 4,840,108 |
2019 | 2018 | |||||||
Ingredients and supplies | $ | 2,612,954 | $ | 2,764,727 | ||||
Finished candy | 1,983,854 | 2,371,610 | ||||||
U-Swirl food and packaging | 44,696 | 63,843 | ||||||
Reserve for slow moving inventory | (371,147 | ) | (357,706 | ) | ||||
Total inventories | $ | 4,270,357 | $ | 4,842,474 |
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 4,787,855 | 4,784,272 | ||||||
Machinery and equipment | 10,598,355 | 9,987,906 | ||||||
Furniture and fixtures | 1,047,319 | 1,169,475 | ||||||
Leasehold improvements | 1,531,112 | 1,862,603 | ||||||
Transportation equipment | 418,402 | 438,601 | ||||||
Asset impairment | (47,891 | ) | (568,803 | ) | ||||
18,848,770 | 18,187,672 | |||||||
Less accumulated depreciation | 12,390,839 | 12,177,369 | ||||||
Property and equipment, net | $ | 6,457,931 | $ | 6,010,303 |
2019 | 2018 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 5,031,395 | 4,905,103 | ||||||
Machinery and equipment | 10,263,119 | 10,686,631 | ||||||
Furniture and fixtures | 864,944 | 1,067,788 | ||||||
Leasehold improvements | 1,131,659 | 1,568,260 | ||||||
Transportation equipment | 422,458 | 434,091 | ||||||
Asset impairment | (30,000 | ) | (62,891 | ) | ||||
18,197,193 | 19,112,600 | |||||||
Less accumulated depreciation | (12,411,054 | ) | (12,946,360 | ) | ||||
Property and equipment, net | $ | 5,786,139 | $ | 6,166,240 |
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2017,28, 2019, the Company had a $5$5.0 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (3.0%(4.7% at February 28, 2017)2019). At February 28, 2017, $52019, $5.0 million was available for borrowings under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 20172019 and we believethe Company believes it is likely to be renewed on terms similar to current terms. At February 28, 2019 and 2018 there was no amount outstanding under this line of credit.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets, including the SWRL Loan Agreement.assets. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. As of February 28, 2019, the Company was in compliance with all such covenants. The Wells Fargo Loan Agreement also contains customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by substantially all business assets. | $ | 3,831,741 | $ | 5,085,133 | ||||
Less current maturities | 1,302,501 | 1,254,007 | ||||||
Long-term obligations | $ | 2,529,240 | $ | 3,831,126 |
The following is a schedule by year of maturities of long-term debt for the years ending February 28 or 29:
2018 | $ | 1,302,501 | ||
2019 | 1,352,900 | |||
2020 | 1,176,340 | |||
Total | $ | 3,831,741 |
2019 | 2018 | ||||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by sustantially all business assets | $ | 1,176,488 | $ | 2,529,309 | |||||
Less current maturities | 1,176,488 | 1,352,893 | |||||||
Long-term obligations | $ | - | $ | 1,176,416 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under fivenon-cancelable operating leases of up to ten-year non-cancelable operating leases.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 following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 603,000 | ||
2019 | 561,000 | |||
2020 | 272,000 | |||
2021 | 49,000 | |||
2022 | 49,000 | |||
Thereafter | 194,000 | |||
Total | $ | 1,728,000 |
2020 | $ | 318,000 | ||
2021 | 259,000 | |||
2022 | 249,000 | |||
2023 | 243,000 | |||
2024 | 249,000 | |||
Thereafter | 175,000 | |||
Total | $ | 1,493,000 |
We actThe Company acts as primary lessee of some franchised store premises, which wethe Company then subleasesubleases to franchisees, but the majority of existing locations are leased by the franchisee directly. OurThe Company’s current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we wereFebruary 28, 2019, the Company was the primary lessee at fivefour of our 332the Company’s 313 domestic franchised stores and 1 former office space.stores.
InIn 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's liability as primary lessee on sublet franchise outlets, all of which is fully offset by sublease rentals, is as follows for the years ending February 28 or 29:
2018 | $ | 189,000 | ||
2019 | 90,000 | |||
2020 | 81,000 | |||
2021 | 83,000 | |||
2022 | 29,000 | |||
Total | $ | 472,000 |
2020 | $ | 92,000 | ||
2021 | 75,000 | |||
2022 | 21,000 | |||
Total | $ | 188,000 |
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Minimum rentals | $ | 944,938 | $ | 1,187,003 | $ | 1,282,363 | ||||||
Less sublease rentals | (318,000 | ) | (479,000 | ) | (468,000 | ) | ||||||
Contingent rentals | 25,200 | 22,200 | 22,200 | |||||||||
$ | 652,138 | $ | 730,203 | $ | 836,563 |
2019 | 2018 | 2017 | ||||||||||
Minimum rentals | $ | 1,030,536 | $ | 1,270,240 | $ | 944,938 | ||||||
Less sublease rentals | (572,000 | ) | (603,000 | ) | (318,000 | ) | ||||||
Contingent rentals | 22,800 | 26,100 | 25,200 | |||||||||
$ | 481,336 | $ | 693,340 | $ | 652,138 |
In FY 2013,2019, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule, by year, of future minimum rental payments required under such lease for the years ending February 28:28 or 29:
2018 | $ | 28,000 | ||
Total | $ | 28,000 |
2020 | $ | 116,000 | ||
2021 | 121,000 | |||
2022 | 125,000 | |||
2023 | 129,000 | |||
2024 | 33,000 | |||
Total | $ | 524,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 185,700 | ||
2019 | 84,300 | |||
2020 | 62,100 | |||
2021 | 62,100 | |||
2022 | 15,500 | |||
Total | $ | 409,700 |
2020 | $ | 323,000 | ||
2021 | 323,000 | |||
2022 | 257,000 | |||
2023 | 29,000 | |||
Total | $ | 932,000 |
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | |||||||
220,791 | 182,006 | 185,703 |
2019 | 2018 | 2017 | |||||||
325,229 | 225,992 | 220,791 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 20172019, the Company was contracted for approximately $2,595,000$880,000 of raw materials under such agreements.
Contingencies
The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (collectively, the “CherryBerry Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB Shares, they must first offer such shares to SWRL and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint in the Colorado District Court, and thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion). On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May 9, 2016, the Oklahoma Court granted that application and we filed an answer to this action on June 6, 2016. All parties are currently involved in discovery proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this lawsuit.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Current | ||||||||||||
Federal | $ | 1,411,126 | $ | 1,420,811 | $ | 1,846,365 | ||||||
State | 272,214 | 195,993 | 246,398 | |||||||||
Total Current | 1,683,340 | 1,616,804 | 2,092,763 | |||||||||
Deferred | ||||||||||||
Federal | 240,234 | (1,725,918 | ) | (50,603 | ) | |||||||
State | 22,015 | (152,286 | ) | (4,465 | ) | |||||||
Total Deferred | 262,249 | (1,878,204 | ) | (55,068 | ) | |||||||
Total | $ | 1,945,589 | $ | (261,400 | ) | $ | 2,037,695 |
2019 | 2018 | 2017 | ||||||||||
Current | ||||||||||||
Federal | $ | 653,226 | $ | 1,916,720 | $ | 1,411,127 | ||||||
State | 142,570 | 220,164 | 272,214 | |||||||||
Total Current | 795,796 | 2,136,884 | 1,683,341 | |||||||||
Deferred | ||||||||||||
Federal | (67,410 | ) | 55,658 | 240,233 | ||||||||
State | (11,524 | ) | (32,247 | ) | 22,015 | |||||||
Total Deferred | (78,934 | ) | 23,411 | 262,248 | ||||||||
Total | $ | 716,862 | $ | 2,160,295 | $ | 1,945,589 |
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years endedended February 28 or 29:
2017 | 2016 | 2015 | ||||||||||
Statutory rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.6 | % | 0.8 | % | 2.8 | % | ||||||
Domestic production deduction | (1.1 | %) | (3.0 | %) | (1.6 | %) | ||||||
Work opportunity tax credits | (0.4 | %) | - | - | ||||||||
Statutory rate change | - | (1.6 | %) | - | % | |||||||
Other | 0.0 | % | 0.5 | % | 0.1 | % | ||||||
U-Swirl loss carryforward recognized | - | (1.8 | %) | (3.0 | %) | |||||||
Valuation allowance, U-Swirl Consolidated loss | - | (36.3 | %) | 3.0 | % | |||||||
Effective rate – provision (benefit) | 36.1 | % | (7.4 | %) | 35.3 | % |
2019 | 2018 | 2017 | ||||||||||
Statutory rate | 21.0 | % | 31.9 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.4 | % | 2.4 | % | 3.6 | % | ||||||
Domestic production deduction | 0.0 | % | (0.9 | )% | (1.1 | )% | ||||||
Work opportunity tax credits | (0.7 | )% | (0.2 | )% | (0.4 | )% | ||||||
Other | 0.5 | % | 0.8 | % | 0.0 | % | ||||||
Impact of tax reform | 0.0 | % | 8.2 | % | 0.0 | % | ||||||
Effective rate - provision (benefit) | 24.2 | % | 42.2 | % | 36.1 | % |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes at February 28 or 29 are as follows:
Deferred Tax Assets | 2017 | 2016 | ||||||
Allowance for doubtful accounts and notes | $ | 198,354 | $ | 248,537 | ||||
Inventories | 90,027 | 96,698 | ||||||
Accrued compensation | 188,002 | 183,898 | ||||||
Loss provisions and deferred income | 1,175,351 | 1,299,191 | ||||||
Self-insurance accrual | 37,000 | 28,923 | ||||||
Amortization | 782,683 | 861,594 | ||||||
Restructuring charges | 148,494 | 148,494 | ||||||
U-Swirl accumulated net loss | 164,035 | 346,605 | ||||||
Valuation allowance | (148,494 | ) | (148,494 | ) | ||||
Net deferred tax assets | 2,635,452 | 3,065,446 | ||||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (1,683,778 | ) | (1,537,653 | ) | ||||
Prepaid expenses | (92,800 | ) | (106,138 | ) | ||||
Deferred tax liabilities | $ | (1,776,578 | ) | $ | (1,643,791 | ) | ||
Net deferred tax assets | $ | 858,874 | $ | 1,421,655 |
2019 | 2018 | |||||||
Deferred Tax Assets | ||||||||
Allowance for doubtful accounts and notes | $ | 120,368 | $ | 124,469 | ||||
Inventories | 91,265 | 86,938 | ||||||
Accrued compensation | 87,930 | 130,049 | ||||||
Loss provisions and deferred income | 492,468 | 817,945 | ||||||
Self-insurance accrual | 34,426 | 38,868 | ||||||
Amortization | 217,481 | 520,379 | ||||||
Restructuring charges | 98,693 | 98,728 | ||||||
U-Swirl accumulated net loss | 325,253 | 258,173 | ||||||
Valuation allowance | (98,693 | ) | (98,728 | ) | ||||
Net deferred tax assets | $ | 1,369,191 | $ | 1,976,821 | ||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (682,542 | ) | (1,066,113 | ) | ||||
Prepaid expenses | (79,228 | ) | (75,245 | ) | ||||
Deferred Tax Liabilities | (761,770 | ) | (1,141,358 | ) | ||||
Net deferred tax assets | $ | 607,421 | $ | 835,463 |
The following table summarizes deferred income tax valuation allowances as of February 28 or 29:28:
2017 | 2016 | |||||||
Valuation allowance at beginning of period | $ | 148,494 | $ | 349,010 | ||||
Tax expense (benefits) realized by valuation allowance | - | 81,340 | ||||||
Tax benefits released from valuation allowance | - | (281,856 | ) | |||||
Valuation allowance at end of period | $ | 148,494 | $ | 148,494 |
2019 | 2018 | |||||||
Valuation allowance at beginning of period | $ | 98,728 | $ | 148,494 | ||||
Tax expense (benefits) realized by valuation allowance | (35 | ) | - | |||||
Tax benefits released from valuation allowance | - | - | ||||||
Impact of tax reform | - | (49,766 | ) | |||||
Valuation allowance at end of period | $ | 98,693 | $ | 98,728 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Income tax benefit realizedexpense and the effective income tax rate for the year ended February 29, 2016, compared to the tax expense in the prior years, is primarily due to the tax consequences of a change in the controlling interest in U-Swirl and foreclosure upon the stock of U-Swirl International, Inc. In FY 2014 we did not realize a tax benefit28, 2019 decreased from the SWRL taxable loss causing our effective rate to increase for the year. During FY 2015 the taxable loss at SWRL was lower, resulting in a decrease to our effective rate. During FY 2016 an income tax benefit of approximately $2,149,000 was recognizedyear ended February 28, 2018, primarily as a result of the company foreclosing upon the interest in U-Swirl and recognizingrevaluation of deferred tax assets and loss carry forwards that previously had full valuation allowances when RMCF had less than an 80% ownership interest. Resulting from this foreclosure, RMCF will consolidate U-Swirl International, Inc. resulting in realizationliabilities to the lower enacted U.S. corporate tax rate of U-Swirl International, Inc. deferred tax assets that previously had a full valuation allowance when filed with SWRL income tax returns. U-Swirl International, Inc.21% under the Tax Cuts and RMCF will file consolidated income tax returns beginning with FY 2017. SWRL will continue to file separate tax returns.
ForJobs Act recognized during the year ended February 29, 201628, 2018 and prior periods, the financial statements presented representlower enacted U.S. corporate tax rate of 21% under the consolidated statementsTax Cuts and Jobs Act effective for the year ended February 28, 2019. The revaluation of two separate consolidated groups fordeferred tax assets and liabilities resulted in income tax purposes. RMCF has filed income tax returns consolidatingexpense of approximately $421,000 recognized in consideration of the results of Rocky Mountain Chocolate Factory and its wholly owned subsidiary, Aspen Leaf Yogurt, LLC. U-Swirl Inc. has filed a separate consolidated income tax returnlower enacted rate for the results of U-Swirl, Inc. and its wholly owned subsidiary, U-Swirl International, Inc. RMCF and SWRL have filed separate income tax returns because RMCF owned only 39% of SWRL. Beginning on March 1, 2016 the results of U-Swirl International, Inc. will be included in RMCF’s consolidated income tax return, and on the same date, will be removed from U-Swirl, Inc.’s consolidated tax return. This is a result of the foreclosure of RMCF on the outstanding stock of U-Swirl in satisfaction of debt between RMCF and SWRL. The consolidated tax return for RMCF for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL.year ended February 28, 2018.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2012.2013. The Company’s federal income tax returns have been examined for the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years. The Company’s federal income tax returns are being examined for the years ended February 28 or 29, 2017 and 2016.
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. Management believes that, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2017.2019.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28, 2019 or 29, 2016 or 2015.2018. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28, or 29, 20172019 and 2016.2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 29,29, 2016, we hadthe Company foreclosed on the outstanding equity of U-Swirl International, Inc. and U-Swirl International, Inc. was consolidated for income tax purposes. SWRL, along with U-Swirl International, Inc., has historically filed its own consolidated federal income tax return and reported its own Federal net operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets. This full valuation allowance was eliminated asAs of February 29, 2016, in recognitiona portion of the likelihoodU-Swirl deferred tax assets were recognized as a result of it becoming more likely than not that the loss carry forwardssome of these assets would be realized in the future as a result of RMCF and U-Swirl International, Inc. filing a consolidated income tax return.
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl International, Inc.’sU-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. We haveThe Company has performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest in January 2013.2013 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl International Inc.’sU-Swirl’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
We estimateThe Company estimates that the potential future tax deductions of U-Swirl International, Inc.’sU-Swirl’s Federal net operating losses, limited by section 382, to be approximately $443,000$1,323,000 with a resulting deferred tax asset of approximately $164,000. U-Swirl International Inc.’s$325,000. U-Swirl’s Federal net operating loss carryovers will expire at various dates beginning in 2026.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash dividendsdividend of $0.12 per common share on March 11, 2016, June 17, 2016, September 16, 2016 and December 9, 20162018 to stockholders of record on February 26, 2016,March 6, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 15, 2018 to stockholders of record on June 5, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 14, 2018 to stockholders of record on September 4, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 7, 2016, September 6, 2016 and2018 to stockholders of record on November 25, 2016, respectively.23, 2018. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 9, 2017 payable14, 2019, which was paid on March 10, 201715, 2019 to stockholders of record on February 24, 2017.March 5, 2019.
Future declarationsdeclarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long termlong-term interest of the Company’s stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the nine months ended November 30, 2016,FY 2017, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the three monthsyears ended February 28, 2017.2019 or 2018. As of February 28, 2017,2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (the(as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock awards under the 2007 Plan as of February 28, 2017:2019:
Original share authorization: | 300,000 | |||
Prior plan shares authorized and incorporated in the 2007 | 85,340 | |||
Additional shares authorized through 2007 Plan amendment: | 300,000 | |||
Available for | 685,340 | |||
Cancelled/ | ||||
Shares awarded as unrestricted shares, stock options or restricted stock | ( | ) | ||
Shares available for award: |
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding stock options at beginning of year: | 12,936 | 12,936 | 155,880 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | (142,944 | ) | ||||||||
Cancelled/forfeited | (12,936 | ) | - | - | ||||||||
Outstanding stock options as of February 28 or 29: | - | 12,936 | 12,936 | |||||||||
Weighted average exercise price | n/a | $ | 12.94 | $ | 12.94 | |||||||
Weighted average remaining contractual term (in years) | n/a | 0.04 | 1.04 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding stock options at beginning of year: | - | - | 12,936 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Cancelled/forfeited | - | - | (12,936 | ) | ||||||||
Outstanding stock options as of February 28: | - | - | - | |||||||||
Weighted average exercise price | n/a | n/a | n/a | |||||||||
Weighted average remaining contractual term (in years) | n/a | n/a | n/a |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 181,742 | 237,641 | 295,040 | |||||||||
Granted | - | - | - | |||||||||
Vested | (48,084 | ) | (55,899 | ) | (56,199 | ) | ||||||
Cancelled/forfeited | (10,000 | ) | - | (1,200 | ) | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 123,658 | 181,742 | 237,641 | |||||||||
Weighted average grant date fair value | $ | 12.21 | $ | 12.22 | $ | 12.13 | ||||||
Weighted average remaining vesting period (in years) | 2.23 | 3.22 | 4.08 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 77,594 | 123,658 | 181,742 | |||||||||
Granted | - | - | - | |||||||||
Vested | (49,058 | ) | (44,064 | ) | (48,084 | ) | ||||||
Cancelled/forfeited | (3,534 | ) | (2,000 | ) | (10,000 | ) | ||||||
Outstanding non-vested restricted stock units as of February 28: | 25,002 | 77,594 | 123,658 | |||||||||
Weighted average grant date fair value | $ | 12.05 | $ | 12.16 | $ | 12.21 | ||||||
Weighted average remaining vesting period (in years) | 0.38 | 1.27 | 2.23 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
FY 2019 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,361,528 | $ | 25,324,024 | $ | 1,272,009 | $ | 3,737,606 | $ | - | $ | 35,695,167 | ||||||||||||
Intersegment revenues | (5,236 | ) | (1,144,484 | ) | - | - | - | (1,149,720 | ) | |||||||||||||||
Revenue from external customers | 5,356,292 | 24,179,540 | 1,272,009 | 3,737,606 | - | 34,545,447 | ||||||||||||||||||
Segment profit (loss) | 2,288,871 | 4,310,722 | (52,009 | ) | (32,391 | ) | (3,559,532 | ) | 2,955,661 | |||||||||||||||
Total assets | 1,182,355 | 12,267,458 | 1,001,419 | 5,264,989 | 6,505,920 | 26,222,141 | ||||||||||||||||||
Capital expenditures | 3,548 | 526,402 | 9,617 | 16,512 | 57,707 | 613,786 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,369 | $ | 573,846 | $ | 32,762 | $ | 952,178 | $ | 104,644 | $ | 1,709,799 |
FY 2016 |
Franchising |
Manufacturing |
Retail |
U-Swirl |
Other |
Total | ||||||||||||||||||
Total revenues | $ | 5,947,769 | $ | 27,726,443 | $ | 1,622,906 | $ | 6,535,646 | $ | - | $ | 41,832,764 | ||||||||||||
Intersegment revenues | (5,185 | ) | (1,370,684 | ) | - | - | - | (1,375,869 | ) | |||||||||||||||
Revenue from external customers | 5,942,584 | 26,355,759 | 1,622,906 | 6,535,646 | - | 40,456,895 | ||||||||||||||||||
Segment profit (loss) | 2,608,351 | 6,731,221 | (2,591 | ) | (2,128,649 | ) | (3,663,201 | ) | 3,545,131 | |||||||||||||||
Total assets | 1,205,616 | 11,980,933 | 1,008,783 | 10,126,209 | 5,994,184 | 30,315,725 | ||||||||||||||||||
Capital expenditures | 76,762 | 432,473 | 3,306 | 66,476 | 164,234 | 743,251 | ||||||||||||||||||
Total depreciation & amortization | $ | 36,908 | $ | 406,082 | $ | 18,236 | $ | 802,953 | $ | 156,122 | $ | 1,420,301 |
FY 2018 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 6,004,897 | $ | 27,491,089 | $ | 1,876,021 | $ | 4,142,085 | $ | - | $ | 39,514,092 | ||||||||||||
Intersegment revenues | (4,882 | ) | (1,434,515 | ) | - | - | - | (1,439,397 | ) | |||||||||||||||
Revenue from external customers | 6,000,015 | 26,056,574 | 1,876,021 | 4,142,085 | - | 38,074,695 | ||||||||||||||||||
Segment profit (loss) | 2,623,081 | 5,791,980 | (37,102 | ) | 542,073 | (3,795,829 | ) | 5,124,203 | ||||||||||||||||
Total assets | 1,157,158 | 12,729,659 | 1,134,876 | 8,125,171 | 5,793,771 | 28,940,635 | ||||||||||||||||||
Capital expenditures | 15,429 | 429,545 | 33,056 | 11,899 | 55,027 | 544,956 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,087 | $ | 540,033 | $ | 32,567 | $ | 576,162 | $ | 124,406 | $ | 1,319,255 |
FY 2015 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,976,964 | $ | 27,459,828 | $ | 2,134,976 | $ | 7,501,943 | $ | - | $ | 43,073,711 | ||||||||||||
Intersegment revenues | (342 | ) | (1,564,993 | ) | - | - | - | (1,565,335 | ) | |||||||||||||||
Revenue from external customers | 5,976,622 | 25,894,835 | 2,134,976 | 7,501,943 | - | 41,508,376 | ||||||||||||||||||
Segment profit (loss) | 2,783,734 | 6,993,693 | (51,803 | ) | (245,546 | ) | (3,699,637 | ) | 5,780,441 | |||||||||||||||
Total assets | 1,193,407 | 12,155,004 | 1,157,674 | 12,424,801 | 7,207,327 | 34,138,213 | ||||||||||||||||||
Capital expenditures | 28,806 | 378,060 | 41,361 | 61,053 | 117,464 | 626,744 | ||||||||||||||||||
Total depreciation & amortization | $ | 41,228 | $ | 395,864 | $ | 35,531 | $ | 813,172 | $ | 154,653 | $ | 1,440,448 |
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
Revenue from one customer of the Company’sCompany’s Manufacturing segment represented approximately $4.1$3.1 million, or 10.69.1 percent, of the Company’s revenues from external customers during the year ended February 28, 2017,2019, compared to $5.2$5.1 million, or 12.813.4 percent of the Company’s revenues from external customers during the year ended February 29, 2016.28, 2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For thethe three years ended February 28 or 29:
Cash paid (received) for: | 2017 | 2016 | 2015 | |||||||||
Income taxes paid | $ | 1,997,751 | $ | 1,383,805 | $ | 1,896,274 | ||||||
Interest | 129,927 | 170,709 | 193,022 | |||||||||
Accrued Inventory | 531,017 | 298,032 | 245,183 | |||||||||
Non-Cash Financing Activities: | ||||||||||||
Dividend payable | 702,525 | 700,728 | 721,536 | |||||||||
Non-Cash Investing Activities: | ||||||||||||
Sale or distribution of assets in exchange for notes receivable | ||||||||||||
Long-lived assets | 20,989 | 127,500 | 414,353 | |||||||||
Other assets | $ | - | $ | 75,000 | $ | - |
Cash paid for: | 2019 | 2018 | 2017 | |||||||||
Interest, net | $ | 52,102 | $ | 102,640 | $ | 129,927 | ||||||
Income taxes | 638,252 | 2,431,884 | 1,997,751 | |||||||||
Non-cash Operating Activities | ||||||||||||
Accrued Inventory | 52,918 | 258,247 | 531,017 | |||||||||
Non-cash Financing Activities | ||||||||||||
Dividend payable | $ | 714,939 | $ | 708,652 | 702,525 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’semployee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, the Company’s contribution was approximately $66,000, $62,000,$70,000, $68,000, and $60,000,$66,000, respectively, to the plan.
NOTE 1212 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscalfiscal years ended February 28, or 29, 20172019 and 2016:2018:
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2017 | ||||||||||||||||||||
Total revenue | $ | 9,376,199 | $ | 8,601,962 | $ | 9,955,239 | $ | 10,362,977 | $ | 38,296,377 | ||||||||||
Gross margin | 2,222,405 | 2,289,011 | 2,706,456 | 1,922,896 | 9,140,768 | |||||||||||||||
Net income | 731,834 | 974,813 | 1,011,799 | 731,670 | 3,450,116 | |||||||||||||||
Basic earnings per share | 0.13 | 0.17 | 0.17 | 0.13 | 0.59 | |||||||||||||||
Dilute earnings per share | $ | 0.12 | $ | 0.16 | $ | 0.17 | $ | 0.12 | $ | 0.58 |
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2016 | ||||||||||||||||||||
Total revenue | $ | 10,364,022 | $ | 9,274,554 | $ | 9,807,313 | $ | 11,011,006 | $ | 40,456,895 | ||||||||||
Gross margin | 2,470,383 | 2,536,811 | 2,723,841 | 2,763,228 | 10,494,263 | |||||||||||||||
Net income | 762,959 | 779,796 | 440,801 | 2,442,351 | 4,425,907 | |||||||||||||||
Basic earnings per share | 0.13 | 0.13 | 0.08 | 0.42 | 0.75 | |||||||||||||||
Diluted earnings per share | $ | 0.12 | $ | 0.13 | $ | 0.07 | $ | 0.41 | $ | 0.73 |
Fiscal Quarter | ||||||||||||||||||||
2019 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 8,366,085 | $ | 7,800,088 | $ | 8,949,747 | $ | 9,429,527 | $ | 34,545,447 | ||||||||||
Gross margin | 1,916,807 | 1,852,435 | 1,882,975 | 1,312,026 | 6,964,243 | |||||||||||||||
Net income | 576,944 | 750,815 | 525,361 | 385,679 | 2,238,799 | |||||||||||||||
Basic earnings per share | 0.10 | 0.13 | 0.09 | 0.06 | 0.38 | |||||||||||||||
Diluted earnings per share | $ | 0.10 | $ | 0.13 | $ | 0.09 | $ | 0.06 | $ | 0.37 |
Fiscal Quarter | ||||||||||||||||||||
2018 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 9,346,447 | $ | 8,266,691 | $ | 9,961,572 | $ | 10,499,985 | $ | 38,074,695 | ||||||||||
Gross margin | 2,191,974 | 2,210,910 | 2,311,579 | 2,276,586 | 8,991,049 | |||||||||||||||
Net income | 813,672 | 928,284 | 751,056 | 470,896 | 2,963,908 | |||||||||||||||
Basic earnings per share | 0.14 | 0.16 | 0.13 | 0.08 | 0.50 | |||||||||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.16 | $ | 0.13 | $ | 0.08 | $ | 0.50 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1313 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28 or 29:28:
| 2017 | 2016 | |||||||||||||||||||
Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 211,152 | $ | 220,778 | $ | 209,653 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 92,758 | 459,340 | 51,423 | ||||||||||||||
Franchise Rights | 20 | 5,971,129 | 1,144,957 | 5,914,181 | 760,818 | ||||||||||||||||
Total | 7,459,049 | 2,000,670 | 7,146,102 | 1,573,697 | |||||||||||||||||
Intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment | |||||||||||||||||||||
Company stores goodwill | 1,099,328 | 267,020 | 1,099,328 | 267,020 | |||||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Manufacturing segment-Goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Trademark-indefinite life | 20,000 | - | 20,000 | - | |||||||||||||||||
Total | 1,709,328 | 662,384 | 1,709,328 | 662,384 | |||||||||||||||||
Total intangible assets | $ | 9,168,377 | $ | 2,663,054 | $ | 8,855,430 | $ | 2,236,081 |
2019 | 2018 | |||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 214,152 | $ | 220,778 | $ | 212,653 | |||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | |||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | |||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 223,628 | 715,339 | 136,087 | |||||||||||||||
Franchise rights | 20 | 5,979,637 | 2,300,717 | 5,979,637 | 1,545,710 | |||||||||||||||||
Total | 7,467,557 | 3,290,300 | 7,467,557 | 2,446,253 | ||||||||||||||||||
Intangible assets not subject to amortization | ||||||||||||||||||||||
Franchising segment- | ||||||||||||||||||||||
Company stores goodwill | $ | 1,099,328 | $ | 267,020 | $ | 1,099,328 | $ | 267,020 | ||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Manufacturing segment-goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Trademark | 20,000 | - | 20,000 | - | ||||||||||||||||||
Total goodwill | 1,709,328 | 662,384 | 1,709,328 | 662,384 | ||||||||||||||||||
Total Intangible Assets | $ | 9,176,885 | $ | 3,952,684 | $ | 9,176,885 | $ | 3,108,637 |
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
On February 29, 2016, RMCF foreclosed on all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. As described in Note 1, this was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. We performed a test of impairment in conjunction with the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. We recognized an impairment loss of $1,930,529 to reduce the carrying value of Goodwill to the fair value. In making this determination we reviewed the fair value of U-Swirl compared to its carrying value. In performing this testing we focused on the actual performance of the acquired businesses that created the initial recognition of the goodwill, as well as U-Swirl’s past performance and future expected performance. Because of the significant underperformance of the acquired businesses as well as U-Swirl we determined that the carrying value of the reporting unit exceeded its fair value.
The following are events that have indicated that it is more likely than not that the fair value of goodwill is less than the carrying amount:
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets totaled $427,840, $378,373,$844,320, $446,050, and $361,723$427,840 during the fiscal years ended February 28 or 29, 2019, 2018 and 2017, 2016 and 2015, respectively.
During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 28, 2017,28, 2019, annual amortization of intangible assets, based upon ourthe Company’s existing intangible assets and current useful lives, is estimated to be the following:
2018 | $ | 445,214 | ||
2019 | 451,644 | |||
2020 | 438,487 | |||
2021 | 426,778 | |||
2022 | 403,596 | |||
Thereafter | 3,292,660 | |||
Total | $ | 5,458,379 |
2020 | $ | 706,177 | ||
2021 | 594,229 | |||
2022 | 490,060 | |||
2023 | 411,607 | |||
2024 | 345,642 | |||
Thereafter | 1,629,542 | |||
Total | $ | 4,177,257 |
NOTE 14 – IMPAIRMENT OF LONG-LIVED RETAIL ASSETS, RESTRUCTURING AND ACQUISITION RELATED CHARGESCOSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
In 2014, SWRL entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, SWRL purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store. SWRL also entered into an Asset Purchase Agreement with Yogli Mogli, which was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, SWRL purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February 20, 2014, SWRL entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rightsCosts associated with 17 Fuzzy Peach Frozen Yogurt stores. Associated with these transactions, the Company recorded net restructuring charges of $124,551 during the year ended February 28, 2015. No restructuring charges were incurred during the year ended February 29, 2016.
On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of SWRL. In addition, Messrs. Conte, H. Cartwright and T. Cartwright resigned as officers of U-Swirl. Also on September 4, 2014, the SWRL Board of Directors appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.
In connection with these management changes, SWRL announced an operational restructuring designed to enhance SWRL’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements with the named officers, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement, property and equipment. The Company recorded restructuring charges of $503,526 during year ended February 28, 2015 associated with this operational restructuring.
As described in Note 1 above, effective March 1, 2015, the Company was reorganized to create a holding company structure pursuant to the Agreement and Plan of Merger, dated as of November 10, 2014, among Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and RKB Merger Corp. In connection with the holding company reorganization, the Company recorded restructuring fees of $179,399 during the year ended February 28, 2015.
During the year ended February 29, 2016, we closed an underperforming Company-owned café resulting in an impairment charge of $39,933. As described in Note 1, on February 29, 2016 the Company foreclosed on 100% of the outstanding equity of U-Swirl in full satisfaction of the obligations owed under the SWRL Loan Agreement. The Company reviewed all operating assets possessed as a part of this transaction and made the determination to offer for sale certain retail assets below their carrying value. This determination was made after a review of expected future cash flow. As a result of this review and determination an impairment charge of $356,280 was recorded to reflect these assets at their fair value.
Impairment of long-lived assets and goodwill, restructuring and acquisition charges incurredstore closures at February 28, or 29,2019, 2018 and 2017 2016 and 2015 were comprised of the following:
2017 | 2016 | 2015 | ||||||||||
Professional fees | $ | - | $ | - | $ | 284,275 | ||||||
Severance/transitional compensation | - | - | 212,027 | |||||||||
Leasehold improvements, property and equipment impairment of long-lived assets and goodwill | - | 2,326,742 | 243,000 | |||||||||
Provision for termination of contractual obligations | 60,000 | - | - | |||||||||
Acceleration of restricted stock unit vesting | - | - | 65,049 | |||||||||
Other | - | - | 3,125 | |||||||||
Total | $ | 60,000 | $ | 2,326,742 | $ | 807,476 |
2019 | 2018 | 2017 | ||||||||||
Loss on distribution of assets | $ | 81,981 | $ | - | $ | - | ||||||
Lease settlement costs | 145,000 | - | 60,000 | |||||||||
Total | $ | 226,981 | $ | - | $ | 60,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – RELATED PARTY TRANSACTIONS
Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have, on occasion, provided services to the Company and may provide services in the future. For the year ended February 28, 2017, the Company paid $47,822 and no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of operations.
NOTE 16 – SUBSEQUENT EVENTS
On May 22, 2017,28, 2019, the Company announced that its Board of Directors has declared a first quarter FY2018FY2020 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 16, 201714, 2019 to shareholders of record at the close of business June 6, 2017.4, 2019.
In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period.
NOTE 1716 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company’sCompany’s prior annual consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233 and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.
NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”)
As described in Note 1, effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be 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. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gift Cards
The Company’s franchisees sell gift cards which do not have either 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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
Impact to Prior Periods
The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:
Amount | ||||
Increase in deferred revenue | $ | (1,022,720 | ) | |
Reduction in gift card liabilities | 2,250,743 | |||
Adjustment to deferred income tax assets | (302,094 | ) | ||
Cumulative increase to retained earnings | $ | 925,929 |
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:
CONSOLIDATED BALANCE SHEET | ||||||||||||
AS OF FEBRUARY 28, 2018 | ||||||||||||
Previously Reported | Adjustments | Restated | ||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 6,072,984 | $ | - | $ | 6,072,984 | ||||||
Accounts receivable, net | 3,897,334 | - | 3,897,334 | |||||||||
Notes receivable, current portion, net | 105,540 | - | 105,540 | |||||||||
Refundable income taxes | 342,863 | - | 342,863 | |||||||||
Inventories, net | 4,842,474 | - | 4,842,474 | |||||||||
Other | 310,173 | - | 310,173 | |||||||||
Total current assets | 15,571,368 | - | 15,571,368 | |||||||||
Property and Equipment, Net | 6,166,240 | - | 6,166,240 | |||||||||
Other Assets | ||||||||||||
Notes receivable, less current portion, net | 235,983 | - | 235,983 | |||||||||
Goodwill, net | 1,046,944 | - | 1,046,944 | |||||||||
Franchise rights, net | 4,433,927 | - | 4,433,927 | |||||||||
Intangible assets, net | 587,377 | - | 587,377 | |||||||||
Deferred income taxes | 835,463 | (302,094 | ) | 533,369 | ||||||||
Other | 63,333 | - | 63,333 | |||||||||
Total other assets | 7,203,027 | (302,094 | ) | 6,900,933 | ||||||||
Total Assets | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 | |||||
Liabilities and Stockholders' Equity | ||||||||||||
Current Liabilities | ||||||||||||
Current maturities of long-term debt | $ | 1,352,893 | - | $ | 1,352,893 | |||||||
Accounts payable | 1,647,991 | - | 1,647,991 | |||||||||
Accrued salaries and wages | 644,005 | - | 644,005 | |||||||||
Gift card liabilities | 3,057,131 | (2,250,743 | ) | 806,388 | ||||||||
Other accrued expenses | 325,034 | - | 325,034 | |||||||||
Dividend payable | 708,652 | - | 708,652 | |||||||||
Deferred revenue | 471,910 | (143,445 | ) | 328,465 | ||||||||
Total current liabilities | 8,207,616 | (2,394,188 | ) | 5,813,428 | ||||||||
Long-Term Debt, Less Current Maturities | 1,176,416 | - | 1,176,416 | |||||||||
Deferred Revenue, Less Current Portion | - | 1,166,165 | 1,166,165 | |||||||||
Commitments and Contingencies | ||||||||||||
Stockholders' Equity | ||||||||||||
Preferred stock | ||||||||||||
Common stock | 5,903 | - | 5,903 | |||||||||
Additional paid-in capital | 6,131,147 | - | 6,131,147 | |||||||||
Retained earnings | 13,419,553 | 925,929 | 14,345,482 | |||||||||
Total stockholders' equity | 19,556,603 | 925,929 | 20,482,532 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
For the Years Ended February 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Franchise Fees contained within the Statement of Income: | $ | 335,028 | $ | 681,613 | $ | 324,718 | ||||||
Adjustment required to conform revenue to prior period method: | (53,528 | ) | - | - | ||||||||
Comparable franchise fees: | $ | 281,500 | $ | 681,613 | $ | 324,718 |
On February 28, 2019, 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:
2020 | $ | 256,093 | ||
2021 | 204,071 | |||
2022 | 190,524 | |||
2023 | 176,394 | |||
2024 | 137,477 | |||
Thereafter | 388,013 | |||
Total | $ | 1,352,572 |
NOTE 18 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2019 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchise fees | $ | 199,362 | $ | - | $ | - | $ | 135,666 | $ | 335,028 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 24,179,540 | - | - | 24,179,540 | |||||||||||||||
Retail sales | - | - | 1,272,009 | 2,112,245 | 3,384,254 | |||||||||||||||
Royalty and marketing fees | 5,156,930 | - | - | 1,489,695 | 6,646,625 | |||||||||||||||
Total | $ | 5,356,292 | $ | 24,179,540 | $ | 1,272,009 | $ | 3,737,606 | $ | 34,545,447 |
ITEMITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systems to future periods are subject to the risk that such controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all errors or all fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These reports by management, including the CEO and CFO, on the effectiveness of the Company’s Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act), that are designed to ensure that material information relating to the Company is made known to the officers who certify the Company’s 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 the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’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.
Management, under the supervision and with the participation of the CEO and CFO, has evaluated the effectiveness,effectiveness, as of February 28, 2017,2019, of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of February 28, 2017.2019.
Management’sManagement’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed under supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2017,2018, of the Company’s internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its publication Internal Control-Integrated Framework (2013). Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of February 28, 2017.2019.
Changes in Internal Control over Financial Reporting —There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended February 28, 20172019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to the Company’sCompany’s equity compensation plansplan, as of February 28, 2017,2019, which consists solely of the Company’s 2007 Equity Incentive Plan.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) | ||||||||
(a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 123,658 |
n/a | 332,589 | ||||||||
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- | ||||||||
Total | 123,658 | n/a | 332,589 |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | 25,002 |
n/a | 327,790 |
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- |
Total | 25,002 | n/a | 327,790 |
(1) Awards outstanding under the 2007 Equity Incentive Plan as of February 28, 20172019 consist of 123,65825,002 unvested restricted stock units. The weighted-average exercise price is calculated solely with respect to the outstanding stock options.
(2)(2) Represents shares remaining available under the Company’s 2007 Equity Incentive Plan. Shares available for future issuances under the 2007 Equity Incentive Plan may be issued in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and performance units, and other stock- and cash-based awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | The following documents are filed as part of this Annual Report: |
1. |
|
Page | |
| 33-34 |
Consolidated Statements of Income | 35 |
Consolidated Balance Sheets | 36 |
Consolidated Statements of Changes in | 37 |
Consolidated Statements of Cash Flows | 38 |
Notes to Consolidated Financial Statements | 39 |
2. | Financial Statement Schedule |
2. Financial Statement Schedule
SCHEDULE II - Valuation and Qualifying Accounts
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |||||||||||||
Year Ended February 28, 2017 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 137,316 | 271,694 | 536,093 | ||||||||||||
Year Ended February 29, 2016 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 729,060 | 171,000 | 229,589 | 670,471 | ||||||||||||
Year Ended February 28, 2015 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 600,930 | 214,600 | 86,470 | 729,060 |
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |
Year Ended February 28, 2019 | ||||
Valuation Allowance for Accounts and Notes Receivable | 505,972 | 143,214 | 159,684 | 489,502 |
Year Ended February 29, 2018 | ||||
Valuation Allowance for Accounts and Notes Receivable | 536,093 | 166,868 | 196,989 | 505,972 |
Year Ended February 28, 2017 | ||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 138,125 | 272,503 | 536,093 |
3. |
|
The following exhibits listed in the Exhibit Index are filed with, or incorporated by reference, in this Annual Report.
Exhibit Number | Description | Incorporated by Reference to | |||
3.1 | Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.2 | Certificate of Designations of Series A Junior Participating Preferred Stock, Par Value $0.001 Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.3 | Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.3 to the Current Report on Form 8-K filed on March 2, 2015 | |||
4.1 | Description of Capital Stock | Filed herewith | |||
10.1** | Form of Employment Agreement (Officers) | Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.2 | Form of Franchise Agreement for Rocky Mountain Chocolate Factory | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2010 (File No. 000-14749) | |||
10.3** | 2007 Equity Incentive Plan (As Amended and Restated) | Exhibit 10.1 to the Current Report on Form 8-K filed on August 9, 2013 (File No. 000-14749) | |||
10.4** | Form of Indemnification Agreement (Directors) | Exhibit 10.7 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.5** | Form of Indemnification Agreement (Officers) | Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.6* | Master License Agreement, dated August 17, 2009, between Kahala Franchise Corp. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2009 (File No. 000-14749) | |||
10.7 | Revolving Line of Credit Note, dated September 13, 2017, between Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank, National Association | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2017 | |||
10.8 | Business Loan Agreement, dated August 2, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2013 (File No. 000-14749) | |||
10.9 | Business Loan Agreement, dated December 27, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 99.3 to the Current Report on Form 8-K filed on January 22, 2014 (File No. 000-14749) | |||
10.10* | Master License Agreement, dated April 27, 2012, between RMCF Asia, Ltd. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2012 (File No. 000-14749) |
Exhibit Number | Description | Incorporated by Reference to | |||
10.11 | Exhibit 99.4 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.12 | Exhibit 99.5 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.13 | Investor Rights Agreement, dated January 14, 2013 between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC | Exhibit 99.6 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | |||
10.14** | Filed herewith | ||||
10.15** | Filed herewith | ||||
21.1 | Filed herewith | ||||
23.1 | Filed herewith | ||||
23.2 | Filed herewith | ||||
31.1 | Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | |||
32.1 | Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
101.INS | XBRL Instance Document | Filed herewith | |||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | |||
* | Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. | ||||
** | Management contract or compensatory plan. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. | ||||
|
|
|
| ||
|
|
|
| ||
Date: May | /s/ Bryan J. Merryman |
|
| ||
|
| BRYAN J. MERRYMAN | |||
Chief | |||||
Financial Officer, Treasurer and
| |||||
Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| |||
| ||||
| ||||
Date: May | /s/ Bryan J. Merryman | |||
BRYAN J. MERRYMAN | ||||
Chief Executive Officer, Chief | ||||
Financial Officer, Treasurer and | ||||
Director | ||||
(Principal Executive, Financial | ||||
and Accounting Officer) | ||||
Date: May 29, 2019 | /s/ Brett P. Seabert | |||
Brett P. Seabert, Director | ||||
Date: May | ||||
/s/ Clyde Wm. Engle | ||||
CLYDE Wm. ENGLE, Director | ||||
Date: May | /s/ Scott G. Capdevielle | |||
SCOTT G. CAPDEVIELLE, Director |
EXHIBIT INDEX
|
|
| ||||||||||
|
|
| ||||||||||
Date: May 29, 2019 | ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
| ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
/s/ Franklin E. Crail | ||||||||||||
6361
2019
2018
Change
Change
Factory gross margin
Plus: depreciation and amortization
Factory adjusted gross margin
Retail
Retail gross margin
Total Adjusted Gross Margin
Factory adjusted gross margin
Retail
Retail gross margin
Total Adjusted Gross Margin
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 270450 basis points during FY 20172019 compared to FY 20162018 due primarily to increasedlower efficiencies associated with a 13.9% decrease in production volume and higher costs associated with inventory obsolescence. Costs associated with inventory obsolescence were generally the result of laborthe initiation of product rationalization resulting from lower volume and overhead related to maintenance, equipment issues and product mix shift, partially offset by lower costs of certain materials.underperforming products. The decrease in Company-owned store margin is due primarily to product mix shift primarily resultinga decrease in Company-owned café revenue from the sale or closure of certain underperforming Company-owned storesyogurt and Cafés.the associated higher margins.
Franchise Costs
The decrease in franchise costs for FY 20172019 compared to FY 20162018 is due primarily to a decrease in professional fees and lower franchise costs associated with supporting U-Swirl franchise unitslower international development in FY 20172019 compared to FY 2016 as a result of fewer store openings in FY 2017.2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreasedincreased to 24.6%28.4% during FY 20172019 from 27.0%26.5% during FY 2016.2018. This decreaseincrease as a percentage of royalty, marketing and franchise fees is primarily a result of a 15.7%an 11.7% decrease in total royalty and marketing fees and franchise costsfee revenue during FY 20172019 compared to FY 2016.2018.
Sales and Marketing
The increasedecrease in sales and marketing costs during FY 20172019 compared to FY 20162018 is primarily due to higher marketing relatedlower marketing-related compensation and professional fees partially offset by lower marketing-related costs associated with U-Swirl franchise locations. Marketing costs for U-Swirl franchise locations declined because of lower marketing fee revenues resulting from fewer franchise stores in operation.
General and Administrative
The decrease in general and administrative costs during FY 20172019 compared to FY 20162018 is due primarily to lower professional fees, the foreclosureresult of U-Swirl in the prior yearresolving legal proceedings, and the associated focus on reduction of duplicative general and administrativelower compensation costs. During FY 2017,2019, approximately $460,000$103,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,291,000$307,000 during FY 2016.2018. As a percentage of total revenues, general and administrative expenses decreased to 10.5%9.9% in FY 20172019 compared to 11.5%10.3% in FY 2016.2018.
Retail Operating Expenses
The decrease in retailRetail operating expenses decreased during FY 20172019 compared to FY 2016 was2018 due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of a certain underperforming Company-owned units.location, offset by the acquisition of a franchised location. Retail operating expenses, as a percentage of retail sales, decreased to 54.0%57.2% during FY 20172019 from 59.0%58.1% during FY 2016.2018. This is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $841,000$1,154,000 during FY 2017, a decrease2019, an increase of 17.2%45.0% from $1,016,000$796,000 incurred during FY 2016.2018. This decreaseincrease was the result of fewer Company-owned store assetsa change in service duemanagement’s estimates related to the sale or closurefuture value of U-Swirl intangibles and the associated acceleration of amortization expense. During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain Company-owned stores and cafés.intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Depreciation and amortization included in cost of sales increased 10.7%6.3% from $404,000$523,000 during FY 20162018 to $448,000$556,000 during FY 2017.2019. This increase was the result of an increase in production assets in service.
Other Income (Expense)
Net interest expense was $128,800$50,300 in FY 20172019 compared to net interest expense of $167,900$96,700 in FY 2016.2018. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions by U-Swirl.
Income Tax Expense
We realized an income tax expense of $1,946,000$717,000 in FY 20172019 compared to an income tax benefitexpense of $261,400$2,160,000 during FY 2016. As described further in Note 6 to the consolidated financial statements, the increase in the effective tax rate is primarily due to the tax consequences of acquiring a 100% controlling interest in U-Swirl during FY 2016.
Fiscal 2016 Compared To Fiscal 2015
Results Summary
Basic earnings per share increased 17.2% from $0.64 in FY 2015 to $0.75 in FY 2016. Revenues decreased 2.5% from $41.5 million for FY 2015 to $40.5 million for FY 2016. Operating income decreased 5.4% from $6.0 million in FY 2015 to $5.6 million in FY 2016. Net income increased 12.4% from $3.9 million in FY 2015 to $4.4 million in FY 2016. The decrease in operating income for FY 2016 compared to FY 2015 is due primarily to a decrease in revenues. The increase in net income is primarily the result of an impairment charge associated with U-Swirl goodwill and certain long lived assets more than offset by income tax benefit recognized.
Revenues
For the Year Ended | ||||||||||||||||
February 29 or 28, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory sales | $ | 26,355.8 | $ | 25,894.6 | $ | 461.2 | 1.8 | % | ||||||||
Retail sales | 5,005.0 | 6,206.0 | (1,201.0 | ) | (19.4% | ) | ||||||||||
Royalty and marketing fees | 8,547.6 | 8,821.0 | (273.4 | ) | (3.1% | ) | ||||||||||
Franchise fees | 548.5 | 586.8 | (38.3 | ) | (6.5% | ) | ||||||||||
Total | $ | 40,456.9 | $ | 41,508.4 | $ | (1,051.5 | ) | (2.5% | ) |
Factory Sales
The increase in factory sales for FY 2016 compared to FY 2015 was primarily due to an 8.1% increase in shipments of product to customers outside our network of franchised retail stores. This increase was partially offset by a 5.3% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation and a 1.5% decrease in same-store pounds purchased by franchise and co-branded license locations during FY 2016 compared with FY 2015.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of five Company-owned locations and the closure of two underperforming Company-owned cafés. Same store sales at all Company-owned stores and cafés decreased 0.8% during FY 2016 compared with FY 2015. Same-store sales at U-Swirl cafés decreased 1.0% during FY 2016 compared to FY 2015.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 2016 compared to FY 2015 resulted from an 11.1% decrease in franchise units in operation and lower same store sales. The average number of total franchise stores in operation decreased from 476 during FY 2015 to 423 during FY 2016. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation increased 0.7% during FY 2016 compared to FY 2015. Franchise fee revenues decreased as a result of fewer international license fees during FY 2016 compared to FY 2015.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2016, U-Swirl revenue decreased 15.7% to $6,535,600 compared with $7,753,000 of U-Swirl revenue consolidated within our results for FY 2015. The decrease resulted from a 15.1% decrease in average domestic U-Swirl franchise cafés in operation during FY 2016 compared to FY 2015, primarily as a result of store closings exceeding store openings and acquired franchisees.
COSTS AND EXPENSES
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Cost of sales – factory adjusted | $ | 19,151.7 | $ | 18,432.3 | $ | 719.4 | 3.9 | % | ||||||||
Cost of sales – retail | 1,714.8 | 2,177.3 | (462.5 | ) | (21.2 | %) | ||||||||||
Franchise costs | 2,452.6 | 2,264.1 | 188.5 | 8.3 | % | |||||||||||
Sales and marketing | 2,466.5 | 2,474.0 | (7.5 | ) | (0.3 | %) | ||||||||||
General and administrative | 4,663.9 | 4,831.9 | (168.0 | ) | (3.5 | %) | ||||||||||
Retail operating | 2,951.8 | 3,509.6 | (557.8 | ) | (15.9 | %) | ||||||||||
Total | $ | 33,401.3 | $ | 33,689.2 | $ | ( 287.9 | ) | (0.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total | $ | 10,494.3 | $ | 11,491.0 | $ | ( 996.7 | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 27.3 | % | 28.8 | % | (1.5% | ) | (5.2% | ) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total | 33.5 | % | 35.8 | % | (2.3% | ) | (6.4% | ) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Plus: depreciation and amortization | 404.4 | 393.8 | 10.6 | 2.7 | % | |||||||||||
Factory adjusted gross margin | 7,608.5 | 7,856.1 | (247.6 | ) | (3.2 | %) | ||||||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 10,898.7 | $ | 11,884.8 | $ | ( 986.1 | ) | (8.3 | %) | |||||||
Factory adjusted gross margin | 28.9 | % | 30.3 | % | (1.4 | %) | (4.6 | %) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total Adjusted Gross Margin | 34.8 | % | 37.0 | % | (2.2 | %) | (5.9 | %) |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 150 basis points during FY 2016 compared to FY 2015 due primarily to increased costs of certain materials and a shift in product and customer mix. The increase in Company-owned store margin is due primarily to the sale or closure of certain underperforming Company-owned stores and cafés.
Franchise Costs
The increase in franchise costs for FY 2016 compared to FY 2015 is due primarily to franchise costs associated with supporting U-Swirl franchise units. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.0% during FY 2016 from 24.1% during FY 2015. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of a 3.3% decrease in royalty, marketing and franchise fee revenue as a result of a decrease in the number of domestic franchise stores during FY 2016 compared to FY 2015.
Sales and Marketing
Sales and marketing costs were approximately unchanged during FY 2016 compared to FY 2015.
General and Administrative
The decrease in general and administrative costs during FY 2016 compared to FY 2015 is due primarily to the reorganization of U-Swirl in the prior year and the associated focus on reduction of duplicative general and administrative costs, partially offset by an increase in professional fees. During FY 2016, approximately $1,291,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,651,000 during FY 2015. As a percentage of total revenues, general and administrative expenses decreased to 11.5% in FY 2016 compared to 11.6% in FY 2015.
Retail Operating Expenses
The decrease in retail operating expense was due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of certain underperforming Company-owned units. The average number of Company-owned stores in operation decreased from 16 during FY 2015 to 12 units during FY 2016. Retail operating expenses, as a percentage of retail sales, increased from 56.6% during FY 2015 to 59.0% in FY 2016. This increase is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $1,016,000 during FY 2016, a decrease of 3.0% from $1,047,000 incurred during FY 2015. This decrease is due to a decrease in amortization related to franchise rights, trademark and intangible assets. Depreciation and amortization included in cost of sales increased 2.5% from $394,000 during FY 2015 to $404,000 during FY 2016. This increase was the result of an increase in production assets in service.
Other Income
Net interest expense was $167,900 in FY 2016 compared to net interest expense of $184,500 in FY 2015. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions of U-Swirl.
Income Tax Expense
We realized an income tax benefit of $261,400 in FY 2016 compared to expense of $2,037,695, an effective rate of 35.3%, during FY 2015.2018. As described further in Note 6 to the consolidated financial statements, the decrease in the effective tax rate is primarily due to the revaluation of deferred tax consequencesassets and liabilities to the lower enacted U.S. corporate tax rate of 21% under the recent Tax Cuts and Jobs Act recognized during FY 2018, with no comparable revaluation recognized during FY 2019. Additionally, the decrease in the effective tax rate during FY 2019 compared to 2018 was due to the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act being effective for all of FY 2019 and only two months of FY 2018.
Fiscal 2018 Compared To Fiscal 2017
A discussion of our controlling interestresults of operations for FY 2018 in U-Swirl.comparison to FY 2017 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Fiscal Year Ended February 28, 2018.
Liquidity and Capital Resources
As of February 28, 2017,28, 2019, working capital was $7.1$9.5 million compared with $7.2$7.4 million as of February 29, 2016.28, 2018. The decreaseincrease in working capital was due primarily to the impact of the adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 and our operating results less the payment of $2.8 million in cash dividends, $1.4 million in debt repayments and the purchase of $1.2 million$614,000 of property and equipment and $1.3 million in debt repayments.equipment. We have historically generated excess operating cash flow. We review our working capital needs and projections and when we believe that we have greater working capital than necessary we have historically utilized that excess working capital to repurchase common stock and pay dividends to our stockholders. This trend continued during FY 2017, resulting in the decrease in working capital at February 28, 2017 compared with February 29, 2016.
Cash and cashcash equivalent balances decreased from $6.2 million as of February 29, 2016 to $5.8$6.1 million as of February 28, 20172018 to $5.4 million as of February 28, 2019 as a result of cash flows generated by operating activities being less than cash flows used in financing and investing activities. The Company’sOur current ratio was 3.0 to 1.0 at February 28, 2019 compared to 1.9 to 1.0 at February 28, 2017, which was the same at February 29, 2016. The Company monitors2018. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2017,2019, we had net income of $3.45$2.2 million. Operating activities provided cash of $5.3$4.0 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.7 million and stock compensation expense of $520,000. During FY 2018, we had net income of $3.0 million. Operating activities provided cash of $4.8 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock compensation expense of $0.6 million. During FY 2016, we had net income of $3.8 million, and operating activities provided cash of $6.8 million. The principal adjustment to reconcile the net income to net cash provided by operating activities was asset impairments of $2.3 million, depreciation and amortization of $1.4 million and stock compensation expense of $0.8 million.
During FY 2017,2019, investing activities used cash of $1.3 million,$506,000, primarily due to the purchases of property and equipment of $1.2 million$614,000 the result of investment in factory infrastructure improvements.improvements, partially offset by proceeds received on notes receivable of $102,000. In comparison, investing activities used cash of $0.7 million$340,000 during FY 20162018 primarily due to the purchases of property and equipment of $0.7 million.$545,000 the result of investment in factory infrastructure improvements, partially offset by proceeds received on notes receivable of $231,000.
Financing activities used cash of $4.4$4.2 million during FY 20172019 and used cash of $7.1$4.1 million during the prior year. ThisThe increase in cash used in financing activities was primarily due to a decreasean increase in the amount of common stock repurchased during FY 2017.debt service being applied to principal, the result of lower interest expense.
The Company has a $5$5.0 million credit line for general corporate and working capital purposes, of which $5$5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2017,2019. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (4.7% at February 28, 2019). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2017.2019 and the Company believes it is likely to be renewed on terms similar to the current terms.
The Company’sCompany’s long-term debt is comprised of a promissory note used to finance prior business acquisitions of U-Swirlby SWRL (unpaid balance as of February 28, 2017, $3.82019, $1.2 million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. This promissory note matures in January 2020. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of February 28, 2017,2019, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets
TheThe table below presents significant contractual obligations of the Company at February 28, 2017.2019.
(Amounts in thousands)
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | 3,832 | 1,303 | 2,529 | - | - | |||||||||||||||
Operating leases | 2,166 | 817 | 980 | 176 | 193 | |||||||||||||||
Other long-term obligations | 472 | 189 | 171 | 112 | - | |||||||||||||||
Total | 6,470 | 2,309 | 3,680 | 288 | 193 |
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | $ | 1,176 | $ | 1,176 | $ | - | $ | - | $ | - | ||||||||||
Operating leases | 2,949 | 758 | 1,333 | 683 | 175 | |||||||||||||||
Purchase contracts | 880 | 880 | - | - | - | |||||||||||||||
Other long-term obligations | 231 | 135 | 96 | - | - | |||||||||||||||
Total | $ | 5,236 | $ | 2,949 | $ | 1,429 | $ | 683 | $ | 175 |
For FY 2018,2020, the Company anticipates making capital expenditures of approximately $1.0 million,$900,000, which will be used to maintain and improve existing factory and administrative infrastructure. The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2018.2020. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
Operating leases: Our Company-owned stores are occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, some of which contain optional renewal rights. We also lease warehouse facilities to support our manufacturing operations and we lease most of our transportation equipment. We do not deem any individual lease to be significant in relation to our overall operations.
Purchase obligations: As of February 28, 2017,28, 2019, we had no off-balance sheet arrangements or obligations.purchase obligations of approximately $880,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’sCompany’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s 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 the Company’s 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria. We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we ordinarily extend credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
We recorded an average expense of approximately $174,300$149,000 per year for potential uncollectible accounts over the three-year period ended February 28, 2017.2019. Write-offs of uncollectible accounts net of recoveries averaged approximately $195,900$209,500 over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over the past three years, the allowances for doubtful notes and accounts have ranged from 10.7%10.0% to 12.6%10.7% of gross receivables.
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. FranchiseBeginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of the associated agreement, which is generally a period of 10-15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon the opening of the store. International license fees are recognizedfranchise store, or upon the execution of thean international license agreement and payment of the license fee.agreement. We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with franchise store openings in the third quarter of FY 2004, we modified our royalty structure. Under the current structure, we recognizeThe Company recognizes no royalty on Rocky Mountain Chocolate Factory franchised stores’ retail sales of products purchased from usthe Company and recognizerecognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. ForRoyalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise stores opened priorrights and range from 2.5% to the third quarter6% of FY 2004 we recognize a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28, 2017,2019, the Company recorded expense averaging $110,600$228,900 per year for potential inventory losses, or approximately 0.5%1.1% of total cost of sales for that period.
Consolidation – The consolidated financial statements in this Annual Report include the accounts of the Company and its subsidiaries. On January 14, 2013 we acquired a controlling interest in U-Swirl. Prior to January 14, 2013, our consolidated financial statements exclude the financial information of U-Swirl. Beginning on January 14, 2013 and continuing through February 28, 2017,2019, the results of operations, assets and liabilities of U-Swirl have been included in our consolidated financial statements. All material inter-Company balances have been eliminated upon consolidation.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. We previously entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with acquisitions of SWRL (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. On February 29, 2016, RMCF repossessed all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement with SWRL. As described in Note 1 below, this was the result of SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants.Agreement. As of February 29, 2016 U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. RMCFWe performed a test of impairment as a result of the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the financial statements.
Franchise Rights – Franchise rights consists of the purchase price paid in consideration of certain rights associated with franchise agreements. These franchise agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.
Other accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with its evaluation of the recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrumentsinstruments for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 2017,2019, based on future contractual obligations for chocolate products, we estimate that a 10% increase or decrease in the prices of contracted ingredients would result in a $259,000an $88,000 favorable or unfavorable price benefit or cost resulting from our commodity purchase contracts.
The Company has a $5$5 million bank line of credit that bears interest at a variable rate. As of February 28, 2017,2019, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of February 28, 2017, $3.82019, $1.2 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.
ITEMITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page | |
|
|
35 | |
36 | |
37 | |
38 | |
39 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders of
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Durango, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Rocky Mountain Chocolate Factory, Inc. and Subsidiaries (the “Company”) as of February 28, 2017 and February 29, 2016, and28, 2019, the related consolidated statementsstatement of income, changes in stockholders’stockholders' equity, and cash flows for each of the years in the three-year periodyear ended February 28, 2017. Our audits also included2019, and the consolidatedrelated notes (collectively referred to as the “financial statements”). In our opinion, the financial statement schedule listedstatements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and the results of its operations and its cash flows for the year ended February 28, 2019, in conformity with accounting principles generally accepted in the Index at Item 15. These consolidatedUnited States of America.
As discussed in Note 1 to the financial statements, and schedule are the responsibility ofCompany adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the Company’s management.modified retrospective adoption method on March 1, 2018.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements and schedule based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting (“Internal Control”). Ourreporting. As part of our audit included considerationwe are required to obtain an understanding of Internal Control as a basis for designing audit procedures that are appropriate in the circumstances,internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s Internal Control.Company's internal control over financial reporting. Accordingly, we express no such opinion. An
Our audit also includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidatedpresentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 and 17 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on March 1, 2018.
We have audited the impact to the 2018 financial statements as disclosed under the modified retrospective method as a result of the adoption of ASC Topic 606, “Revenue from Contracts with Customers”, as described in Note 1 and 17 to the financial statements. In our opinion, the consolidatedimpacts are appropriate and have been properly disclosed. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the impacts disclosed and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements taken as a whole.
/s/ Plante & Moran, PLLC
Denver, Colorado
May 8, 2019
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2018, the related statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. and Subsidiariesthe Company as of February 28,28, 2018 and 2017, and February 29, 2016, and the results of theirits operations and theirits cash flows for each of the years in the three-yeartwo-year period ended February 28, 20172018, in conformity with accounting principles generally accepted in the United States of America. Also, in
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our opinion,audits. We are a public accounting firm registered with the related financial statement schedule, when considered in relationPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the basic consolidatedCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements taken as a whole, presents fairly in allare free of material respects,misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the information set forth therein.purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EKS&H LLLP
May 23, 2017
Denver, Colorado
May 15, 2018
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 29,876,507 | $ | 31,360,745 | $ | 32,100,824 | ||||||
Franchise and royalty fees | 8,419,870 | 9,096,150 | 9,407,552 | |||||||||
Total revenues | 38,296,377 | 40,456,895 | 41,508,376 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,735,739 | 20,866,482 | 20,609,609 | |||||||||
Franchise costs | 2,067,530 | 2,452,609 | 2,264,138 | |||||||||
Sales & marketing | 2,658,421 | 2,466,469 | 2,474,027 | |||||||||
General and administrative | 4,005,142 | 4,663,914 | 4,831,903 | |||||||||
Retail operating | 2,404,003 | 2,951,783 | 3,509,584 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $447,651, $404,391 and $393,776, respectively, included in cost of sales | 841,058 | 1,015,910 | 1,046,672 | |||||||||
Impairment of long-lived assets and goodwill | - | 2,326,742 | - | |||||||||
Restructuring and acquisition related charges | 60,000 | - | 807,476 | |||||||||
Total costs and expenses | 32,771,893 | 36,743,909 | 35,543,409 | |||||||||
Operating Income | 5,524,484 | 3,712,986 | 5,964,967 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (170,351 | ) | (216,600 | ) | (243,188 | ) | ||||||
Interest income | 41,572 | 48,745 | 58,662 | |||||||||
Other, net | (128,779 | ) | (167,855 | ) | (184,526 | ) | ||||||
Income Before Income Taxes | 5,395,705 | 3,545,131 | 5,780,441 | |||||||||
Income Tax Expense (Benefit) | 1,945,589 | (261,400 | ) | 2,037,695 | ||||||||
Net Income | 3,450,116 | 3,806,531 | 3,742,746 | |||||||||
Less: Net loss attributable to non-controlling interest | - | (619,376 | ) | (195,094 | ) | |||||||
Net Income attributable to RMCF stockholders | $ | 3,450,116 | $ | 4,425,907 | $ | 3,937,840 | ||||||
Basic Earnings per Common Share | $ | 0.59 | $ | 0.75 | $ | 0.64 | ||||||
Diluted Earnings per Common Share | $ | 0.58 | $ | 0.73 | $ | 0.61 | ||||||
Weighted Average Common Shares Outstanding | 5,843,245 | 5,893,618 | 6,144,426 | |||||||||
Dilutive Effect of Employee Stock Awards | 150,447 | 201,856 | 268,913 | |||||||||
Weighted Average Common Shares Outstanding, Assuming Dilution | 5,993,692 | 6,095,474 | 6,413,339 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 27,563,794 | $ | 30,167,760 | $ | 29,876,507 | ||||||
Franchise and royalty fees | 6,981,653 | 7,906,935 | 8,419,870 | |||||||||
Total Revenue | 34,545,447 | 38,074,695 | 38,296,377 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,599,551 | 21,176,711 | 20,735,739 | |||||||||
Franchise costs | 1,980,781 | 2,097,555 | 2,067,530 | |||||||||
Sales and marketing | 2,210,800 | 2,489,483 | 2,658,421 | |||||||||
General and administrative | 3,432,618 | 3,904,560 | 4,005,142 | |||||||||
Retail operating | 1,934,891 | 2,389,296 | 2,404,003 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $555,926, $523,034, and $447,651, respectively, included in cost of sales | 1,153,873 | 796,221 | 841,058 | |||||||||
Costs associated with Company-owned store closures | 226,981 | - | 60,000 | |||||||||
Total costs and expenses | 31,539,495 | 32,853,826 | 32,771,893 | |||||||||
Income from Operations | 3,005,952 | 5,220,869 | 5,524,484 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (70,787 | ) | (121,244 | ) | (170,351 | ) | ||||||
Interest income | 20,496 | 24,578 | 41,572 | |||||||||
Other expense, net | (50,291 | ) | (96,666 | ) | (128,779 | ) | ||||||
Income Before Income Taxes | 2,955,661 | 5,124,203 | 5,395,705 | |||||||||
Income Tax Provision | 716,862 | 2,160,295 | 1,945,589 | |||||||||
Consolidated Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Basic Earnings per Common Share | $ | 0.38 | $ | 0.50 | $ | 0.59 | ||||||
Diluted Earnings per Common Share | $ | 0.37 | $ | 0.50 | $ | 0.58 | ||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Basic | 5,931,431 | 5,884,337 | 5,843,245 | |||||||||
Dilutive Effect of Employee | ||||||||||||
Stock Awards | 51,207 | 96,099 | 150,447 | |||||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Diluted | 5,982,638 | 5,980,436 | 5,993,692 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28 or 29, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,779,195 | $ | 6,194,948 | ||||
Accounts receivable, less allowance for doubtful accounts of $487,446 and $595,471, respectively | 3,855,823 | 3,799,691 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $22,147 and $0, respectively | 235,612 | 317,248 | ||||||
Refundable income taxes | 47,863 | - | ||||||
Inventories, less reserve for slow moving inventory of $249,051 and $261,346, respectively | 4,975,779 | 4,840,108 | ||||||
Other | 256,548 | 286,859 | ||||||
Total current assets | 15,150,820 | 15,438,854 | ||||||
Property and Equipment, Net | 6,457,931 | 6,010,303 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and allowance for doubtful accounts of $26,500 and $75,000, respectively | 370,769 | 530,446 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights | 4,826,172 | 5,153,363 | ||||||
Intangible assets, net | 632,207 | 419,042 | ||||||
Deferred income taxes | 858,874 | 1,421,655 | ||||||
Other | 74,639 | 295,118 | ||||||
Total other assets | 7,809,605 | 8,866,568 | ||||||
Total Assets | $ | 29,418,356 | $ | 30,315,725 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,302,501 | $ | 1,254,007 | ||||
Accounts payable | 1,820,470 | 1,663,245 | ||||||
Accrued salaries and wages | 608,510 | 683,863 | ||||||
Gift card liabilities | 2,921,585 | 2,835,943 | ||||||
Other accrued expenses | 253,497 | 364,955 | ||||||
Dividend payable | 702,525 | 700,728 | ||||||
Deferred income | 451,171 | 502,950 | ||||||
Total current liabilities | 8,060,259 | 8,005,691 | ||||||
Long-Term Debt, Less Current Maturities | 2,529,240 | 3,831,126 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock, authorized 50,000 shares | - | - | ||||||
Undesignated series, authorized 200,000 shares | - | - | ||||||
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,854,372 and 5,839,396 issued, and 5,854,372 and 5,839,396 outstanding, respectively | 5,854 | 5,839 | ||||||
Additional paid-in capital | 5,539,357 | 5,340,190 | ||||||
Retained earnings | 13,283,646 | 13,132,879 | ||||||
Total stockholders’ equity | 18,828,857 | 18,478,908 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 29,418,356 | $ | 30,315,725 |
AS OF FEBRUARY 28, | ||||||||
2019 | 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,384,027 | $ | 6,072,984 | ||||
Accounts receivable, less allowance for doubtful accounts of $489,502 and $479,472, respectively | 3,993,262 | 3,897,334 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $0 and $9,000, respectively | 110,162 | 105,540 | ||||||
Refundable income taxes | 190,201 | 342,863 | ||||||
Inventories, less reserve for slow moving inventory of $371,147 and $357,706, respectively | 4,270,357 | 4,842,474 | ||||||
Other | 318,126 | 310,173 | ||||||
Total current assets | 14,266,135 | 15,571,368 | ||||||
Property and Equipment, Net | 5,786,139 | 6,166,240 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and valuation allowance of $0 and $17,500, respectively | 281,669 | 235,983 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights, net | 3,678,920 | 4,433,927 | ||||||
Intangible assets, net | 498,337 | 587,377 | ||||||
Deferred income taxes | 607,421 | 835,463 | ||||||
Other | 56,576 | 63,333 | ||||||
Total other assets | 6,169,867 | 7,203,027 | ||||||
Total Assets | $ | 26,222,141 | $ | 28,940,635 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,176,488 | $ | 1,352,893 | ||||
Accounts payable | 897,074 | 1,647,991 | ||||||
Accrued salaries and wages | 655,853 | 644,005 | ||||||
Gift card liabilities | 742,289 | 3,057,131 | ||||||
Other accrued expenses | 293,094 | 325,034 | ||||||
Dividend payable | 714,939 | 708,652 | ||||||
Contract liabilities | 256,094 | 471,910 | ||||||
Total current liabilities | 4,735,831 | 8,207,616 | ||||||
Long-Term Debt, Less Current Maturities | - | 1,176,416 | ||||||
Contract Liabilities, Less Current Portion | 1,096,478 | - | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock; 50,000 authorized; -0- shares issued and outstanding | - | - | ||||||
Undesignated series; 200,000 shares authorized; -0- shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 5,957,827 shares and 5,903,436 shares issued and outstanding, respectively | 5,958 | 5,903 | ||||||
Additional paid-in capital | 6,650,864 | 6,131,147 | ||||||
Retained earnings | 13,733,010 | 13,419,553 | ||||||
Total stockholders' equity | 20,389,832 | 19,556,603 | ||||||
Total Liabilities and Stockholders' Equity | $ | 26,222,141 | $ | 28,940,635 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,839 | $ | 180,384 | $ | 184,206 | ||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | (174,371 | ) | - | ||||||||
Repurchase and retirement of common stock | (35 | ) | (233 | ) | (7,383 | ) | ||||||
Issuance of common stock | 2 | 4 | 120 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48 | 55 | 3,441 | |||||||||
Balance at end of year | 5,854 | 5,839 | 180,384 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 5,340,190 | 7,163,092 | 8,921,723 | |||||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | 174,371 | - | |||||||||
Repurchase and retirement of common stock | (351,548 | ) | (3,030,475 | ) | (3,120,241 | ) | ||||||
Issuance of common stock | 20,418 | 61,036 | 47,360 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 564,425 | 602,498 | 731,400 | |||||||||
Transfers from non-controlling interest | - | 349,800 | 382,306 | |||||||||
Tax (expense) benefit from employee stock transactions | (34,128 | ) | 19,868 | 200,544 | ||||||||
Balance at end of year | 5,539,357 | 5,340,190 | 7,163,092 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,132,879 | 11,524,708 | 10,344,794 | |||||||||
Net income attributable to RMCF stockholders | 3,450,116 | 4,425,907 | 3,937,840 | |||||||||
Cash dividends declared | (2,806,583 | ) | (2,817,736 | ) | (2,757,926 | ) | ||||||
Correction of immaterial error1 | (492,766 | ) | - | - | ||||||||
Balance at end of year | 13,283,646 | 13,132,879 | 11,524,708 | |||||||||
Non-controlling Interest in Equity of Subsidiary | ||||||||||||
Balance at beginning of year | - | 869,671 | 401,655 | |||||||||
Net loss | - | (619,376 | ) | (195,094 | ) | |||||||
Deductions | - | (310,995 | ) | - | ||||||||
Contributions | - | 60,700 | 663,110 | |||||||||
Balance at end of year | - | - | 869,671 | |||||||||
Total Stockholders’ Equity | $ | 18,828,857 | $ | 18,478,908 | $ | 19,737,855 | ||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,839,396 | 6,012,799 | 6,140,200 | |||||||||
Repurchase and retirement of common stock | (35,108 | ) | (233,302 | ) | (246,106 | ) | ||||||
Issuance of common stock | 2,000 | 4,000 | 4,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48,084 | 55,899 | 114,705 | |||||||||
Balance at end of year | 5,854,372 | 5,839,396 | 6,012,799 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,903 | $ | 5,854 | $ | 5,839 | ||||||
Repurchase and retirement of common stock | - | - | (35 | ) | ||||||||
Issuance of common stock | 6 | 5 | 2 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49 | 44 | 48 | |||||||||
Balance at end of year | 5,958 | 5,903 | 5,854 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 6,131,147 | 5,539,357 | 5,340,190 | |||||||||
Repurchase and retirement of common stock | - | - | (351,548 | ) | ||||||||
Issuance of common stock | 55,971 | 59,095 | 20,418 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 463,746 | 532,695 | 564,425 | |||||||||
Tax (expense) benefit from employee stock transactions | - | - | (34,128 | ) | ||||||||
Balance at end of year | 6,650,864 | 6,131,147 | 5,539,357 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,419,553 | 13,283,646 | 13,132,879 | |||||||||
Net income attributable to RMCF stockholders | 2,238,799 | 2,963,908 | 3,450,116 | |||||||||
Cash dividends declared | (2,851,271 | ) | (2,828,001 | ) | (2,806,583 | ) | ||||||
Correction of immaterial error1 | - | - | (492,766 | ) | ||||||||
Adoption of ASC 6062 | 925,929 | - | - | |||||||||
Balance at end of year | 13,733,010 | 13,419,553 | 13,283,646 | |||||||||
Total Stockholders' Equity | 20,389,832 | 19,556,603 | 18,828,857 | |||||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,903,436 | 5,854,372 | 5,839,396 | |||||||||
Repurchase and retirement of common stock | - | - | (35,108 | ) | ||||||||
Issuance of common stock | 5,333 | 5,000 | 2,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49,058 | 44,064 | 48,084 | |||||||||
Balance at end of year | 5,957,827 | 5,903,436 | 5,854,372 |
1 As revised. Refer to Note 1716 for information on immaterial correction of errors in prior period.
2 Refer to Note 17 for information on the adoption of ASC 606.
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 3,450,116 | $ | 3,806,531 | $ | 3,742,746 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,288,709 | 1,420,301 | 1,440,448 | |||||||||
Provision for loss on accounts and notes receivable | 138,125 | 171,000 | 214,600 | |||||||||
Provision for inventory loss | 100,049 | 76,695 | 58,836 | |||||||||
Asset impairment and store closure losses | - | 2,319,003 | 225,640 | |||||||||
(Gain) loss on sale of assets | 37,112 | 90,149 | (46,857 | ) | ||||||||
Expense recorded for stock compensation | 584,893 | 763,094 | 865,240 | |||||||||
Deferred income taxes | 262,248 | (1,878,205 | ) | (55,068 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (128,404 | ) | 364,767 | 662,625 | ||||||||
Refundable income taxes | (47,863 | ) | 172,945 | (12,055 | ) | |||||||
Inventories | (2,735 | ) | 144,454 | (202,333 | ) | |||||||
Other assets | 29,442 | 24,415 | (16,087 | ) | ||||||||
Accounts payable | (87,657 | ) | (310,533 | ) | (451,080 | ) | ||||||
Accrued liabilities | (293,402 | ) | 154,800 | 325,544 | ||||||||
Deferred income | (9,619 | ) | (531,331 | ) | (880,684 | ) | ||||||
Net cash provided by operating activities | 5,321,014 | 6,788,085 | 5,871,515 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Additions to notes receivable | (133,202 | ) | (46,489 | ) | (179,569 | ) | ||||||
Proceeds received on notes receivable | 318,219 | 368,122 | 488,691 | |||||||||
Proceeds from sale or distribution of assets | 39,045 | 23,692 | 530,175 | |||||||||
Intangible assets | (312,947 | ) | (83,103 | ) | - | |||||||
Decrease (increase) in other assets | 34,479 | (212,860 | ) | (2,395 | ) | |||||||
Purchase of property and equipment | (1,238,472 | ) | (743,251 | ) | (626,744 | ) | ||||||
Net cash (used in) provided by investing activities | (1,292,878 | ) | (693,889 | ) | 210,158 | |||||||
Cash Flows From Financing Activities: | ||||||||||||
Payments on long-term debt | (1,253,392 | ) | (1,207,234 | ) | (107,633 | ) | ||||||
Repurchase of common stock | (351,583 | ) | (3,030,708 | ) | (3,127,624 | ) | ||||||
Issuance of common stock | - | - | 69,599 | |||||||||
Proceeds from issuance of common stock in subsidiary | - | - | 892,895 | |||||||||
Tax (expense) benefit of stock option exercise | (34,128 | ) | 19,868 | 200,544 | ||||||||
Dividends paid | (2,804,786 | ) | (2,838,545 | ) | (2,711,812 | ) | ||||||
Net cash used in financing activities | (4,443,889 | ) | (7,056,619 | ) | (4,784,031 | ) | ||||||
Net (Decrease) Increase In Cash And Cash Equivalents | (415,753 | ) | (962,423 | ) | 1,297,642 | |||||||
Cash And Cash Equivalents At Beginning Of Year | 6,194,948 | 7,157,371 | 5,859,729 | |||||||||
Cash And Cash Equivalents At End Of Year | $ | 5,779,195 | $ | 6,194,948 | $ | 7,157,371 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,709,799 | 1,319,255 | 1,288,709 | |||||||||
Provision for obsolete inventory | 325,478 | 166,868 | 138,125 | |||||||||
Provision for loss on accounts and notes receivable | 155,600 | 225,858 | 100,049 | |||||||||
Asset impairment and store closure losses | 67,822 | - | - | |||||||||
Loss on sale or disposal of property and equipment | 36,024 | 38,496 | 37,112 | |||||||||
Expense recorded for stock compensation | 519,772 | 591,839 | 584,893 | |||||||||
Deferred income taxes | (78,934 | ) | 23,411 | 262,248 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (390,663 | ) | (229,948 | ) | (128,404 | ) | ||||||
Refundable income taxes | 157,544 | (295,000 | ) | (47,863 | ) | |||||||
Inventories | 41,310 | (365,323 | ) | (2,735 | ) | |||||||
Other current assets | (8,225 | ) | (54,091 | ) | 29,442 | |||||||
Accounts payable | (545,588 | ) | 96,491 | (87,657 | ) | |||||||
Accrued liabilities | (84,191 | ) | 242,578 | (293,402 | ) | |||||||
Contract Liabilities | (129,527 | ) | 33,270 | (9,619 | ) | |||||||
Net cash provided by operating activities | 4,015,020 | 4,757,612 | 5,321,014 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Addition to notes receivable | - | (14,293 | ) | (133,202 | ) | |||||||
Proceeds received on notes receivable | 102,256 | 230,637 | 318,219 | |||||||||
Purchase of intangible assets | - | (8,508 | ) | (312,947 | ) | |||||||
Proceeds from (cost of) sale or distribution of assets | 13,498 | (7,926 | ) | 39,045 | ||||||||
Purchases of property and equipment | (613,786 | ) | (544,956 | ) | (1,238,472 | ) | ||||||
(Increase) decrease in other assets | (8,140 | ) | 5,529 | 34,479 | ||||||||
Net cash used in investing activities | (506,172 | ) | (339,517 | ) | (1,292,878 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Payments on long-term debt | (1,352,821 | ) | (1,302,432 | ) | (1,253,392 | ) | ||||||
Repurchase of common stock | - | - | (351,583 | ) | ||||||||
Tax expense of stock option exercise | - | - | (34,128 | ) | ||||||||
Dividends paid | (2,844,984 | ) | (2,821,874 | ) | (2,804,786 | ) | ||||||
Net cash used in financing activities | (4,197,805 | ) | (4,124,306 | ) | (4,443,889 | ) | ||||||
Net Decrease in Cash and Cash Equivalents | (688,957 | ) | 293,789 | (415,753 | ) | |||||||
Cash and Cash Equivalents, Beginning of Period | 6,072,984 | 5,779,195 | 6,194,948 | |||||||||
Cash and Cash Equivalents, End of Period | $ | 5,384,027 | $ | 6,072,984 | $ | 5,779,195 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS 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) and, Aspen Leaf Yogurt, LLC (“ALY”), its 39%-owned subsidiary, U-Swirl, Inc. (“SWRL”), and U-Swirl International, Inc. (“U-Swirl”), a wholly-ownedand its 46%-owned subsidiary, as of February 29, 2016U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.
Effective March 1, 2015, the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03 per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001, of Newco. The new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), the Company entered into two agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to SWRL, in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of February 29, 2016 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. As of February 28, 2017, the Company held a 39% interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving as the Company’s Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. becoming a wholly-owned subsidiary of the Company as of February 29, 2016. As of February 29, 2016 U-Swirl, Inc. had no assets.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’sCompany’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2017:2019:
Sold, Not Yet Open |
Open |
Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 4 | 4 | |||||||||
Franchise stores – Domestic stores and kiosks | 6 | 189 | 195 | |||||||||
International License Stores | - | 94 | 94 | |||||||||
Cold Stone Creamery – co-branded | 5 | 83 | 88 | |||||||||
U-Swirl cafés (Including all associated brands) | ||||||||||||
Company-owned cafés | - | 2 | 2 | |||||||||
Company-owned cafés – co-branded | - | 3 | 3 | |||||||||
Franchise stores – North American cafés | * | 129 | 129 | |||||||||
Franchise stores – North American – co-branded | * | 16 | 16 | |||||||||
International License cafés | - | 2 | 2 | |||||||||
Total | 11 | 522 | 533 |
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Sold, Not Yet Open | Open | Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 2 | 2 | |||||||||
Franchise stores - Domestic stores and kiosks | 4 | 183 | 187 | |||||||||
International license stores | 1 | 64 | 65 | |||||||||
Cold Stone Creamery - co-branded | 11 | 91 | 102 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores | - | 1 | 1 | |||||||||
Company-owned stores - co-branded | - | 3 | 3 | |||||||||
Franchise stores - Domestic stores | - | 87 | 87 | |||||||||
Franchise stores - Domestic - co-branded | - | 9 | 9 | |||||||||
International license stores | - | 2 | 2 | |||||||||
Total | 16 | 442 | 458 |
Consolidation
ManagementManagement accounts for the activities of the Company and its subsidiaries, and the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As described above, on January 14, 2013, the Company acquired a controlling interest in SWRL. Prior to January 14, 2013, the Company’s consolidated financial statements excludeexcluded the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets and liabilities of SWRL have been included in these consolidated financial statements. The Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under a loan and security agreement with SWRL to cover the SWRLpurchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement.Agreement”). This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February 29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $5.3$4.9 million at February 28, 2017.2019.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business, we extendthe Company extends credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At February 28, 2017,2019, the Company has $655,028had $391,831 of notes receivable outstanding and an allowance for doubtful accounts of $48,647$0 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through September, 2022November 2023 and approximately $579,000$375,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’sCompany’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.
Income Taxes
We provideThe 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 bases 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. Due to historical U-Swirl losses, prior to FY 2016 wethe Company established a full valuation allowance on ourthe Company’s deferred tax assets. During FY 2016 wethe Company took possession of the outstanding equity in U-Swirl International, Inc.U-Swirl. As a result of ourthe Company’s ownership increasing to 100%, wethe Company began filing consolidated income tax returns in FY 2017. Because of this change, we havethe Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 wethe Company further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The correction of this immaterial error to ourthe Company’s balance sheet is further described in Note 17.16. The Company's temporary differences are listed in Note 6.
Gift Card Breakage
The Company and ourits franchisees sell gift cards that are redeemable for product in our stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on ourthe Company’s gift cards, and we dothe Company does not charge any service fees. While ourthe Company’s franchisees continue to honor all gift cards presented for payment, wethe Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is inredeemed by the processcustomer or the Company determines the likelihood of accumulating sufficient historical redemption patterns to calculate breakage estimates related to unredeemedthe gift cards. Thiscard being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based on a percentage of sales when the likelihood of the redemption of the gift card becomes remote. When the Company has sufficientupon Company-specific historical redemption patterns to calculate breakage estimates, the gift card breakage will be recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. As the Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage estimates, the Company did not recognize gift card breakage during the year ended February 28 or 29, 2017 or 2016.patterns. Accrued gift card liability was $2,921,585$742,289 and $2,835,943$3,057,131 at February 28, or 29, 20172019 and 2016,2018, respectively. The Company recognized breakage of $139,188 and $0 during FY 2019 and FY 2018, respectively. See Note 17 to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC 606.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of ourthe Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the SWRL Loan Agreement with SWRL.Agreement. This was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of goodwill recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership and the result of ourthe Company’s test indicated a full impairment of the U-Swirl goodwill. OurThe Company’s testing and impairment is described in Note 13 to the financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under the acquisition method, the purchase price of the acquisition is allocated to the underlying tangible and intangible assets acquired based on their respective fair values. Fair values are derived from various observable and unobservable inputs and assumptions. The Company utilizes third-party valuation specialists to assist in the allocation. Initial purchase price allocations are preliminary and are subject to revision within the measurement period, not to exceed one year from the date of acquisition. The costs of the business acquisitions are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Moreover, unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to ourthe Company’s franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’sCompany’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
FranchiseBeginning in FY 2019, upon adoption of adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with Rocky Mountain Chocolate Factory franchise store openings in the third quarter of FY 2004, the Company modified its royalty structure. Under the current structure, theThe Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 the Company recognizes a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain instances, we arethe Company is required to pay a portion of franchise fee revenue, or royalty fees to parties we’vethe Company has contracted with to assist in developing and growing a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the ongoing royalty fees, or both. When such agreements exist, we reportthe Company reports franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of the Company’s Manufacturingour manufacturing segment represented approximately $4.1$3.1 million or 11%9% of the Company’sour total revenues during the year ended February 28, 2017. The Company’s2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by a changefurther decreases in the purchases of this customer.customer or the loss of this customer entirely.
Stock-Based Compensation
At February 28, 2017,28, 2019, the Company had one stock-based compensation plans, which currently consists solely ofplan, the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $584,893, $763,094,$519,772, $591,839, and $865,240$584,893 related to equity-based compensation expense during the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
TaxBeginning March 1, 2017, the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement. Prior to March 1, 2017 tax benefits or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the accompanying Statements of Cash Flows. The excess tax benefit or (expense)expense included in net cash provided by financing activities for the years ended February 28, or 29, 2017 2016 and 2015 was $(34,128), $19,868 and $200,544, respectively.$34,128.
During FY 20172019 and 2016,2018, the Company granted no restricted stock units. There were no stock options granted to employees during FY 20172019 or FY 2016.2018. The restricted stock unit grants generally vest 17-20%17 to 20% annually over a period of five to six years. The Company recognized $564,473$463,795 of consolidated stock-based compensation expense related to these grants made in prior years during FY 20172019 compared with $602,554$532,739 in FY 2016.2018 and $564,473 in FY 2017. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 20172019 was $1,179,492,$114,183, which is expected to be recognized over the weighted average period of 2.20.4 years.
During FY 2017, theThe Company issued 2,000 fully-vested, unrestricted shares to non-employee directors compared with 4,000 fully-vested,fully vested, unrestricted shares of stock to non-employee directors in FY 2016.during the year ended February 28, 2019 compared to no shares issued during the year ended February 28, 2018 and 2,000 issued during the year ended February 28, 2017. In connection with these non-employee director stock issuances, the Company recognized $20,420$24,480, $0 and $61,040$20,420 of stock-based compensation expense during FYyear ended February 28, 2019, 2018 and 2017, respectively.
During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and FY 2016, respectively.based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized $31,497 in stock-based compensation expense during the year ended February 28, 2019.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. DuringFollowing the expiration of all outstanding options, during FY 2017, FY 2016 and FY 2015, 0, 12,936, and 12,936, respectively, ofno stock options were excluded from diluted shares as their effect was anti-dilutive.shares.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $279,698, $215,314,$275,441, $355,678, and $244,946$279,698 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Total advertising expense for U-Swirl and its brands amounted to $335,771, $460,034,$168,000, $222,093, and $399,414$335,771 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The Company’sCompany’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable and notes receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, FASB issued ASU 2016-15, Statement2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 clarifies and provides specific guidancechanges in stockholders’ equity in the interim financial statements included in Quarterly Reports on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduceForm 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current diversity in practice. ASU No. 2016-15 isand comparative quarter and year-to-date interim periods. The amendments are effective for public business entities for annual periods, including interim periods within those annual periods, beginningall filings made on or after December 15, 2017, with early application permitted. This guidance is applicableNovember 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the Company's fiscal year beginning March 1, 2018.filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Quarterly Report on Form 10-Q. The Company does not anticipate that this guidancethe adoption of these SEC amendments will have a material impacteffect on its consolidatedthe Company’s financial statements.position, results of operations, cash flows or stockholders’ equity.
In June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting 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- 132016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU No. 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2017. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the process of assessing the impact of the adoption of ASU No. 2016-09 on its consolidated financial statements. During the fiscal years ended February 28, 2017 and February 29, 2016 the Company would have realized additional expense of $34,000 and additional income of $20,000, respectively, if this guidance had been applied.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are requiredThe Company will adopt this guidance effective with the three month period ending May 31, 2019 (the first quarter of Fiscal Year 2020). The Company can elect to apply the amendments atrecord a cumulative-effect adjustment as of the beginning of the earliest period presented usingyear of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments (see note 5) will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, The Company anticipates ASU 2016-02 will have a material impact on the FASB issuedconsolidated balance sheet. The impact of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The cumulative adjustment to be recorded as right-of-use assets and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 willoperating lease liabilities, upon adoption, is expected to be effective for us in the first quarterrange of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.$3,500,000 to $3,900,000.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASC 606”). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in TopicASC 605 Revenue“Revenue Recognition.” ASC 606 provides that revenues are to be 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. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early applicationnew standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in Company-owned stores as those sales are recognized at the time of the guidance is permittedunderlying sale and are presented net of sales taxes and discounts. The standard also did not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard changed the timing in which the Company recognizes initial fees from franchisees and licensees for annual reporting periods beginning after December 31, 2016. This guidance is applicablenew franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store opening and renewals that impact the Company's fiscal year beginning March 1, 2018. The Company expectsterm of the adoption offranchise agreement upon renewal. In accordance with the new guidance, to change the timinginitial franchise services are not distinct from the continuing rights or services offered during the term of recognition ofthe franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees including master license and territory fees for our international business, and renewal fees. Currently, these fees are generallybeing recognized upfront upon either opening ofas the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognizedCompany satisfies the performance obligation over the term of the relatedfranchise agreement, which we expect will result in a material impactis generally 10 to revenue recognized for franchise fees, license fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. 15 years.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Ingredients and supplies | $ | 3,021,220 | $ | 2,868,157 | ||||
Finished candy | 2,137,609 | 2,138,952 | ||||||
U-Swirl food and packaging | 66,001 | 94,345 | ||||||
Reserve for slow moving inventory | (249,051 | ) | (261,346 | ) | ||||
Total inventories | $ | 4,975,779 | $ | 4,840,108 |
2019 | 2018 | |||||||
Ingredients and supplies | $ | 2,612,954 | $ | 2,764,727 | ||||
Finished candy | 1,983,854 | 2,371,610 | ||||||
U-Swirl food and packaging | 44,696 | 63,843 | ||||||
Reserve for slow moving inventory | (371,147 | ) | (357,706 | ) | ||||
Total inventories | $ | 4,270,357 | $ | 4,842,474 |
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 4,787,855 | 4,784,272 | ||||||
Machinery and equipment | 10,598,355 | 9,987,906 | ||||||
Furniture and fixtures | 1,047,319 | 1,169,475 | ||||||
Leasehold improvements | 1,531,112 | 1,862,603 | ||||||
Transportation equipment | 418,402 | 438,601 | ||||||
Asset impairment | (47,891 | ) | (568,803 | ) | ||||
18,848,770 | 18,187,672 | |||||||
Less accumulated depreciation | 12,390,839 | 12,177,369 | ||||||
Property and equipment, net | $ | 6,457,931 | $ | 6,010,303 |
2019 | 2018 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 5,031,395 | 4,905,103 | ||||||
Machinery and equipment | 10,263,119 | 10,686,631 | ||||||
Furniture and fixtures | 864,944 | 1,067,788 | ||||||
Leasehold improvements | 1,131,659 | 1,568,260 | ||||||
Transportation equipment | 422,458 | 434,091 | ||||||
Asset impairment | (30,000 | ) | (62,891 | ) | ||||
18,197,193 | 19,112,600 | |||||||
Less accumulated depreciation | (12,411,054 | ) | (12,946,360 | ) | ||||
Property and equipment, net | $ | 5,786,139 | $ | 6,166,240 |
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2017,28, 2019, the Company had a $5$5.0 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (3.0%(4.7% at February 28, 2017)2019). At February 28, 2017, $52019, $5.0 million was available for borrowings under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 20172019 and we believethe Company believes it is likely to be renewed on terms similar to current terms. At February 28, 2019 and 2018 there was no amount outstanding under this line of credit.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets, including the SWRL Loan Agreement.assets. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. As of February 28, 2019, the Company was in compliance with all such covenants. The Wells Fargo Loan Agreement also contains customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by substantially all business assets. | $ | 3,831,741 | $ | 5,085,133 | ||||
Less current maturities | 1,302,501 | 1,254,007 | ||||||
Long-term obligations | $ | 2,529,240 | $ | 3,831,126 |
The following is a schedule by year of maturities of long-term debt for the years ending February 28 or 29:
2018 | $ | 1,302,501 | ||
2019 | 1,352,900 | |||
2020 | 1,176,340 | |||
Total | $ | 3,831,741 |
2019 | 2018 | ||||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by sustantially all business assets | $ | 1,176,488 | $ | 2,529,309 | |||||
Less current maturities | 1,176,488 | 1,352,893 | |||||||
Long-term obligations | $ | - | $ | 1,176,416 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under fivenon-cancelable operating leases of up to ten-year non-cancelable operating leases.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 following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 603,000 | ||
2019 | 561,000 | |||
2020 | 272,000 | |||
2021 | 49,000 | |||
2022 | 49,000 | |||
Thereafter | 194,000 | |||
Total | $ | 1,728,000 |
2020 | $ | 318,000 | ||
2021 | 259,000 | |||
2022 | 249,000 | |||
2023 | 243,000 | |||
2024 | 249,000 | |||
Thereafter | 175,000 | |||
Total | $ | 1,493,000 |
We actThe Company acts as primary lessee of some franchised store premises, which wethe Company then subleasesubleases to franchisees, but the majority of existing locations are leased by the franchisee directly. OurThe Company’s current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we wereFebruary 28, 2019, the Company was the primary lessee at fivefour of our 332the Company’s 313 domestic franchised stores and 1 former office space.stores.
InIn 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's liability as primary lessee on sublet franchise outlets, all of which is fully offset by sublease rentals, is as follows for the years ending February 28 or 29:
2018 | $ | 189,000 | ||
2019 | 90,000 | |||
2020 | 81,000 | |||
2021 | 83,000 | |||
2022 | 29,000 | |||
Total | $ | 472,000 |
2020 | $ | 92,000 | ||
2021 | 75,000 | |||
2022 | 21,000 | |||
Total | $ | 188,000 |
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Minimum rentals | $ | 944,938 | $ | 1,187,003 | $ | 1,282,363 | ||||||
Less sublease rentals | (318,000 | ) | (479,000 | ) | (468,000 | ) | ||||||
Contingent rentals | 25,200 | 22,200 | 22,200 | |||||||||
$ | 652,138 | $ | 730,203 | $ | 836,563 |
2019 | 2018 | 2017 | ||||||||||
Minimum rentals | $ | 1,030,536 | $ | 1,270,240 | $ | 944,938 | ||||||
Less sublease rentals | (572,000 | ) | (603,000 | ) | (318,000 | ) | ||||||
Contingent rentals | 22,800 | 26,100 | 25,200 | |||||||||
$ | 481,336 | $ | 693,340 | $ | 652,138 |
In FY 2013,2019, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule, by year, of future minimum rental payments required under such lease for the years ending February 28:28 or 29:
2018 | $ | 28,000 | ||
Total | $ | 28,000 |
2020 | $ | 116,000 | ||
2021 | 121,000 | |||
2022 | 125,000 | |||
2023 | 129,000 | |||
2024 | 33,000 | |||
Total | $ | 524,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 185,700 | ||
2019 | 84,300 | |||
2020 | 62,100 | |||
2021 | 62,100 | |||
2022 | 15,500 | |||
Total | $ | 409,700 |
2020 | $ | 323,000 | ||
2021 | 323,000 | |||
2022 | 257,000 | |||
2023 | 29,000 | |||
Total | $ | 932,000 |
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | |||||||
220,791 | 182,006 | 185,703 |
2019 | 2018 | 2017 | |||||||
325,229 | 225,992 | 220,791 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 20172019, the Company was contracted for approximately $2,595,000$880,000 of raw materials under such agreements.
Contingencies
The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (collectively, the “CherryBerry Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB Shares, they must first offer such shares to SWRL and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint in the Colorado District Court, and thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion). On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May 9, 2016, the Oklahoma Court granted that application and we filed an answer to this action on June 6, 2016. All parties are currently involved in discovery proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this lawsuit.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Current | ||||||||||||
Federal | $ | 1,411,126 | $ | 1,420,811 | $ | 1,846,365 | ||||||
State | 272,214 | 195,993 | 246,398 | |||||||||
Total Current | 1,683,340 | 1,616,804 | 2,092,763 | |||||||||
Deferred | ||||||||||||
Federal | 240,234 | (1,725,918 | ) | (50,603 | ) | |||||||
State | 22,015 | (152,286 | ) | (4,465 | ) | |||||||
Total Deferred | 262,249 | (1,878,204 | ) | (55,068 | ) | |||||||
Total | $ | 1,945,589 | $ | (261,400 | ) | $ | 2,037,695 |
2019 | 2018 | 2017 | ||||||||||
Current | ||||||||||||
Federal | $ | 653,226 | $ | 1,916,720 | $ | 1,411,127 | ||||||
State | 142,570 | 220,164 | 272,214 | |||||||||
Total Current | 795,796 | 2,136,884 | 1,683,341 | |||||||||
Deferred | ||||||||||||
Federal | (67,410 | ) | 55,658 | 240,233 | ||||||||
State | (11,524 | ) | (32,247 | ) | 22,015 | |||||||
Total Deferred | (78,934 | ) | 23,411 | 262,248 | ||||||||
Total | $ | 716,862 | $ | 2,160,295 | $ | 1,945,589 |
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years endedended February 28 or 29:
2017 | 2016 | 2015 | ||||||||||
Statutory rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.6 | % | 0.8 | % | 2.8 | % | ||||||
Domestic production deduction | (1.1 | %) | (3.0 | %) | (1.6 | %) | ||||||
Work opportunity tax credits | (0.4 | %) | - | - | ||||||||
Statutory rate change | - | (1.6 | %) | - | % | |||||||
Other | 0.0 | % | 0.5 | % | 0.1 | % | ||||||
U-Swirl loss carryforward recognized | - | (1.8 | %) | (3.0 | %) | |||||||
Valuation allowance, U-Swirl Consolidated loss | - | (36.3 | %) | 3.0 | % | |||||||
Effective rate – provision (benefit) | 36.1 | % | (7.4 | %) | 35.3 | % |
2019 | 2018 | 2017 | ||||||||||
Statutory rate | 21.0 | % | 31.9 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.4 | % | 2.4 | % | 3.6 | % | ||||||
Domestic production deduction | 0.0 | % | (0.9 | )% | (1.1 | )% | ||||||
Work opportunity tax credits | (0.7 | )% | (0.2 | )% | (0.4 | )% | ||||||
Other | 0.5 | % | 0.8 | % | 0.0 | % | ||||||
Impact of tax reform | 0.0 | % | 8.2 | % | 0.0 | % | ||||||
Effective rate - provision (benefit) | 24.2 | % | 42.2 | % | 36.1 | % |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes at February 28 or 29 are as follows:
Deferred Tax Assets | 2017 | 2016 | ||||||
Allowance for doubtful accounts and notes | $ | 198,354 | $ | 248,537 | ||||
Inventories | 90,027 | 96,698 | ||||||
Accrued compensation | 188,002 | 183,898 | ||||||
Loss provisions and deferred income | 1,175,351 | 1,299,191 | ||||||
Self-insurance accrual | 37,000 | 28,923 | ||||||
Amortization | 782,683 | 861,594 | ||||||
Restructuring charges | 148,494 | 148,494 | ||||||
U-Swirl accumulated net loss | 164,035 | 346,605 | ||||||
Valuation allowance | (148,494 | ) | (148,494 | ) | ||||
Net deferred tax assets | 2,635,452 | 3,065,446 | ||||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (1,683,778 | ) | (1,537,653 | ) | ||||
Prepaid expenses | (92,800 | ) | (106,138 | ) | ||||
Deferred tax liabilities | $ | (1,776,578 | ) | $ | (1,643,791 | ) | ||
Net deferred tax assets | $ | 858,874 | $ | 1,421,655 |
2019 | 2018 | |||||||
Deferred Tax Assets | ||||||||
Allowance for doubtful accounts and notes | $ | 120,368 | $ | 124,469 | ||||
Inventories | 91,265 | 86,938 | ||||||
Accrued compensation | 87,930 | 130,049 | ||||||
Loss provisions and deferred income | 492,468 | 817,945 | ||||||
Self-insurance accrual | 34,426 | 38,868 | ||||||
Amortization | 217,481 | 520,379 | ||||||
Restructuring charges | 98,693 | 98,728 | ||||||
U-Swirl accumulated net loss | 325,253 | 258,173 | ||||||
Valuation allowance | (98,693 | ) | (98,728 | ) | ||||
Net deferred tax assets | $ | 1,369,191 | $ | 1,976,821 | ||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (682,542 | ) | (1,066,113 | ) | ||||
Prepaid expenses | (79,228 | ) | (75,245 | ) | ||||
Deferred Tax Liabilities | (761,770 | ) | (1,141,358 | ) | ||||
Net deferred tax assets | $ | 607,421 | $ | 835,463 |
The following table summarizes deferred income tax valuation allowances as of February 28 or 29:28:
2017 | 2016 | |||||||
Valuation allowance at beginning of period | $ | 148,494 | $ | 349,010 | ||||
Tax expense (benefits) realized by valuation allowance | - | 81,340 | ||||||
Tax benefits released from valuation allowance | - | (281,856 | ) | |||||
Valuation allowance at end of period | $ | 148,494 | $ | 148,494 |
2019 | 2018 | |||||||
Valuation allowance at beginning of period | $ | 98,728 | $ | 148,494 | ||||
Tax expense (benefits) realized by valuation allowance | (35 | ) | - | |||||
Tax benefits released from valuation allowance | - | - | ||||||
Impact of tax reform | - | (49,766 | ) | |||||
Valuation allowance at end of period | $ | 98,693 | $ | 98,728 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Income tax benefit realizedexpense and the effective income tax rate for the year ended February 29, 2016, compared to the tax expense in the prior years, is primarily due to the tax consequences of a change in the controlling interest in U-Swirl and foreclosure upon the stock of U-Swirl International, Inc. In FY 2014 we did not realize a tax benefit28, 2019 decreased from the SWRL taxable loss causing our effective rate to increase for the year. During FY 2015 the taxable loss at SWRL was lower, resulting in a decrease to our effective rate. During FY 2016 an income tax benefit of approximately $2,149,000 was recognizedyear ended February 28, 2018, primarily as a result of the company foreclosing upon the interest in U-Swirl and recognizingrevaluation of deferred tax assets and loss carry forwards that previously had full valuation allowances when RMCF had less than an 80% ownership interest. Resulting from this foreclosure, RMCF will consolidate U-Swirl International, Inc. resulting in realizationliabilities to the lower enacted U.S. corporate tax rate of U-Swirl International, Inc. deferred tax assets that previously had a full valuation allowance when filed with SWRL income tax returns. U-Swirl International, Inc.21% under the Tax Cuts and RMCF will file consolidated income tax returns beginning with FY 2017. SWRL will continue to file separate tax returns.
ForJobs Act recognized during the year ended February 29, 201628, 2018 and prior periods, the financial statements presented representlower enacted U.S. corporate tax rate of 21% under the consolidated statementsTax Cuts and Jobs Act effective for the year ended February 28, 2019. The revaluation of two separate consolidated groups fordeferred tax assets and liabilities resulted in income tax purposes. RMCF has filed income tax returns consolidatingexpense of approximately $421,000 recognized in consideration of the results of Rocky Mountain Chocolate Factory and its wholly owned subsidiary, Aspen Leaf Yogurt, LLC. U-Swirl Inc. has filed a separate consolidated income tax returnlower enacted rate for the results of U-Swirl, Inc. and its wholly owned subsidiary, U-Swirl International, Inc. RMCF and SWRL have filed separate income tax returns because RMCF owned only 39% of SWRL. Beginning on March 1, 2016 the results of U-Swirl International, Inc. will be included in RMCF’s consolidated income tax return, and on the same date, will be removed from U-Swirl, Inc.’s consolidated tax return. This is a result of the foreclosure of RMCF on the outstanding stock of U-Swirl in satisfaction of debt between RMCF and SWRL. The consolidated tax return for RMCF for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL.year ended February 28, 2018.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2012.2013. The Company’s federal income tax returns have been examined for the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years. The Company’s federal income tax returns are being examined for the years ended February 28 or 29, 2017 and 2016.
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. Management believes that, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2017.2019.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28, 2019 or 29, 2016 or 2015.2018. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28, or 29, 20172019 and 2016.2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 29,29, 2016, we hadthe Company foreclosed on the outstanding equity of U-Swirl International, Inc. and U-Swirl International, Inc. was consolidated for income tax purposes. SWRL, along with U-Swirl International, Inc., has historically filed its own consolidated federal income tax return and reported its own Federal net operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets. This full valuation allowance was eliminated asAs of February 29, 2016, in recognitiona portion of the likelihoodU-Swirl deferred tax assets were recognized as a result of it becoming more likely than not that the loss carry forwardssome of these assets would be realized in the future as a result of RMCF and U-Swirl International, Inc. filing a consolidated income tax return.
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl International, Inc.’sU-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. We haveThe Company has performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest in January 2013.2013 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl International Inc.’sU-Swirl’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
We estimateThe Company estimates that the potential future tax deductions of U-Swirl International, Inc.’sU-Swirl’s Federal net operating losses, limited by section 382, to be approximately $443,000$1,323,000 with a resulting deferred tax asset of approximately $164,000. U-Swirl International Inc.’s$325,000. U-Swirl’s Federal net operating loss carryovers will expire at various dates beginning in 2026.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash dividendsdividend of $0.12 per common share on March 11, 2016, June 17, 2016, September 16, 2016 and December 9, 20162018 to stockholders of record on February 26, 2016,March 6, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 15, 2018 to stockholders of record on June 5, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 14, 2018 to stockholders of record on September 4, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 7, 2016, September 6, 2016 and2018 to stockholders of record on November 25, 2016, respectively.23, 2018. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 9, 2017 payable14, 2019, which was paid on March 10, 201715, 2019 to stockholders of record on February 24, 2017.March 5, 2019.
Future declarationsdeclarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long termlong-term interest of the Company’s stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the nine months ended November 30, 2016,FY 2017, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the three monthsyears ended February 28, 2017.2019 or 2018. As of February 28, 2017,2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (the(as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock awards under the 2007 Plan as of February 28, 2017:2019:
Original share authorization: | 300,000 | |||
Prior plan shares authorized and incorporated in the 2007 | 85,340 | |||
Additional shares authorized through 2007 Plan amendment: | 300,000 | |||
Available for | 685,340 | |||
Cancelled/ | ||||
Shares awarded as unrestricted shares, stock options or restricted stock | ( | ) | ||
Shares available for award: |
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding stock options at beginning of year: | 12,936 | 12,936 | 155,880 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | (142,944 | ) | ||||||||
Cancelled/forfeited | (12,936 | ) | - | - | ||||||||
Outstanding stock options as of February 28 or 29: | - | 12,936 | 12,936 | |||||||||
Weighted average exercise price | n/a | $ | 12.94 | $ | 12.94 | |||||||
Weighted average remaining contractual term (in years) | n/a | 0.04 | 1.04 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding stock options at beginning of year: | - | - | 12,936 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Cancelled/forfeited | - | - | (12,936 | ) | ||||||||
Outstanding stock options as of February 28: | - | - | - | |||||||||
Weighted average exercise price | n/a | n/a | n/a | |||||||||
Weighted average remaining contractual term (in years) | n/a | n/a | n/a |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 181,742 | 237,641 | 295,040 | |||||||||
Granted | - | - | - | |||||||||
Vested | (48,084 | ) | (55,899 | ) | (56,199 | ) | ||||||
Cancelled/forfeited | (10,000 | ) | - | (1,200 | ) | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 123,658 | 181,742 | 237,641 | |||||||||
Weighted average grant date fair value | $ | 12.21 | $ | 12.22 | $ | 12.13 | ||||||
Weighted average remaining vesting period (in years) | 2.23 | 3.22 | 4.08 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 77,594 | 123,658 | 181,742 | |||||||||
Granted | - | - | - | |||||||||
Vested | (49,058 | ) | (44,064 | ) | (48,084 | ) | ||||||
Cancelled/forfeited | (3,534 | ) | (2,000 | ) | (10,000 | ) | ||||||
Outstanding non-vested restricted stock units as of February 28: | 25,002 | 77,594 | 123,658 | |||||||||
Weighted average grant date fair value | $ | 12.05 | $ | 12.16 | $ | 12.21 | ||||||
Weighted average remaining vesting period (in years) | 0.38 | 1.27 | 2.23 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
FY 2019 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,361,528 | $ | 25,324,024 | $ | 1,272,009 | $ | 3,737,606 | $ | - | $ | 35,695,167 | ||||||||||||
Intersegment revenues | (5,236 | ) | (1,144,484 | ) | - | - | - | (1,149,720 | ) | |||||||||||||||
Revenue from external customers | 5,356,292 | 24,179,540 | 1,272,009 | 3,737,606 | - | 34,545,447 | ||||||||||||||||||
Segment profit (loss) | 2,288,871 | 4,310,722 | (52,009 | ) | (32,391 | ) | (3,559,532 | ) | 2,955,661 | |||||||||||||||
Total assets | 1,182,355 | 12,267,458 | 1,001,419 | 5,264,989 | 6,505,920 | 26,222,141 | ||||||||||||||||||
Capital expenditures | 3,548 | 526,402 | 9,617 | 16,512 | 57,707 | 613,786 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,369 | $ | 573,846 | $ | 32,762 | $ | 952,178 | $ | 104,644 | $ | 1,709,799 |
FY 2016 |
Franchising |
Manufacturing |
Retail |
U-Swirl |
Other |
Total | ||||||||||||||||||
Total revenues | $ | 5,947,769 | $ | 27,726,443 | $ | 1,622,906 | $ | 6,535,646 | $ | - | $ | 41,832,764 | ||||||||||||
Intersegment revenues | (5,185 | ) | (1,370,684 | ) | - | - | - | (1,375,869 | ) | |||||||||||||||
Revenue from external customers | 5,942,584 | 26,355,759 | 1,622,906 | 6,535,646 | - | 40,456,895 | ||||||||||||||||||
Segment profit (loss) | 2,608,351 | 6,731,221 | (2,591 | ) | (2,128,649 | ) | (3,663,201 | ) | 3,545,131 | |||||||||||||||
Total assets | 1,205,616 | 11,980,933 | 1,008,783 | 10,126,209 | 5,994,184 | 30,315,725 | ||||||||||||||||||
Capital expenditures | 76,762 | 432,473 | 3,306 | 66,476 | 164,234 | 743,251 | ||||||||||||||||||
Total depreciation & amortization | $ | 36,908 | $ | 406,082 | $ | 18,236 | $ | 802,953 | $ | 156,122 | $ | 1,420,301 |
FY 2018 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 6,004,897 | $ | 27,491,089 | $ | 1,876,021 | $ | 4,142,085 | $ | - | $ | 39,514,092 | ||||||||||||
Intersegment revenues | (4,882 | ) | (1,434,515 | ) | - | - | - | (1,439,397 | ) | |||||||||||||||
Revenue from external customers | 6,000,015 | 26,056,574 | 1,876,021 | 4,142,085 | - | 38,074,695 | ||||||||||||||||||
Segment profit (loss) | 2,623,081 | 5,791,980 | (37,102 | ) | 542,073 | (3,795,829 | ) | 5,124,203 | ||||||||||||||||
Total assets | 1,157,158 | 12,729,659 | 1,134,876 | 8,125,171 | 5,793,771 | 28,940,635 | ||||||||||||||||||
Capital expenditures | 15,429 | 429,545 | 33,056 | 11,899 | 55,027 | 544,956 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,087 | $ | 540,033 | $ | 32,567 | $ | 576,162 | $ | 124,406 | $ | 1,319,255 |
FY 2015 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,976,964 | $ | 27,459,828 | $ | 2,134,976 | $ | 7,501,943 | $ | - | $ | 43,073,711 | ||||||||||||
Intersegment revenues | (342 | ) | (1,564,993 | ) | - | - | - | (1,565,335 | ) | |||||||||||||||
Revenue from external customers | 5,976,622 | 25,894,835 | 2,134,976 | 7,501,943 | - | 41,508,376 | ||||||||||||||||||
Segment profit (loss) | 2,783,734 | 6,993,693 | (51,803 | ) | (245,546 | ) | (3,699,637 | ) | 5,780,441 | |||||||||||||||
Total assets | 1,193,407 | 12,155,004 | 1,157,674 | 12,424,801 | 7,207,327 | 34,138,213 | ||||||||||||||||||
Capital expenditures | 28,806 | 378,060 | 41,361 | 61,053 | 117,464 | 626,744 | ||||||||||||||||||
Total depreciation & amortization | $ | 41,228 | $ | 395,864 | $ | 35,531 | $ | 813,172 | $ | 154,653 | $ | 1,440,448 |
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
Revenue from one customer of the Company’sCompany’s Manufacturing segment represented approximately $4.1$3.1 million, or 10.69.1 percent, of the Company’s revenues from external customers during the year ended February 28, 2017,2019, compared to $5.2$5.1 million, or 12.813.4 percent of the Company’s revenues from external customers during the year ended February 29, 2016.28, 2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For thethe three years ended February 28 or 29:
Cash paid (received) for: | 2017 | 2016 | 2015 | |||||||||
Income taxes paid | $ | 1,997,751 | $ | 1,383,805 | $ | 1,896,274 | ||||||
Interest | 129,927 | 170,709 | 193,022 | |||||||||
Accrued Inventory | 531,017 | 298,032 | 245,183 | |||||||||
Non-Cash Financing Activities: | ||||||||||||
Dividend payable | 702,525 | 700,728 | 721,536 | |||||||||
Non-Cash Investing Activities: | ||||||||||||
Sale or distribution of assets in exchange for notes receivable | ||||||||||||
Long-lived assets | 20,989 | 127,500 | 414,353 | |||||||||
Other assets | $ | - | $ | 75,000 | $ | - |
Cash paid for: | 2019 | 2018 | 2017 | |||||||||
Interest, net | $ | 52,102 | $ | 102,640 | $ | 129,927 | ||||||
Income taxes | 638,252 | 2,431,884 | 1,997,751 | |||||||||
Non-cash Operating Activities | ||||||||||||
Accrued Inventory | 52,918 | 258,247 | 531,017 | |||||||||
Non-cash Financing Activities | ||||||||||||
Dividend payable | $ | 714,939 | $ | 708,652 | 702,525 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’semployee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, the Company’s contribution was approximately $66,000, $62,000,$70,000, $68,000, and $60,000,$66,000, respectively, to the plan.
NOTE 1212 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscalfiscal years ended February 28, or 29, 20172019 and 2016:2018:
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2017 | ||||||||||||||||||||
Total revenue | $ | 9,376,199 | $ | 8,601,962 | $ | 9,955,239 | $ | 10,362,977 | $ | 38,296,377 | ||||||||||
Gross margin | 2,222,405 | 2,289,011 | 2,706,456 | 1,922,896 | 9,140,768 | |||||||||||||||
Net income | 731,834 | 974,813 | 1,011,799 | 731,670 | 3,450,116 | |||||||||||||||
Basic earnings per share | 0.13 | 0.17 | 0.17 | 0.13 | 0.59 | |||||||||||||||
Dilute earnings per share | $ | 0.12 | $ | 0.16 | $ | 0.17 | $ | 0.12 | $ | 0.58 |
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2016 | ||||||||||||||||||||
Total revenue | $ | 10,364,022 | $ | 9,274,554 | $ | 9,807,313 | $ | 11,011,006 | $ | 40,456,895 | ||||||||||
Gross margin | 2,470,383 | 2,536,811 | 2,723,841 | 2,763,228 | 10,494,263 | |||||||||||||||
Net income | 762,959 | 779,796 | 440,801 | 2,442,351 | 4,425,907 | |||||||||||||||
Basic earnings per share | 0.13 | 0.13 | 0.08 | 0.42 | 0.75 | |||||||||||||||
Diluted earnings per share | $ | 0.12 | $ | 0.13 | $ | 0.07 | $ | 0.41 | $ | 0.73 |
Fiscal Quarter | ||||||||||||||||||||
2019 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 8,366,085 | $ | 7,800,088 | $ | 8,949,747 | $ | 9,429,527 | $ | 34,545,447 | ||||||||||
Gross margin | 1,916,807 | 1,852,435 | 1,882,975 | 1,312,026 | 6,964,243 | |||||||||||||||
Net income | 576,944 | 750,815 | 525,361 | 385,679 | 2,238,799 | |||||||||||||||
Basic earnings per share | 0.10 | 0.13 | 0.09 | 0.06 | 0.38 | |||||||||||||||
Diluted earnings per share | $ | 0.10 | $ | 0.13 | $ | 0.09 | $ | 0.06 | $ | 0.37 |
Fiscal Quarter | ||||||||||||||||||||
2018 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 9,346,447 | $ | 8,266,691 | $ | 9,961,572 | $ | 10,499,985 | $ | 38,074,695 | ||||||||||
Gross margin | 2,191,974 | 2,210,910 | 2,311,579 | 2,276,586 | 8,991,049 | |||||||||||||||
Net income | 813,672 | 928,284 | 751,056 | 470,896 | 2,963,908 | |||||||||||||||
Basic earnings per share | 0.14 | 0.16 | 0.13 | 0.08 | 0.50 | |||||||||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.16 | $ | 0.13 | $ | 0.08 | $ | 0.50 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1313 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28 or 29:28:
| 2017 | 2016 | |||||||||||||||||||
Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 211,152 | $ | 220,778 | $ | 209,653 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 92,758 | 459,340 | 51,423 | ||||||||||||||
Franchise Rights | 20 | 5,971,129 | 1,144,957 | 5,914,181 | 760,818 | ||||||||||||||||
Total | 7,459,049 | 2,000,670 | 7,146,102 | 1,573,697 | |||||||||||||||||
Intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment | |||||||||||||||||||||
Company stores goodwill | 1,099,328 | 267,020 | 1,099,328 | 267,020 | |||||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Manufacturing segment-Goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Trademark-indefinite life | 20,000 | - | 20,000 | - | |||||||||||||||||
Total | 1,709,328 | 662,384 | 1,709,328 | 662,384 | |||||||||||||||||
Total intangible assets | $ | 9,168,377 | $ | 2,663,054 | $ | 8,855,430 | $ | 2,236,081 |
2019 | 2018 | |||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 214,152 | $ | 220,778 | $ | 212,653 | |||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | |||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | |||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 223,628 | 715,339 | 136,087 | |||||||||||||||
Franchise rights | 20 | 5,979,637 | 2,300,717 | 5,979,637 | 1,545,710 | |||||||||||||||||
Total | 7,467,557 | 3,290,300 | 7,467,557 | 2,446,253 | ||||||||||||||||||
Intangible assets not subject to amortization | ||||||||||||||||||||||
Franchising segment- | ||||||||||||||||||||||
Company stores goodwill | $ | 1,099,328 | $ | 267,020 | $ | 1,099,328 | $ | 267,020 | ||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Manufacturing segment-goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Trademark | 20,000 | - | 20,000 | - | ||||||||||||||||||
Total goodwill | 1,709,328 | 662,384 | 1,709,328 | 662,384 | ||||||||||||||||||
Total Intangible Assets | $ | 9,176,885 | $ | 3,952,684 | $ | 9,176,885 | $ | 3,108,637 |
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
On February 29, 2016, RMCF foreclosed on all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. As described in Note 1, this was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. We performed a test of impairment in conjunction with the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. We recognized an impairment loss of $1,930,529 to reduce the carrying value of Goodwill to the fair value. In making this determination we reviewed the fair value of U-Swirl compared to its carrying value. In performing this testing we focused on the actual performance of the acquired businesses that created the initial recognition of the goodwill, as well as U-Swirl’s past performance and future expected performance. Because of the significant underperformance of the acquired businesses as well as U-Swirl we determined that the carrying value of the reporting unit exceeded its fair value.
The following are events that have indicated that it is more likely than not that the fair value of goodwill is less than the carrying amount:
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets totaled $427,840, $378,373,$844,320, $446,050, and $361,723$427,840 during the fiscal years ended February 28 or 29, 2019, 2018 and 2017, 2016 and 2015, respectively.
During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 28, 2017,28, 2019, annual amortization of intangible assets, based upon ourthe Company’s existing intangible assets and current useful lives, is estimated to be the following:
2018 | $ | 445,214 | ||
2019 | 451,644 | |||
2020 | 438,487 | |||
2021 | 426,778 | |||
2022 | 403,596 | |||
Thereafter | 3,292,660 | |||
Total | $ | 5,458,379 |
2020 | $ | 706,177 | ||
2021 | 594,229 | |||
2022 | 490,060 | |||
2023 | 411,607 | |||
2024 | 345,642 | |||
Thereafter | 1,629,542 | |||
Total | $ | 4,177,257 |
NOTE 14 – IMPAIRMENT OF LONG-LIVED RETAIL ASSETS, RESTRUCTURING AND ACQUISITION RELATED CHARGESCOSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
In 2014, SWRL entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, SWRL purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store. SWRL also entered into an Asset Purchase Agreement with Yogli Mogli, which was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, SWRL purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February 20, 2014, SWRL entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rightsCosts associated with 17 Fuzzy Peach Frozen Yogurt stores. Associated with these transactions, the Company recorded net restructuring charges of $124,551 during the year ended February 28, 2015. No restructuring charges were incurred during the year ended February 29, 2016.
On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of SWRL. In addition, Messrs. Conte, H. Cartwright and T. Cartwright resigned as officers of U-Swirl. Also on September 4, 2014, the SWRL Board of Directors appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.
In connection with these management changes, SWRL announced an operational restructuring designed to enhance SWRL’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements with the named officers, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement, property and equipment. The Company recorded restructuring charges of $503,526 during year ended February 28, 2015 associated with this operational restructuring.
As described in Note 1 above, effective March 1, 2015, the Company was reorganized to create a holding company structure pursuant to the Agreement and Plan of Merger, dated as of November 10, 2014, among Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and RKB Merger Corp. In connection with the holding company reorganization, the Company recorded restructuring fees of $179,399 during the year ended February 28, 2015.
During the year ended February 29, 2016, we closed an underperforming Company-owned café resulting in an impairment charge of $39,933. As described in Note 1, on February 29, 2016 the Company foreclosed on 100% of the outstanding equity of U-Swirl in full satisfaction of the obligations owed under the SWRL Loan Agreement. The Company reviewed all operating assets possessed as a part of this transaction and made the determination to offer for sale certain retail assets below their carrying value. This determination was made after a review of expected future cash flow. As a result of this review and determination an impairment charge of $356,280 was recorded to reflect these assets at their fair value.
Impairment of long-lived assets and goodwill, restructuring and acquisition charges incurredstore closures at February 28, or 29,2019, 2018 and 2017 2016 and 2015 were comprised of the following:
2017 | 2016 | 2015 | ||||||||||
Professional fees | $ | - | $ | - | $ | 284,275 | ||||||
Severance/transitional compensation | - | - | 212,027 | |||||||||
Leasehold improvements, property and equipment impairment of long-lived assets and goodwill | - | 2,326,742 | 243,000 | |||||||||
Provision for termination of contractual obligations | 60,000 | - | - | |||||||||
Acceleration of restricted stock unit vesting | - | - | 65,049 | |||||||||
Other | - | - | 3,125 | |||||||||
Total | $ | 60,000 | $ | 2,326,742 | $ | 807,476 |
2019 | 2018 | 2017 | ||||||||||
Loss on distribution of assets | $ | 81,981 | $ | - | $ | - | ||||||
Lease settlement costs | 145,000 | - | 60,000 | |||||||||
Total | $ | 226,981 | $ | - | $ | 60,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – RELATED PARTY TRANSACTIONS
Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have, on occasion, provided services to the Company and may provide services in the future. For the year ended February 28, 2017, the Company paid $47,822 and no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of operations.
NOTE 16 – SUBSEQUENT EVENTS
On May 22, 2017,28, 2019, the Company announced that its Board of Directors has declared a first quarter FY2018FY2020 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 16, 201714, 2019 to shareholders of record at the close of business June 6, 2017.4, 2019.
In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period.
NOTE 1716 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company’sCompany’s prior annual consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233 and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.
NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”)
As described in Note 1, effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be 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. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gift Cards
The Company’s franchisees sell gift cards which do not have either 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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
Impact to Prior Periods
The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:
Amount | ||||
Increase in deferred revenue | $ | (1,022,720 | ) | |
Reduction in gift card liabilities | 2,250,743 | |||
Adjustment to deferred income tax assets | (302,094 | ) | ||
Cumulative increase to retained earnings | $ | 925,929 |
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:
CONSOLIDATED BALANCE SHEET | ||||||||||||
AS OF FEBRUARY 28, 2018 | ||||||||||||
Previously Reported | Adjustments | Restated | ||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 6,072,984 | $ | - | $ | 6,072,984 | ||||||
Accounts receivable, net | 3,897,334 | - | 3,897,334 | |||||||||
Notes receivable, current portion, net | 105,540 | - | 105,540 | |||||||||
Refundable income taxes | 342,863 | - | 342,863 | |||||||||
Inventories, net | 4,842,474 | - | 4,842,474 | |||||||||
Other | 310,173 | - | 310,173 | |||||||||
Total current assets | 15,571,368 | - | 15,571,368 | |||||||||
Property and Equipment, Net | 6,166,240 | - | 6,166,240 | |||||||||
Other Assets | ||||||||||||
Notes receivable, less current portion, net | 235,983 | - | 235,983 | |||||||||
Goodwill, net | 1,046,944 | - | 1,046,944 | |||||||||
Franchise rights, net | 4,433,927 | - | 4,433,927 | |||||||||
Intangible assets, net | 587,377 | - | 587,377 | |||||||||
Deferred income taxes | 835,463 | (302,094 | ) | 533,369 | ||||||||
Other | 63,333 | - | 63,333 | |||||||||
Total other assets | 7,203,027 | (302,094 | ) | 6,900,933 | ||||||||
Total Assets | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 | |||||
Liabilities and Stockholders' Equity | ||||||||||||
Current Liabilities | ||||||||||||
Current maturities of long-term debt | $ | 1,352,893 | - | $ | 1,352,893 | |||||||
Accounts payable | 1,647,991 | - | 1,647,991 | |||||||||
Accrued salaries and wages | 644,005 | - | 644,005 | |||||||||
Gift card liabilities | 3,057,131 | (2,250,743 | ) | 806,388 | ||||||||
Other accrued expenses | 325,034 | - | 325,034 | |||||||||
Dividend payable | 708,652 | - | 708,652 | |||||||||
Deferred revenue | 471,910 | (143,445 | ) | 328,465 | ||||||||
Total current liabilities | 8,207,616 | (2,394,188 | ) | 5,813,428 | ||||||||
Long-Term Debt, Less Current Maturities | 1,176,416 | - | 1,176,416 | |||||||||
Deferred Revenue, Less Current Portion | - | 1,166,165 | 1,166,165 | |||||||||
Commitments and Contingencies | ||||||||||||
Stockholders' Equity | ||||||||||||
Preferred stock | ||||||||||||
Common stock | 5,903 | - | 5,903 | |||||||||
Additional paid-in capital | 6,131,147 | - | 6,131,147 | |||||||||
Retained earnings | 13,419,553 | 925,929 | 14,345,482 | |||||||||
Total stockholders' equity | 19,556,603 | 925,929 | 20,482,532 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
For the Years Ended February 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Franchise Fees contained within the Statement of Income: | $ | 335,028 | $ | 681,613 | $ | 324,718 | ||||||
Adjustment required to conform revenue to prior period method: | (53,528 | ) | - | - | ||||||||
Comparable franchise fees: | $ | 281,500 | $ | 681,613 | $ | 324,718 |
On February 28, 2019, 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:
2020 | $ | 256,093 | ||
2021 | 204,071 | |||
2022 | 190,524 | |||
2023 | 176,394 | |||
2024 | 137,477 | |||
Thereafter | 388,013 | |||
Total | $ | 1,352,572 |
NOTE 18 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2019 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchise fees | $ | 199,362 | $ | - | $ | - | $ | 135,666 | $ | 335,028 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 24,179,540 | - | - | 24,179,540 | |||||||||||||||
Retail sales | - | - | 1,272,009 | 2,112,245 | 3,384,254 | |||||||||||||||
Royalty and marketing fees | 5,156,930 | - | - | 1,489,695 | 6,646,625 | |||||||||||||||
Total | $ | 5,356,292 | $ | 24,179,540 | $ | 1,272,009 | $ | 3,737,606 | $ | 34,545,447 |
ITEMITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systems to future periods are subject to the risk that such controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all errors or all fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These reports by management, including the CEO and CFO, on the effectiveness of the Company’s Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act), that are designed to ensure that material information relating to the Company is made known to the officers who certify the Company’s 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 the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’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.
Management, under the supervision and with the participation of the CEO and CFO, has evaluated the effectiveness,effectiveness, as of February 28, 2017,2019, of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of February 28, 2017.2019.
Management’sManagement’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed under supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2017,2018, of the Company’s internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its publication Internal Control-Integrated Framework (2013). Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of February 28, 2017.2019.
Changes in Internal Control over Financial Reporting —There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended February 28, 20172019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to the Company’sCompany’s equity compensation plansplan, as of February 28, 2017,2019, which consists solely of the Company’s 2007 Equity Incentive Plan.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) | ||||||||
(a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 123,658 |
n/a | 332,589 | ||||||||
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- | ||||||||
Total | 123,658 | n/a | 332,589 |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | 25,002 |
n/a | 327,790 |
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- |
Total | 25,002 | n/a | 327,790 |
(1) Awards outstanding under the 2007 Equity Incentive Plan as of February 28, 20172019 consist of 123,65825,002 unvested restricted stock units. The weighted-average exercise price is calculated solely with respect to the outstanding stock options.
(2)(2) Represents shares remaining available under the Company’s 2007 Equity Incentive Plan. Shares available for future issuances under the 2007 Equity Incentive Plan may be issued in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and performance units, and other stock- and cash-based awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | The following documents are filed as part of this Annual Report: |
1. |
|
Page | |
| 33-34 |
Consolidated Statements of Income | 35 |
Consolidated Balance Sheets | 36 |
Consolidated Statements of Changes in | 37 |
Consolidated Statements of Cash Flows | 38 |
Notes to Consolidated Financial Statements | 39 |
2. | Financial Statement Schedule |
2. Financial Statement Schedule
SCHEDULE II - Valuation and Qualifying Accounts
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |||||||||||||
Year Ended February 28, 2017 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 137,316 | 271,694 | 536,093 | ||||||||||||
Year Ended February 29, 2016 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 729,060 | 171,000 | 229,589 | 670,471 | ||||||||||||
Year Ended February 28, 2015 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 600,930 | 214,600 | 86,470 | 729,060 |
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |
Year Ended February 28, 2019 | ||||
Valuation Allowance for Accounts and Notes Receivable | 505,972 | 143,214 | 159,684 | 489,502 |
Year Ended February 29, 2018 | ||||
Valuation Allowance for Accounts and Notes Receivable | 536,093 | 166,868 | 196,989 | 505,972 |
Year Ended February 28, 2017 | ||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 138,125 | 272,503 | 536,093 |
3. |
|
The following exhibits listed in the Exhibit Index are filed with, or incorporated by reference, in this Annual Report.
Exhibit Number | Description | Incorporated by Reference to | |||
3.1 | Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.2 | Certificate of Designations of Series A Junior Participating Preferred Stock, Par Value $0.001 Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.3 | Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.3 to the Current Report on Form 8-K filed on March 2, 2015 | |||
4.1 | Description of Capital Stock | Filed herewith | |||
10.1** | Form of Employment Agreement (Officers) | Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.2 | Form of Franchise Agreement for Rocky Mountain Chocolate Factory | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2010 (File No. 000-14749) | |||
10.3** | 2007 Equity Incentive Plan (As Amended and Restated) | Exhibit 10.1 to the Current Report on Form 8-K filed on August 9, 2013 (File No. 000-14749) | |||
10.4** | Form of Indemnification Agreement (Directors) | Exhibit 10.7 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.5** | Form of Indemnification Agreement (Officers) | Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.6* | Master License Agreement, dated August 17, 2009, between Kahala Franchise Corp. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2009 (File No. 000-14749) | |||
10.7 | Revolving Line of Credit Note, dated September 13, 2017, between Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank, National Association | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2017 | |||
10.8 | Business Loan Agreement, dated August 2, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2013 (File No. 000-14749) | |||
10.9 | Business Loan Agreement, dated December 27, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 99.3 to the Current Report on Form 8-K filed on January 22, 2014 (File No. 000-14749) | |||
10.10* | Master License Agreement, dated April 27, 2012, between RMCF Asia, Ltd. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2012 (File No. 000-14749) |
Exhibit Number | Description | Incorporated by Reference to | |||
10.11 | Exhibit 99.4 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.12 | Exhibit 99.5 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.13 | Investor Rights Agreement, dated January 14, 2013 between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC | Exhibit 99.6 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | |||
10.14** | Filed herewith | ||||
10.15** | Filed herewith | ||||
21.1 | Filed herewith | ||||
23.1 | Filed herewith | ||||
23.2 | Filed herewith | ||||
31.1 | Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | |||
32.1 | Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
101.INS | XBRL Instance Document | Filed herewith | |||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | |||
* | Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. | ||||
** | Management contract or compensatory plan. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. | ||||
|
|
|
| ||
|
|
|
| ||
Date: May | /s/ Bryan J. Merryman |
|
| ||
|
| BRYAN J. MERRYMAN | |||
Chief | |||||
Financial Officer, Treasurer and
| |||||
Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| |||
| ||||
| ||||
Date: May | /s/ Bryan J. Merryman | |||
BRYAN J. MERRYMAN | ||||
Chief Executive Officer, Chief | ||||
Financial Officer, Treasurer and | ||||
Director | ||||
(Principal Executive, Financial | ||||
and Accounting Officer) | ||||
Date: May 29, 2019 | /s/ Brett P. Seabert | |||
Brett P. Seabert, Director | ||||
Date: May | ||||
/s/ Clyde Wm. Engle | ||||
CLYDE Wm. ENGLE, Director | ||||
Date: May | /s/ Scott G. Capdevielle | |||
SCOTT G. CAPDEVIELLE, Director |
EXHIBIT INDEX
|
|
| ||||||||||
|
|
| ||||||||||
Date: May 29, 2019 | ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
| ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
/s/ Franklin E. Crail | ||||||||||||
6361
February 28,
%
February 29 or 28,
%
2019
2018
Change
Change
($’s in thousands)
2017
2016
Change
Change
Factory sales
Retail sales
Franchise fees
Royalty and marketing fees
Franchise fees
Total
Factory Sales
The decrease in factory sales for FY 20172019 compared to FY 20162018 was primarily due to an 5.6%a 23.1% decrease in shipments of product to customers outside our network of franchised retail stores, partially offset by a 1.0% increase in shipments to our network of franchised and a 4.7%licensed stores. The decrease in same-storeshipments of product to customers outside our network of franchised and licensed stores was primarily the result of a decrease in purchases by the Company’s largest customer during FY 2019, with revenue from such customer decreasing to approximately $3.1 million, or 9.1%, of the Company’s revenues during FY 2019, compared to $5.1 million, or 13.4% of the Company’s revenues during FY 2018 for this same customer. Same-store pounds purchased by franchise and co-branded license locations decreased 0.5% during FY 20172019 compared with FY 2016, and a 3.0% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation.2018.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of certain Company-owned locations and the closure of a certain underperforming Company-owned location.locations. Same store sales at all Company-owned stores and cafés increased 0.5%1.4% during FY 20172019 compared with FY 2016. Same-store sales at U-Swirl cafés decreased 2.2% during FY 2017 compared to FY 2016.2018.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 20172019 compared to FY 20162018 resulted primarily from a 12.3%9.1% decrease in franchise units in operation and lower same store sales.operation. The average number of total franchise stores in operation decreased from 423317 during FY 20162018 to 371288 during FY 2017.2019. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation decreased 0.2%increased 0.6% during FY 20172019 compared to FY 2016.2018. Franchise fee revenues decreased in FY 2019 compared to FY 2018 primarily as a result of $9,000$359,000 in international license fees being recognized during FY 2017 compared2018 with $263,000no comparable fees recognized during FY 2016.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2017, U-Swirl revenue decreased 20.2% to $5,216,100 compared with $6,535,600 of U-Swirl revenue consolidated within our results for FY 2016. The decrease resulted from a 20.4% decrease in average domestic U-Swirl franchise cafés in operation during FY 2017 compared to FY 2016, primarily as a result of store closings exceeding store openings, in-line with expected industry trends. 2019.
COSTS AND EXPENSES
Cost of Sales
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Cost of sales – factory | $ | 19,181.0 | $ | 19,151.7 | $ | 29.3 | 0.2 | % | ||||||||
Cost of sales – retail | 1,554.8 | 1,714.8 | (160.0 | ) | (9.3 | %) | ||||||||||
Franchise costs | 2,067.5 | 2,452.6 | (385.1 | ) | (15.7 | %) | ||||||||||
Sales and marketing | 2,658.4 | 2,466.5 | 191.9 | 7.8 | % | |||||||||||
General and administrative | 4,005.1 | 4,663.9 | (658.8 | ) | (14.1 | %) | ||||||||||
Retail operating | 2,404.0 | 2,951.8 | (547.8 | ) | (18.6 | %) | ||||||||||
Total | $ | 31,870.8 | $ | 33,401.3 | $ | (1,530.5 | ) | (4.6 | %) |
For the Year Ended | ||||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 19,360.5 | $ | 19,703.6 | $ | (343.1 | ) | (1.7 | )% | |||||||
Cost of sales - retail | 1,239.0 | 1,473.1 | (234.1 | ) | (15.9 | )% | ||||||||||
Franchise costs | 1,980.8 | 2,097.6 | (116.8 | ) | (5.6 | )% | ||||||||||
Sales and marketing | 2,210.8 | 2,489.5 | (278.7 | ) | (11.2 | )% | ||||||||||
General and administrative | 3,432.6 | 3,904.6 | (472.0 | ) | (12.1 | )% | ||||||||||
Retail operating | 1,934.9 | 2,389.3 | (454.4 | ) | (19.0 | )% | ||||||||||
Total | $ | 30,158.6 | $ | 32,057.7 | $ | (1,899.1 | ) | (5.9 | )% |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 6,242.8 | $ | 7,204.1 | $ | ( 961.3 | ) | (13.3 | %) | |||||||
Retail | 2,897.9 | 3,290.2 | (392.3 | ) | (11.9 | %) | ||||||||||
Total | $ | 9,140.7 | $ | 10,494.3 | $ | (1,353.6 | ) | (12.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,819.0 | $ | 6,353.0 | $ | (1,534.0 | ) | (24.1 | )% | |||||||
Retail gross margin | 2,145.3 | 2,638.1 | (492.8 | ) | (18.7 | )% | ||||||||||
Total | $ | 6,964.3 | $ | 8,991.1 | $ | (2,026.8 | ) | (22.5 | )% |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 24.6 | % | 27.3 | % | (2.7% | ) | (9.9 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6% | ) | (0.9 | %) | ||||||||
Total | 30.6 | % | 33.5 | % | (2.9% | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28, | % | % | ||||||||||||||
(Percent) | 2019 | 2018 | Change | Change | ||||||||||||
| ||||||||||||||||
Factory gross margin | 19.9 | % | 24.4 | % | (4.5 | )% | (18.4 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total | 25.3 | % | 29.8 | % | (4.5 | )% | (15.1 | )% |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 6,242.8 | $ | 7,204.1 | $ | ( 961.3 | ) | (13.3 | %) | |||||||
Plus: depreciation and amortization | 447.7 | 404.4 | 43.3 | 10.7 | % | |||||||||||
Factory adjusted gross margin | 6,609.5 | 7,608.5 | (999.0 | ) | (13.1 | %) | ||||||||||
Retail | 2,897.9 | 3,290.2 | (392.3 | ) | (11.9 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 9,507.4 | $ | 10,898.7 | $ | (1,391.3 | ) | (12.8 | %) | |||||||
Factory adjusted gross margin | 26.0 | % | 28.9 | % | (2.9 | %) | (10.0 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6 | %) | (0.9 | %) | ||||||||
Total Adjusted Gross Margin | 31.8 | % | 34.8 | % | (3.0 | %) | (8.6 | %) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,819.0 | $ | 6,353.0 | $ | (1,534.0 | ) | (24.1 | )% | |||||||
Plus: depreciation and amortization | 555.9 | 523.0 | 32.9 | 6.3 | % | |||||||||||
Factory adjusted gross margin | 5,374.9 | 6,876.0 | (1,501.1 | ) | (21.8 | )% | ||||||||||
Retail gross margin | 2,145.3 | 2,638.1 | (492.8 | ) | (18.7 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 7,520.2 | $ | 9,514.1 | $ | (1,993.9 | ) | (21.0 | )% | |||||||
Factory adjusted gross margin | 22.2 | % | 26.4 | % | (4.2 | )% | (15.9 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 31.5 | % | (4.2 | )% | (13.3 | )% |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 270450 basis points during FY 20172019 compared to FY 20162018 due primarily to increasedlower efficiencies associated with a 13.9% decrease in production volume and higher costs associated with inventory obsolescence. Costs associated with inventory obsolescence were generally the result of laborthe initiation of product rationalization resulting from lower volume and overhead related to maintenance, equipment issues and product mix shift, partially offset by lower costs of certain materials.underperforming products. The decrease in Company-owned store margin is due primarily to product mix shift primarily resultinga decrease in Company-owned café revenue from the sale or closure of certain underperforming Company-owned storesyogurt and Cafés.the associated higher margins.
Franchise Costs
The decrease in franchise costs for FY 20172019 compared to FY 20162018 is due primarily to a decrease in professional fees and lower franchise costs associated with supporting U-Swirl franchise unitslower international development in FY 20172019 compared to FY 2016 as a result of fewer store openings in FY 2017.2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreasedincreased to 24.6%28.4% during FY 20172019 from 27.0%26.5% during FY 2016.2018. This decreaseincrease as a percentage of royalty, marketing and franchise fees is primarily a result of a 15.7%an 11.7% decrease in total royalty and marketing fees and franchise costsfee revenue during FY 20172019 compared to FY 2016.2018.
Sales and Marketing
The increasedecrease in sales and marketing costs during FY 20172019 compared to FY 20162018 is primarily due to higher marketing relatedlower marketing-related compensation and professional fees partially offset by lower marketing-related costs associated with U-Swirl franchise locations. Marketing costs for U-Swirl franchise locations declined because of lower marketing fee revenues resulting from fewer franchise stores in operation.
General and Administrative
The decrease in general and administrative costs during FY 20172019 compared to FY 20162018 is due primarily to lower professional fees, the foreclosureresult of U-Swirl in the prior yearresolving legal proceedings, and the associated focus on reduction of duplicative general and administrativelower compensation costs. During FY 2017,2019, approximately $460,000$103,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,291,000$307,000 during FY 2016.2018. As a percentage of total revenues, general and administrative expenses decreased to 10.5%9.9% in FY 20172019 compared to 11.5%10.3% in FY 2016.2018.
Retail Operating Expenses
The decrease in retailRetail operating expenses decreased during FY 20172019 compared to FY 2016 was2018 due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of a certain underperforming Company-owned units.location, offset by the acquisition of a franchised location. Retail operating expenses, as a percentage of retail sales, decreased to 54.0%57.2% during FY 20172019 from 59.0%58.1% during FY 2016.2018. This is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $841,000$1,154,000 during FY 2017, a decrease2019, an increase of 17.2%45.0% from $1,016,000$796,000 incurred during FY 2016.2018. This decreaseincrease was the result of fewer Company-owned store assetsa change in service duemanagement’s estimates related to the sale or closurefuture value of U-Swirl intangibles and the associated acceleration of amortization expense. During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain Company-owned stores and cafés.intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Depreciation and amortization included in cost of sales increased 10.7%6.3% from $404,000$523,000 during FY 20162018 to $448,000$556,000 during FY 2017.2019. This increase was the result of an increase in production assets in service.
Other Income (Expense)
Net interest expense was $128,800$50,300 in FY 20172019 compared to net interest expense of $167,900$96,700 in FY 2016.2018. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions by U-Swirl.
Income Tax Expense
We realized an income tax expense of $1,946,000$717,000 in FY 20172019 compared to an income tax benefitexpense of $261,400$2,160,000 during FY 2016. As described further in Note 6 to the consolidated financial statements, the increase in the effective tax rate is primarily due to the tax consequences of acquiring a 100% controlling interest in U-Swirl during FY 2016.
Fiscal 2016 Compared To Fiscal 2015
Results Summary
Basic earnings per share increased 17.2% from $0.64 in FY 2015 to $0.75 in FY 2016. Revenues decreased 2.5% from $41.5 million for FY 2015 to $40.5 million for FY 2016. Operating income decreased 5.4% from $6.0 million in FY 2015 to $5.6 million in FY 2016. Net income increased 12.4% from $3.9 million in FY 2015 to $4.4 million in FY 2016. The decrease in operating income for FY 2016 compared to FY 2015 is due primarily to a decrease in revenues. The increase in net income is primarily the result of an impairment charge associated with U-Swirl goodwill and certain long lived assets more than offset by income tax benefit recognized.
Revenues
For the Year Ended | ||||||||||||||||
February 29 or 28, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory sales | $ | 26,355.8 | $ | 25,894.6 | $ | 461.2 | 1.8 | % | ||||||||
Retail sales | 5,005.0 | 6,206.0 | (1,201.0 | ) | (19.4% | ) | ||||||||||
Royalty and marketing fees | 8,547.6 | 8,821.0 | (273.4 | ) | (3.1% | ) | ||||||||||
Franchise fees | 548.5 | 586.8 | (38.3 | ) | (6.5% | ) | ||||||||||
Total | $ | 40,456.9 | $ | 41,508.4 | $ | (1,051.5 | ) | (2.5% | ) |
Factory Sales
The increase in factory sales for FY 2016 compared to FY 2015 was primarily due to an 8.1% increase in shipments of product to customers outside our network of franchised retail stores. This increase was partially offset by a 5.3% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation and a 1.5% decrease in same-store pounds purchased by franchise and co-branded license locations during FY 2016 compared with FY 2015.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of five Company-owned locations and the closure of two underperforming Company-owned cafés. Same store sales at all Company-owned stores and cafés decreased 0.8% during FY 2016 compared with FY 2015. Same-store sales at U-Swirl cafés decreased 1.0% during FY 2016 compared to FY 2015.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 2016 compared to FY 2015 resulted from an 11.1% decrease in franchise units in operation and lower same store sales. The average number of total franchise stores in operation decreased from 476 during FY 2015 to 423 during FY 2016. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation increased 0.7% during FY 2016 compared to FY 2015. Franchise fee revenues decreased as a result of fewer international license fees during FY 2016 compared to FY 2015.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2016, U-Swirl revenue decreased 15.7% to $6,535,600 compared with $7,753,000 of U-Swirl revenue consolidated within our results for FY 2015. The decrease resulted from a 15.1% decrease in average domestic U-Swirl franchise cafés in operation during FY 2016 compared to FY 2015, primarily as a result of store closings exceeding store openings and acquired franchisees.
COSTS AND EXPENSES
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Cost of sales – factory adjusted | $ | 19,151.7 | $ | 18,432.3 | $ | 719.4 | 3.9 | % | ||||||||
Cost of sales – retail | 1,714.8 | 2,177.3 | (462.5 | ) | (21.2 | %) | ||||||||||
Franchise costs | 2,452.6 | 2,264.1 | 188.5 | 8.3 | % | |||||||||||
Sales and marketing | 2,466.5 | 2,474.0 | (7.5 | ) | (0.3 | %) | ||||||||||
General and administrative | 4,663.9 | 4,831.9 | (168.0 | ) | (3.5 | %) | ||||||||||
Retail operating | 2,951.8 | 3,509.6 | (557.8 | ) | (15.9 | %) | ||||||||||
Total | $ | 33,401.3 | $ | 33,689.2 | $ | ( 287.9 | ) | (0.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total | $ | 10,494.3 | $ | 11,491.0 | $ | ( 996.7 | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 27.3 | % | 28.8 | % | (1.5% | ) | (5.2% | ) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total | 33.5 | % | 35.8 | % | (2.3% | ) | (6.4% | ) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Plus: depreciation and amortization | 404.4 | 393.8 | 10.6 | 2.7 | % | |||||||||||
Factory adjusted gross margin | 7,608.5 | 7,856.1 | (247.6 | ) | (3.2 | %) | ||||||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 10,898.7 | $ | 11,884.8 | $ | ( 986.1 | ) | (8.3 | %) | |||||||
Factory adjusted gross margin | 28.9 | % | 30.3 | % | (1.4 | %) | (4.6 | %) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total Adjusted Gross Margin | 34.8 | % | 37.0 | % | (2.2 | %) | (5.9 | %) |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 150 basis points during FY 2016 compared to FY 2015 due primarily to increased costs of certain materials and a shift in product and customer mix. The increase in Company-owned store margin is due primarily to the sale or closure of certain underperforming Company-owned stores and cafés.
Franchise Costs
The increase in franchise costs for FY 2016 compared to FY 2015 is due primarily to franchise costs associated with supporting U-Swirl franchise units. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.0% during FY 2016 from 24.1% during FY 2015. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of a 3.3% decrease in royalty, marketing and franchise fee revenue as a result of a decrease in the number of domestic franchise stores during FY 2016 compared to FY 2015.
Sales and Marketing
Sales and marketing costs were approximately unchanged during FY 2016 compared to FY 2015.
General and Administrative
The decrease in general and administrative costs during FY 2016 compared to FY 2015 is due primarily to the reorganization of U-Swirl in the prior year and the associated focus on reduction of duplicative general and administrative costs, partially offset by an increase in professional fees. During FY 2016, approximately $1,291,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,651,000 during FY 2015. As a percentage of total revenues, general and administrative expenses decreased to 11.5% in FY 2016 compared to 11.6% in FY 2015.
Retail Operating Expenses
The decrease in retail operating expense was due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of certain underperforming Company-owned units. The average number of Company-owned stores in operation decreased from 16 during FY 2015 to 12 units during FY 2016. Retail operating expenses, as a percentage of retail sales, increased from 56.6% during FY 2015 to 59.0% in FY 2016. This increase is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $1,016,000 during FY 2016, a decrease of 3.0% from $1,047,000 incurred during FY 2015. This decrease is due to a decrease in amortization related to franchise rights, trademark and intangible assets. Depreciation and amortization included in cost of sales increased 2.5% from $394,000 during FY 2015 to $404,000 during FY 2016. This increase was the result of an increase in production assets in service.
Other Income
Net interest expense was $167,900 in FY 2016 compared to net interest expense of $184,500 in FY 2015. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions of U-Swirl.
Income Tax Expense
We realized an income tax benefit of $261,400 in FY 2016 compared to expense of $2,037,695, an effective rate of 35.3%, during FY 2015.2018. As described further in Note 6 to the consolidated financial statements, the decrease in the effective tax rate is primarily due to the revaluation of deferred tax consequencesassets and liabilities to the lower enacted U.S. corporate tax rate of 21% under the recent Tax Cuts and Jobs Act recognized during FY 2018, with no comparable revaluation recognized during FY 2019. Additionally, the decrease in the effective tax rate during FY 2019 compared to 2018 was due to the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act being effective for all of FY 2019 and only two months of FY 2018.
Fiscal 2018 Compared To Fiscal 2017
A discussion of our controlling interestresults of operations for FY 2018 in U-Swirl.comparison to FY 2017 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Fiscal Year Ended February 28, 2018.
Liquidity and Capital Resources
As of February 28, 2017,28, 2019, working capital was $7.1$9.5 million compared with $7.2$7.4 million as of February 29, 2016.28, 2018. The decreaseincrease in working capital was due primarily to the impact of the adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 and our operating results less the payment of $2.8 million in cash dividends, $1.4 million in debt repayments and the purchase of $1.2 million$614,000 of property and equipment and $1.3 million in debt repayments.equipment. We have historically generated excess operating cash flow. We review our working capital needs and projections and when we believe that we have greater working capital than necessary we have historically utilized that excess working capital to repurchase common stock and pay dividends to our stockholders. This trend continued during FY 2017, resulting in the decrease in working capital at February 28, 2017 compared with February 29, 2016.
Cash and cashcash equivalent balances decreased from $6.2 million as of February 29, 2016 to $5.8$6.1 million as of February 28, 20172018 to $5.4 million as of February 28, 2019 as a result of cash flows generated by operating activities being less than cash flows used in financing and investing activities. The Company’sOur current ratio was 3.0 to 1.0 at February 28, 2019 compared to 1.9 to 1.0 at February 28, 2017, which was the same at February 29, 2016. The Company monitors2018. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2017,2019, we had net income of $3.45$2.2 million. Operating activities provided cash of $5.3$4.0 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.7 million and stock compensation expense of $520,000. During FY 2018, we had net income of $3.0 million. Operating activities provided cash of $4.8 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock compensation expense of $0.6 million. During FY 2016, we had net income of $3.8 million, and operating activities provided cash of $6.8 million. The principal adjustment to reconcile the net income to net cash provided by operating activities was asset impairments of $2.3 million, depreciation and amortization of $1.4 million and stock compensation expense of $0.8 million.
During FY 2017,2019, investing activities used cash of $1.3 million,$506,000, primarily due to the purchases of property and equipment of $1.2 million$614,000 the result of investment in factory infrastructure improvements.improvements, partially offset by proceeds received on notes receivable of $102,000. In comparison, investing activities used cash of $0.7 million$340,000 during FY 20162018 primarily due to the purchases of property and equipment of $0.7 million.$545,000 the result of investment in factory infrastructure improvements, partially offset by proceeds received on notes receivable of $231,000.
Financing activities used cash of $4.4$4.2 million during FY 20172019 and used cash of $7.1$4.1 million during the prior year. ThisThe increase in cash used in financing activities was primarily due to a decreasean increase in the amount of common stock repurchased during FY 2017.debt service being applied to principal, the result of lower interest expense.
The Company has a $5$5.0 million credit line for general corporate and working capital purposes, of which $5$5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2017,2019. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (4.7% at February 28, 2019). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2017.2019 and the Company believes it is likely to be renewed on terms similar to the current terms.
The Company’sCompany’s long-term debt is comprised of a promissory note used to finance prior business acquisitions of U-Swirlby SWRL (unpaid balance as of February 28, 2017, $3.82019, $1.2 million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. This promissory note matures in January 2020. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of February 28, 2017,2019, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets
TheThe table below presents significant contractual obligations of the Company at February 28, 2017.2019.
(Amounts in thousands)
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | 3,832 | 1,303 | 2,529 | - | - | |||||||||||||||
Operating leases | 2,166 | 817 | 980 | 176 | 193 | |||||||||||||||
Other long-term obligations | 472 | 189 | 171 | 112 | - | |||||||||||||||
Total | 6,470 | 2,309 | 3,680 | 288 | 193 |
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | $ | 1,176 | $ | 1,176 | $ | - | $ | - | $ | - | ||||||||||
Operating leases | 2,949 | 758 | 1,333 | 683 | 175 | |||||||||||||||
Purchase contracts | 880 | 880 | - | - | - | |||||||||||||||
Other long-term obligations | 231 | 135 | 96 | - | - | |||||||||||||||
Total | $ | 5,236 | $ | 2,949 | $ | 1,429 | $ | 683 | $ | 175 |
For FY 2018,2020, the Company anticipates making capital expenditures of approximately $1.0 million,$900,000, which will be used to maintain and improve existing factory and administrative infrastructure. The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2018.2020. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
Operating leases: Our Company-owned stores are occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, some of which contain optional renewal rights. We also lease warehouse facilities to support our manufacturing operations and we lease most of our transportation equipment. We do not deem any individual lease to be significant in relation to our overall operations.
Purchase obligations: As of February 28, 2017,28, 2019, we had no off-balance sheet arrangements or obligations.purchase obligations of approximately $880,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’sCompany’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s 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 the Company’s 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria. We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we ordinarily extend credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
We recorded an average expense of approximately $174,300$149,000 per year for potential uncollectible accounts over the three-year period ended February 28, 2017.2019. Write-offs of uncollectible accounts net of recoveries averaged approximately $195,900$209,500 over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over the past three years, the allowances for doubtful notes and accounts have ranged from 10.7%10.0% to 12.6%10.7% of gross receivables.
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. FranchiseBeginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of the associated agreement, which is generally a period of 10-15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon the opening of the store. International license fees are recognizedfranchise store, or upon the execution of thean international license agreement and payment of the license fee.agreement. We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with franchise store openings in the third quarter of FY 2004, we modified our royalty structure. Under the current structure, we recognizeThe Company recognizes no royalty on Rocky Mountain Chocolate Factory franchised stores’ retail sales of products purchased from usthe Company and recognizerecognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. ForRoyalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise stores opened priorrights and range from 2.5% to the third quarter6% of FY 2004 we recognize a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28, 2017,2019, the Company recorded expense averaging $110,600$228,900 per year for potential inventory losses, or approximately 0.5%1.1% of total cost of sales for that period.
Consolidation – The consolidated financial statements in this Annual Report include the accounts of the Company and its subsidiaries. On January 14, 2013 we acquired a controlling interest in U-Swirl. Prior to January 14, 2013, our consolidated financial statements exclude the financial information of U-Swirl. Beginning on January 14, 2013 and continuing through February 28, 2017,2019, the results of operations, assets and liabilities of U-Swirl have been included in our consolidated financial statements. All material inter-Company balances have been eliminated upon consolidation.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. We previously entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with acquisitions of SWRL (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. On February 29, 2016, RMCF repossessed all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement with SWRL. As described in Note 1 below, this was the result of SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants.Agreement. As of February 29, 2016 U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. RMCFWe performed a test of impairment as a result of the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the financial statements.
Franchise Rights – Franchise rights consists of the purchase price paid in consideration of certain rights associated with franchise agreements. These franchise agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.
Other accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with its evaluation of the recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrumentsinstruments for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 2017,2019, based on future contractual obligations for chocolate products, we estimate that a 10% increase or decrease in the prices of contracted ingredients would result in a $259,000an $88,000 favorable or unfavorable price benefit or cost resulting from our commodity purchase contracts.
The Company has a $5$5 million bank line of credit that bears interest at a variable rate. As of February 28, 2017,2019, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of February 28, 2017, $3.82019, $1.2 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.
ITEMITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page | |
|
|
35 | |
36 | |
37 | |
38 | |
39 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders of
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Durango, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Rocky Mountain Chocolate Factory, Inc. and Subsidiaries (the “Company”) as of February 28, 2017 and February 29, 2016, and28, 2019, the related consolidated statementsstatement of income, changes in stockholders’stockholders' equity, and cash flows for each of the years in the three-year periodyear ended February 28, 2017. Our audits also included2019, and the consolidatedrelated notes (collectively referred to as the “financial statements”). In our opinion, the financial statement schedule listedstatements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and the results of its operations and its cash flows for the year ended February 28, 2019, in conformity with accounting principles generally accepted in the Index at Item 15. These consolidatedUnited States of America.
As discussed in Note 1 to the financial statements, and schedule are the responsibility ofCompany adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the Company’s management.modified retrospective adoption method on March 1, 2018.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements and schedule based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting (“Internal Control”). Ourreporting. As part of our audit included considerationwe are required to obtain an understanding of Internal Control as a basis for designing audit procedures that are appropriate in the circumstances,internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s Internal Control.Company's internal control over financial reporting. Accordingly, we express no such opinion. An
Our audit also includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidatedpresentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 and 17 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on March 1, 2018.
We have audited the impact to the 2018 financial statements as disclosed under the modified retrospective method as a result of the adoption of ASC Topic 606, “Revenue from Contracts with Customers”, as described in Note 1 and 17 to the financial statements. In our opinion, the consolidatedimpacts are appropriate and have been properly disclosed. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the impacts disclosed and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements taken as a whole.
/s/ Plante & Moran, PLLC
Denver, Colorado
May 8, 2019
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2018, the related statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. and Subsidiariesthe Company as of February 28,28, 2018 and 2017, and February 29, 2016, and the results of theirits operations and theirits cash flows for each of the years in the three-yeartwo-year period ended February 28, 20172018, in conformity with accounting principles generally accepted in the United States of America. Also, in
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our opinion,audits. We are a public accounting firm registered with the related financial statement schedule, when considered in relationPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the basic consolidatedCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements taken as a whole, presents fairly in allare free of material respects,misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the information set forth therein.purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EKS&H LLLP
May 23, 2017
Denver, Colorado
May 15, 2018
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 29,876,507 | $ | 31,360,745 | $ | 32,100,824 | ||||||
Franchise and royalty fees | 8,419,870 | 9,096,150 | 9,407,552 | |||||||||
Total revenues | 38,296,377 | 40,456,895 | 41,508,376 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,735,739 | 20,866,482 | 20,609,609 | |||||||||
Franchise costs | 2,067,530 | 2,452,609 | 2,264,138 | |||||||||
Sales & marketing | 2,658,421 | 2,466,469 | 2,474,027 | |||||||||
General and administrative | 4,005,142 | 4,663,914 | 4,831,903 | |||||||||
Retail operating | 2,404,003 | 2,951,783 | 3,509,584 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $447,651, $404,391 and $393,776, respectively, included in cost of sales | 841,058 | 1,015,910 | 1,046,672 | |||||||||
Impairment of long-lived assets and goodwill | - | 2,326,742 | - | |||||||||
Restructuring and acquisition related charges | 60,000 | - | 807,476 | |||||||||
Total costs and expenses | 32,771,893 | 36,743,909 | 35,543,409 | |||||||||
Operating Income | 5,524,484 | 3,712,986 | 5,964,967 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (170,351 | ) | (216,600 | ) | (243,188 | ) | ||||||
Interest income | 41,572 | 48,745 | 58,662 | |||||||||
Other, net | (128,779 | ) | (167,855 | ) | (184,526 | ) | ||||||
Income Before Income Taxes | 5,395,705 | 3,545,131 | 5,780,441 | |||||||||
Income Tax Expense (Benefit) | 1,945,589 | (261,400 | ) | 2,037,695 | ||||||||
Net Income | 3,450,116 | 3,806,531 | 3,742,746 | |||||||||
Less: Net loss attributable to non-controlling interest | - | (619,376 | ) | (195,094 | ) | |||||||
Net Income attributable to RMCF stockholders | $ | 3,450,116 | $ | 4,425,907 | $ | 3,937,840 | ||||||
Basic Earnings per Common Share | $ | 0.59 | $ | 0.75 | $ | 0.64 | ||||||
Diluted Earnings per Common Share | $ | 0.58 | $ | 0.73 | $ | 0.61 | ||||||
Weighted Average Common Shares Outstanding | 5,843,245 | 5,893,618 | 6,144,426 | |||||||||
Dilutive Effect of Employee Stock Awards | 150,447 | 201,856 | 268,913 | |||||||||
Weighted Average Common Shares Outstanding, Assuming Dilution | 5,993,692 | 6,095,474 | 6,413,339 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 27,563,794 | $ | 30,167,760 | $ | 29,876,507 | ||||||
Franchise and royalty fees | 6,981,653 | 7,906,935 | 8,419,870 | |||||||||
Total Revenue | 34,545,447 | 38,074,695 | 38,296,377 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,599,551 | 21,176,711 | 20,735,739 | |||||||||
Franchise costs | 1,980,781 | 2,097,555 | 2,067,530 | |||||||||
Sales and marketing | 2,210,800 | 2,489,483 | 2,658,421 | |||||||||
General and administrative | 3,432,618 | 3,904,560 | 4,005,142 | |||||||||
Retail operating | 1,934,891 | 2,389,296 | 2,404,003 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $555,926, $523,034, and $447,651, respectively, included in cost of sales | 1,153,873 | 796,221 | 841,058 | |||||||||
Costs associated with Company-owned store closures | 226,981 | - | 60,000 | |||||||||
Total costs and expenses | 31,539,495 | 32,853,826 | 32,771,893 | |||||||||
Income from Operations | 3,005,952 | 5,220,869 | 5,524,484 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (70,787 | ) | (121,244 | ) | (170,351 | ) | ||||||
Interest income | 20,496 | 24,578 | 41,572 | |||||||||
Other expense, net | (50,291 | ) | (96,666 | ) | (128,779 | ) | ||||||
Income Before Income Taxes | 2,955,661 | 5,124,203 | 5,395,705 | |||||||||
Income Tax Provision | 716,862 | 2,160,295 | 1,945,589 | |||||||||
Consolidated Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Basic Earnings per Common Share | $ | 0.38 | $ | 0.50 | $ | 0.59 | ||||||
Diluted Earnings per Common Share | $ | 0.37 | $ | 0.50 | $ | 0.58 | ||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Basic | 5,931,431 | 5,884,337 | 5,843,245 | |||||||||
Dilutive Effect of Employee | ||||||||||||
Stock Awards | 51,207 | 96,099 | 150,447 | |||||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Diluted | 5,982,638 | 5,980,436 | 5,993,692 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28 or 29, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,779,195 | $ | 6,194,948 | ||||
Accounts receivable, less allowance for doubtful accounts of $487,446 and $595,471, respectively | 3,855,823 | 3,799,691 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $22,147 and $0, respectively | 235,612 | 317,248 | ||||||
Refundable income taxes | 47,863 | - | ||||||
Inventories, less reserve for slow moving inventory of $249,051 and $261,346, respectively | 4,975,779 | 4,840,108 | ||||||
Other | 256,548 | 286,859 | ||||||
Total current assets | 15,150,820 | 15,438,854 | ||||||
Property and Equipment, Net | 6,457,931 | 6,010,303 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and allowance for doubtful accounts of $26,500 and $75,000, respectively | 370,769 | 530,446 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights | 4,826,172 | 5,153,363 | ||||||
Intangible assets, net | 632,207 | 419,042 | ||||||
Deferred income taxes | 858,874 | 1,421,655 | ||||||
Other | 74,639 | 295,118 | ||||||
Total other assets | 7,809,605 | 8,866,568 | ||||||
Total Assets | $ | 29,418,356 | $ | 30,315,725 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,302,501 | $ | 1,254,007 | ||||
Accounts payable | 1,820,470 | 1,663,245 | ||||||
Accrued salaries and wages | 608,510 | 683,863 | ||||||
Gift card liabilities | 2,921,585 | 2,835,943 | ||||||
Other accrued expenses | 253,497 | 364,955 | ||||||
Dividend payable | 702,525 | 700,728 | ||||||
Deferred income | 451,171 | 502,950 | ||||||
Total current liabilities | 8,060,259 | 8,005,691 | ||||||
Long-Term Debt, Less Current Maturities | 2,529,240 | 3,831,126 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock, authorized 50,000 shares | - | - | ||||||
Undesignated series, authorized 200,000 shares | - | - | ||||||
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,854,372 and 5,839,396 issued, and 5,854,372 and 5,839,396 outstanding, respectively | 5,854 | 5,839 | ||||||
Additional paid-in capital | 5,539,357 | 5,340,190 | ||||||
Retained earnings | 13,283,646 | 13,132,879 | ||||||
Total stockholders’ equity | 18,828,857 | 18,478,908 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 29,418,356 | $ | 30,315,725 |
AS OF FEBRUARY 28, | ||||||||
2019 | 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,384,027 | $ | 6,072,984 | ||||
Accounts receivable, less allowance for doubtful accounts of $489,502 and $479,472, respectively | 3,993,262 | 3,897,334 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $0 and $9,000, respectively | 110,162 | 105,540 | ||||||
Refundable income taxes | 190,201 | 342,863 | ||||||
Inventories, less reserve for slow moving inventory of $371,147 and $357,706, respectively | 4,270,357 | 4,842,474 | ||||||
Other | 318,126 | 310,173 | ||||||
Total current assets | 14,266,135 | 15,571,368 | ||||||
Property and Equipment, Net | 5,786,139 | 6,166,240 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and valuation allowance of $0 and $17,500, respectively | 281,669 | 235,983 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights, net | 3,678,920 | 4,433,927 | ||||||
Intangible assets, net | 498,337 | 587,377 | ||||||
Deferred income taxes | 607,421 | 835,463 | ||||||
Other | 56,576 | 63,333 | ||||||
Total other assets | 6,169,867 | 7,203,027 | ||||||
Total Assets | $ | 26,222,141 | $ | 28,940,635 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,176,488 | $ | 1,352,893 | ||||
Accounts payable | 897,074 | 1,647,991 | ||||||
Accrued salaries and wages | 655,853 | 644,005 | ||||||
Gift card liabilities | 742,289 | 3,057,131 | ||||||
Other accrued expenses | 293,094 | 325,034 | ||||||
Dividend payable | 714,939 | 708,652 | ||||||
Contract liabilities | 256,094 | 471,910 | ||||||
Total current liabilities | 4,735,831 | 8,207,616 | ||||||
Long-Term Debt, Less Current Maturities | - | 1,176,416 | ||||||
Contract Liabilities, Less Current Portion | 1,096,478 | - | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock; 50,000 authorized; -0- shares issued and outstanding | - | - | ||||||
Undesignated series; 200,000 shares authorized; -0- shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 5,957,827 shares and 5,903,436 shares issued and outstanding, respectively | 5,958 | 5,903 | ||||||
Additional paid-in capital | 6,650,864 | 6,131,147 | ||||||
Retained earnings | 13,733,010 | 13,419,553 | ||||||
Total stockholders' equity | 20,389,832 | 19,556,603 | ||||||
Total Liabilities and Stockholders' Equity | $ | 26,222,141 | $ | 28,940,635 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,839 | $ | 180,384 | $ | 184,206 | ||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | (174,371 | ) | - | ||||||||
Repurchase and retirement of common stock | (35 | ) | (233 | ) | (7,383 | ) | ||||||
Issuance of common stock | 2 | 4 | 120 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48 | 55 | 3,441 | |||||||||
Balance at end of year | 5,854 | 5,839 | 180,384 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 5,340,190 | 7,163,092 | 8,921,723 | |||||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | 174,371 | - | |||||||||
Repurchase and retirement of common stock | (351,548 | ) | (3,030,475 | ) | (3,120,241 | ) | ||||||
Issuance of common stock | 20,418 | 61,036 | 47,360 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 564,425 | 602,498 | 731,400 | |||||||||
Transfers from non-controlling interest | - | 349,800 | 382,306 | |||||||||
Tax (expense) benefit from employee stock transactions | (34,128 | ) | 19,868 | 200,544 | ||||||||
Balance at end of year | 5,539,357 | 5,340,190 | 7,163,092 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,132,879 | 11,524,708 | 10,344,794 | |||||||||
Net income attributable to RMCF stockholders | 3,450,116 | 4,425,907 | 3,937,840 | |||||||||
Cash dividends declared | (2,806,583 | ) | (2,817,736 | ) | (2,757,926 | ) | ||||||
Correction of immaterial error1 | (492,766 | ) | - | - | ||||||||
Balance at end of year | 13,283,646 | 13,132,879 | 11,524,708 | |||||||||
Non-controlling Interest in Equity of Subsidiary | ||||||||||||
Balance at beginning of year | - | 869,671 | 401,655 | |||||||||
Net loss | - | (619,376 | ) | (195,094 | ) | |||||||
Deductions | - | (310,995 | ) | - | ||||||||
Contributions | - | 60,700 | 663,110 | |||||||||
Balance at end of year | - | - | 869,671 | |||||||||
Total Stockholders’ Equity | $ | 18,828,857 | $ | 18,478,908 | $ | 19,737,855 | ||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,839,396 | 6,012,799 | 6,140,200 | |||||||||
Repurchase and retirement of common stock | (35,108 | ) | (233,302 | ) | (246,106 | ) | ||||||
Issuance of common stock | 2,000 | 4,000 | 4,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48,084 | 55,899 | 114,705 | |||||||||
Balance at end of year | 5,854,372 | 5,839,396 | 6,012,799 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,903 | $ | 5,854 | $ | 5,839 | ||||||
Repurchase and retirement of common stock | - | - | (35 | ) | ||||||||
Issuance of common stock | 6 | 5 | 2 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49 | 44 | 48 | |||||||||
Balance at end of year | 5,958 | 5,903 | 5,854 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 6,131,147 | 5,539,357 | 5,340,190 | |||||||||
Repurchase and retirement of common stock | - | - | (351,548 | ) | ||||||||
Issuance of common stock | 55,971 | 59,095 | 20,418 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 463,746 | 532,695 | 564,425 | |||||||||
Tax (expense) benefit from employee stock transactions | - | - | (34,128 | ) | ||||||||
Balance at end of year | 6,650,864 | 6,131,147 | 5,539,357 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,419,553 | 13,283,646 | 13,132,879 | |||||||||
Net income attributable to RMCF stockholders | 2,238,799 | 2,963,908 | 3,450,116 | |||||||||
Cash dividends declared | (2,851,271 | ) | (2,828,001 | ) | (2,806,583 | ) | ||||||
Correction of immaterial error1 | - | - | (492,766 | ) | ||||||||
Adoption of ASC 6062 | 925,929 | - | - | |||||||||
Balance at end of year | 13,733,010 | 13,419,553 | 13,283,646 | |||||||||
Total Stockholders' Equity | 20,389,832 | 19,556,603 | 18,828,857 | |||||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,903,436 | 5,854,372 | 5,839,396 | |||||||||
Repurchase and retirement of common stock | - | - | (35,108 | ) | ||||||||
Issuance of common stock | 5,333 | 5,000 | 2,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49,058 | 44,064 | 48,084 | |||||||||
Balance at end of year | 5,957,827 | 5,903,436 | 5,854,372 |
1 As revised. Refer to Note 1716 for information on immaterial correction of errors in prior period.
2 Refer to Note 17 for information on the adoption of ASC 606.
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 3,450,116 | $ | 3,806,531 | $ | 3,742,746 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,288,709 | 1,420,301 | 1,440,448 | |||||||||
Provision for loss on accounts and notes receivable | 138,125 | 171,000 | 214,600 | |||||||||
Provision for inventory loss | 100,049 | 76,695 | 58,836 | |||||||||
Asset impairment and store closure losses | - | 2,319,003 | 225,640 | |||||||||
(Gain) loss on sale of assets | 37,112 | 90,149 | (46,857 | ) | ||||||||
Expense recorded for stock compensation | 584,893 | 763,094 | 865,240 | |||||||||
Deferred income taxes | 262,248 | (1,878,205 | ) | (55,068 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (128,404 | ) | 364,767 | 662,625 | ||||||||
Refundable income taxes | (47,863 | ) | 172,945 | (12,055 | ) | |||||||
Inventories | (2,735 | ) | 144,454 | (202,333 | ) | |||||||
Other assets | 29,442 | 24,415 | (16,087 | ) | ||||||||
Accounts payable | (87,657 | ) | (310,533 | ) | (451,080 | ) | ||||||
Accrued liabilities | (293,402 | ) | 154,800 | 325,544 | ||||||||
Deferred income | (9,619 | ) | (531,331 | ) | (880,684 | ) | ||||||
Net cash provided by operating activities | 5,321,014 | 6,788,085 | 5,871,515 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Additions to notes receivable | (133,202 | ) | (46,489 | ) | (179,569 | ) | ||||||
Proceeds received on notes receivable | 318,219 | 368,122 | 488,691 | |||||||||
Proceeds from sale or distribution of assets | 39,045 | 23,692 | 530,175 | |||||||||
Intangible assets | (312,947 | ) | (83,103 | ) | - | |||||||
Decrease (increase) in other assets | 34,479 | (212,860 | ) | (2,395 | ) | |||||||
Purchase of property and equipment | (1,238,472 | ) | (743,251 | ) | (626,744 | ) | ||||||
Net cash (used in) provided by investing activities | (1,292,878 | ) | (693,889 | ) | 210,158 | |||||||
Cash Flows From Financing Activities: | ||||||||||||
Payments on long-term debt | (1,253,392 | ) | (1,207,234 | ) | (107,633 | ) | ||||||
Repurchase of common stock | (351,583 | ) | (3,030,708 | ) | (3,127,624 | ) | ||||||
Issuance of common stock | - | - | 69,599 | |||||||||
Proceeds from issuance of common stock in subsidiary | - | - | 892,895 | |||||||||
Tax (expense) benefit of stock option exercise | (34,128 | ) | 19,868 | 200,544 | ||||||||
Dividends paid | (2,804,786 | ) | (2,838,545 | ) | (2,711,812 | ) | ||||||
Net cash used in financing activities | (4,443,889 | ) | (7,056,619 | ) | (4,784,031 | ) | ||||||
Net (Decrease) Increase In Cash And Cash Equivalents | (415,753 | ) | (962,423 | ) | 1,297,642 | |||||||
Cash And Cash Equivalents At Beginning Of Year | 6,194,948 | 7,157,371 | 5,859,729 | |||||||||
Cash And Cash Equivalents At End Of Year | $ | 5,779,195 | $ | 6,194,948 | $ | 7,157,371 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,709,799 | 1,319,255 | 1,288,709 | |||||||||
Provision for obsolete inventory | 325,478 | 166,868 | 138,125 | |||||||||
Provision for loss on accounts and notes receivable | 155,600 | 225,858 | 100,049 | |||||||||
Asset impairment and store closure losses | 67,822 | - | - | |||||||||
Loss on sale or disposal of property and equipment | 36,024 | 38,496 | 37,112 | |||||||||
Expense recorded for stock compensation | 519,772 | 591,839 | 584,893 | |||||||||
Deferred income taxes | (78,934 | ) | 23,411 | 262,248 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (390,663 | ) | (229,948 | ) | (128,404 | ) | ||||||
Refundable income taxes | 157,544 | (295,000 | ) | (47,863 | ) | |||||||
Inventories | 41,310 | (365,323 | ) | (2,735 | ) | |||||||
Other current assets | (8,225 | ) | (54,091 | ) | 29,442 | |||||||
Accounts payable | (545,588 | ) | 96,491 | (87,657 | ) | |||||||
Accrued liabilities | (84,191 | ) | 242,578 | (293,402 | ) | |||||||
Contract Liabilities | (129,527 | ) | 33,270 | (9,619 | ) | |||||||
Net cash provided by operating activities | 4,015,020 | 4,757,612 | 5,321,014 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Addition to notes receivable | - | (14,293 | ) | (133,202 | ) | |||||||
Proceeds received on notes receivable | 102,256 | 230,637 | 318,219 | |||||||||
Purchase of intangible assets | - | (8,508 | ) | (312,947 | ) | |||||||
Proceeds from (cost of) sale or distribution of assets | 13,498 | (7,926 | ) | 39,045 | ||||||||
Purchases of property and equipment | (613,786 | ) | (544,956 | ) | (1,238,472 | ) | ||||||
(Increase) decrease in other assets | (8,140 | ) | 5,529 | 34,479 | ||||||||
Net cash used in investing activities | (506,172 | ) | (339,517 | ) | (1,292,878 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Payments on long-term debt | (1,352,821 | ) | (1,302,432 | ) | (1,253,392 | ) | ||||||
Repurchase of common stock | - | - | (351,583 | ) | ||||||||
Tax expense of stock option exercise | - | - | (34,128 | ) | ||||||||
Dividends paid | (2,844,984 | ) | (2,821,874 | ) | (2,804,786 | ) | ||||||
Net cash used in financing activities | (4,197,805 | ) | (4,124,306 | ) | (4,443,889 | ) | ||||||
Net Decrease in Cash and Cash Equivalents | (688,957 | ) | 293,789 | (415,753 | ) | |||||||
Cash and Cash Equivalents, Beginning of Period | 6,072,984 | 5,779,195 | 6,194,948 | |||||||||
Cash and Cash Equivalents, End of Period | $ | 5,384,027 | $ | 6,072,984 | $ | 5,779,195 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS 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) and, Aspen Leaf Yogurt, LLC (“ALY”), its 39%-owned subsidiary, U-Swirl, Inc. (“SWRL”), and U-Swirl International, Inc. (“U-Swirl”), a wholly-ownedand its 46%-owned subsidiary, as of February 29, 2016U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.
Effective March 1, 2015, the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03 per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001, of Newco. The new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), the Company entered into two agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to SWRL, in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of February 29, 2016 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. As of February 28, 2017, the Company held a 39% interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving as the Company’s Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. becoming a wholly-owned subsidiary of the Company as of February 29, 2016. As of February 29, 2016 U-Swirl, Inc. had no assets.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’sCompany’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2017:2019:
Sold, Not Yet Open |
Open |
Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 4 | 4 | |||||||||
Franchise stores – Domestic stores and kiosks | 6 | 189 | 195 | |||||||||
International License Stores | - | 94 | 94 | |||||||||
Cold Stone Creamery – co-branded | 5 | 83 | 88 | |||||||||
U-Swirl cafés (Including all associated brands) | ||||||||||||
Company-owned cafés | - | 2 | 2 | |||||||||
Company-owned cafés – co-branded | - | 3 | 3 | |||||||||
Franchise stores – North American cafés | * | 129 | 129 | |||||||||
Franchise stores – North American – co-branded | * | 16 | 16 | |||||||||
International License cafés | - | 2 | 2 | |||||||||
Total | 11 | 522 | 533 |
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Sold, Not Yet Open | Open | Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 2 | 2 | |||||||||
Franchise stores - Domestic stores and kiosks | 4 | 183 | 187 | |||||||||
International license stores | 1 | 64 | 65 | |||||||||
Cold Stone Creamery - co-branded | 11 | 91 | 102 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores | - | 1 | 1 | |||||||||
Company-owned stores - co-branded | - | 3 | 3 | |||||||||
Franchise stores - Domestic stores | - | 87 | 87 | |||||||||
Franchise stores - Domestic - co-branded | - | 9 | 9 | |||||||||
International license stores | - | 2 | 2 | |||||||||
Total | 16 | 442 | 458 |
Consolidation
ManagementManagement accounts for the activities of the Company and its subsidiaries, and the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As described above, on January 14, 2013, the Company acquired a controlling interest in SWRL. Prior to January 14, 2013, the Company’s consolidated financial statements excludeexcluded the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets and liabilities of SWRL have been included in these consolidated financial statements. The Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under a loan and security agreement with SWRL to cover the SWRLpurchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement.Agreement”). This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February 29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $5.3$4.9 million at February 28, 2017.2019.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business, we extendthe Company extends credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At February 28, 2017,2019, the Company has $655,028had $391,831 of notes receivable outstanding and an allowance for doubtful accounts of $48,647$0 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through September, 2022November 2023 and approximately $579,000$375,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’sCompany’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.
Income Taxes
We provideThe 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 bases 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. Due to historical U-Swirl losses, prior to FY 2016 wethe Company established a full valuation allowance on ourthe Company’s deferred tax assets. During FY 2016 wethe Company took possession of the outstanding equity in U-Swirl International, Inc.U-Swirl. As a result of ourthe Company’s ownership increasing to 100%, wethe Company began filing consolidated income tax returns in FY 2017. Because of this change, we havethe Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 wethe Company further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The correction of this immaterial error to ourthe Company’s balance sheet is further described in Note 17.16. The Company's temporary differences are listed in Note 6.
Gift Card Breakage
The Company and ourits franchisees sell gift cards that are redeemable for product in our stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on ourthe Company’s gift cards, and we dothe Company does not charge any service fees. While ourthe Company’s franchisees continue to honor all gift cards presented for payment, wethe Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is inredeemed by the processcustomer or the Company determines the likelihood of accumulating sufficient historical redemption patterns to calculate breakage estimates related to unredeemedthe gift cards. Thiscard being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based on a percentage of sales when the likelihood of the redemption of the gift card becomes remote. When the Company has sufficientupon Company-specific historical redemption patterns to calculate breakage estimates, the gift card breakage will be recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. As the Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage estimates, the Company did not recognize gift card breakage during the year ended February 28 or 29, 2017 or 2016.patterns. Accrued gift card liability was $2,921,585$742,289 and $2,835,943$3,057,131 at February 28, or 29, 20172019 and 2016,2018, respectively. The Company recognized breakage of $139,188 and $0 during FY 2019 and FY 2018, respectively. See Note 17 to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC 606.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of ourthe Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the SWRL Loan Agreement with SWRL.Agreement. This was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of goodwill recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership and the result of ourthe Company’s test indicated a full impairment of the U-Swirl goodwill. OurThe Company’s testing and impairment is described in Note 13 to the financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under the acquisition method, the purchase price of the acquisition is allocated to the underlying tangible and intangible assets acquired based on their respective fair values. Fair values are derived from various observable and unobservable inputs and assumptions. The Company utilizes third-party valuation specialists to assist in the allocation. Initial purchase price allocations are preliminary and are subject to revision within the measurement period, not to exceed one year from the date of acquisition. The costs of the business acquisitions are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Moreover, unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to ourthe Company’s franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’sCompany’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
FranchiseBeginning in FY 2019, upon adoption of adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with Rocky Mountain Chocolate Factory franchise store openings in the third quarter of FY 2004, the Company modified its royalty structure. Under the current structure, theThe Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 the Company recognizes a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain instances, we arethe Company is required to pay a portion of franchise fee revenue, or royalty fees to parties we’vethe Company has contracted with to assist in developing and growing a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the ongoing royalty fees, or both. When such agreements exist, we reportthe Company reports franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of the Company’s Manufacturingour manufacturing segment represented approximately $4.1$3.1 million or 11%9% of the Company’sour total revenues during the year ended February 28, 2017. The Company’s2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by a changefurther decreases in the purchases of this customer.customer or the loss of this customer entirely.
Stock-Based Compensation
At February 28, 2017,28, 2019, the Company had one stock-based compensation plans, which currently consists solely ofplan, the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $584,893, $763,094,$519,772, $591,839, and $865,240$584,893 related to equity-based compensation expense during the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
TaxBeginning March 1, 2017, the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement. Prior to March 1, 2017 tax benefits or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the accompanying Statements of Cash Flows. The excess tax benefit or (expense)expense included in net cash provided by financing activities for the years ended February 28, or 29, 2017 2016 and 2015 was $(34,128), $19,868 and $200,544, respectively.$34,128.
During FY 20172019 and 2016,2018, the Company granted no restricted stock units. There were no stock options granted to employees during FY 20172019 or FY 2016.2018. The restricted stock unit grants generally vest 17-20%17 to 20% annually over a period of five to six years. The Company recognized $564,473$463,795 of consolidated stock-based compensation expense related to these grants made in prior years during FY 20172019 compared with $602,554$532,739 in FY 2016.2018 and $564,473 in FY 2017. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 20172019 was $1,179,492,$114,183, which is expected to be recognized over the weighted average period of 2.20.4 years.
During FY 2017, theThe Company issued 2,000 fully-vested, unrestricted shares to non-employee directors compared with 4,000 fully-vested,fully vested, unrestricted shares of stock to non-employee directors in FY 2016.during the year ended February 28, 2019 compared to no shares issued during the year ended February 28, 2018 and 2,000 issued during the year ended February 28, 2017. In connection with these non-employee director stock issuances, the Company recognized $20,420$24,480, $0 and $61,040$20,420 of stock-based compensation expense during FYyear ended February 28, 2019, 2018 and 2017, respectively.
During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and FY 2016, respectively.based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized $31,497 in stock-based compensation expense during the year ended February 28, 2019.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. DuringFollowing the expiration of all outstanding options, during FY 2017, FY 2016 and FY 2015, 0, 12,936, and 12,936, respectively, ofno stock options were excluded from diluted shares as their effect was anti-dilutive.shares.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $279,698, $215,314,$275,441, $355,678, and $244,946$279,698 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Total advertising expense for U-Swirl and its brands amounted to $335,771, $460,034,$168,000, $222,093, and $399,414$335,771 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The Company’sCompany’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable and notes receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, FASB issued ASU 2016-15, Statement2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 clarifies and provides specific guidancechanges in stockholders’ equity in the interim financial statements included in Quarterly Reports on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduceForm 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current diversity in practice. ASU No. 2016-15 isand comparative quarter and year-to-date interim periods. The amendments are effective for public business entities for annual periods, including interim periods within those annual periods, beginningall filings made on or after December 15, 2017, with early application permitted. This guidance is applicableNovember 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the Company's fiscal year beginning March 1, 2018.filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Quarterly Report on Form 10-Q. The Company does not anticipate that this guidancethe adoption of these SEC amendments will have a material impacteffect on its consolidatedthe Company’s financial statements.position, results of operations, cash flows or stockholders’ equity.
In June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting 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- 132016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU No. 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2017. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the process of assessing the impact of the adoption of ASU No. 2016-09 on its consolidated financial statements. During the fiscal years ended February 28, 2017 and February 29, 2016 the Company would have realized additional expense of $34,000 and additional income of $20,000, respectively, if this guidance had been applied.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are requiredThe Company will adopt this guidance effective with the three month period ending May 31, 2019 (the first quarter of Fiscal Year 2020). The Company can elect to apply the amendments atrecord a cumulative-effect adjustment as of the beginning of the earliest period presented usingyear of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments (see note 5) will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, The Company anticipates ASU 2016-02 will have a material impact on the FASB issuedconsolidated balance sheet. The impact of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The cumulative adjustment to be recorded as right-of-use assets and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 willoperating lease liabilities, upon adoption, is expected to be effective for us in the first quarterrange of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.$3,500,000 to $3,900,000.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASC 606”). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in TopicASC 605 Revenue“Revenue Recognition.” ASC 606 provides that revenues are to be 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. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early applicationnew standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in Company-owned stores as those sales are recognized at the time of the guidance is permittedunderlying sale and are presented net of sales taxes and discounts. The standard also did not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard changed the timing in which the Company recognizes initial fees from franchisees and licensees for annual reporting periods beginning after December 31, 2016. This guidance is applicablenew franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store opening and renewals that impact the Company's fiscal year beginning March 1, 2018. The Company expectsterm of the adoption offranchise agreement upon renewal. In accordance with the new guidance, to change the timinginitial franchise services are not distinct from the continuing rights or services offered during the term of recognition ofthe franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees including master license and territory fees for our international business, and renewal fees. Currently, these fees are generallybeing recognized upfront upon either opening ofas the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognizedCompany satisfies the performance obligation over the term of the relatedfranchise agreement, which we expect will result in a material impactis generally 10 to revenue recognized for franchise fees, license fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. 15 years.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Ingredients and supplies | $ | 3,021,220 | $ | 2,868,157 | ||||
Finished candy | 2,137,609 | 2,138,952 | ||||||
U-Swirl food and packaging | 66,001 | 94,345 | ||||||
Reserve for slow moving inventory | (249,051 | ) | (261,346 | ) | ||||
Total inventories | $ | 4,975,779 | $ | 4,840,108 |
2019 | 2018 | |||||||
Ingredients and supplies | $ | 2,612,954 | $ | 2,764,727 | ||||
Finished candy | 1,983,854 | 2,371,610 | ||||||
U-Swirl food and packaging | 44,696 | 63,843 | ||||||
Reserve for slow moving inventory | (371,147 | ) | (357,706 | ) | ||||
Total inventories | $ | 4,270,357 | $ | 4,842,474 |
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 4,787,855 | 4,784,272 | ||||||
Machinery and equipment | 10,598,355 | 9,987,906 | ||||||
Furniture and fixtures | 1,047,319 | 1,169,475 | ||||||
Leasehold improvements | 1,531,112 | 1,862,603 | ||||||
Transportation equipment | 418,402 | 438,601 | ||||||
Asset impairment | (47,891 | ) | (568,803 | ) | ||||
18,848,770 | 18,187,672 | |||||||
Less accumulated depreciation | 12,390,839 | 12,177,369 | ||||||
Property and equipment, net | $ | 6,457,931 | $ | 6,010,303 |
2019 | 2018 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 5,031,395 | 4,905,103 | ||||||
Machinery and equipment | 10,263,119 | 10,686,631 | ||||||
Furniture and fixtures | 864,944 | 1,067,788 | ||||||
Leasehold improvements | 1,131,659 | 1,568,260 | ||||||
Transportation equipment | 422,458 | 434,091 | ||||||
Asset impairment | (30,000 | ) | (62,891 | ) | ||||
18,197,193 | 19,112,600 | |||||||
Less accumulated depreciation | (12,411,054 | ) | (12,946,360 | ) | ||||
Property and equipment, net | $ | 5,786,139 | $ | 6,166,240 |
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2017,28, 2019, the Company had a $5$5.0 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (3.0%(4.7% at February 28, 2017)2019). At February 28, 2017, $52019, $5.0 million was available for borrowings under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 20172019 and we believethe Company believes it is likely to be renewed on terms similar to current terms. At February 28, 2019 and 2018 there was no amount outstanding under this line of credit.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets, including the SWRL Loan Agreement.assets. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. As of February 28, 2019, the Company was in compliance with all such covenants. The Wells Fargo Loan Agreement also contains customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by substantially all business assets. | $ | 3,831,741 | $ | 5,085,133 | ||||
Less current maturities | 1,302,501 | 1,254,007 | ||||||
Long-term obligations | $ | 2,529,240 | $ | 3,831,126 |
The following is a schedule by year of maturities of long-term debt for the years ending February 28 or 29:
2018 | $ | 1,302,501 | ||
2019 | 1,352,900 | |||
2020 | 1,176,340 | |||
Total | $ | 3,831,741 |
2019 | 2018 | ||||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by sustantially all business assets | $ | 1,176,488 | $ | 2,529,309 | |||||
Less current maturities | 1,176,488 | 1,352,893 | |||||||
Long-term obligations | $ | - | $ | 1,176,416 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under fivenon-cancelable operating leases of up to ten-year non-cancelable operating leases.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 following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 603,000 | ||
2019 | 561,000 | |||
2020 | 272,000 | |||
2021 | 49,000 | |||
2022 | 49,000 | |||
Thereafter | 194,000 | |||
Total | $ | 1,728,000 |
2020 | $ | 318,000 | ||
2021 | 259,000 | |||
2022 | 249,000 | |||
2023 | 243,000 | |||
2024 | 249,000 | |||
Thereafter | 175,000 | |||
Total | $ | 1,493,000 |
We actThe Company acts as primary lessee of some franchised store premises, which wethe Company then subleasesubleases to franchisees, but the majority of existing locations are leased by the franchisee directly. OurThe Company’s current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we wereFebruary 28, 2019, the Company was the primary lessee at fivefour of our 332the Company’s 313 domestic franchised stores and 1 former office space.stores.
InIn 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's liability as primary lessee on sublet franchise outlets, all of which is fully offset by sublease rentals, is as follows for the years ending February 28 or 29:
2018 | $ | 189,000 | ||
2019 | 90,000 | |||
2020 | 81,000 | |||
2021 | 83,000 | |||
2022 | 29,000 | |||
Total | $ | 472,000 |
2020 | $ | 92,000 | ||
2021 | 75,000 | |||
2022 | 21,000 | |||
Total | $ | 188,000 |
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Minimum rentals | $ | 944,938 | $ | 1,187,003 | $ | 1,282,363 | ||||||
Less sublease rentals | (318,000 | ) | (479,000 | ) | (468,000 | ) | ||||||
Contingent rentals | 25,200 | 22,200 | 22,200 | |||||||||
$ | 652,138 | $ | 730,203 | $ | 836,563 |
2019 | 2018 | 2017 | ||||||||||
Minimum rentals | $ | 1,030,536 | $ | 1,270,240 | $ | 944,938 | ||||||
Less sublease rentals | (572,000 | ) | (603,000 | ) | (318,000 | ) | ||||||
Contingent rentals | 22,800 | 26,100 | 25,200 | |||||||||
$ | 481,336 | $ | 693,340 | $ | 652,138 |
In FY 2013,2019, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule, by year, of future minimum rental payments required under such lease for the years ending February 28:28 or 29:
2018 | $ | 28,000 | ||
Total | $ | 28,000 |
2020 | $ | 116,000 | ||
2021 | 121,000 | |||
2022 | 125,000 | |||
2023 | 129,000 | |||
2024 | 33,000 | |||
Total | $ | 524,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 185,700 | ||
2019 | 84,300 | |||
2020 | 62,100 | |||
2021 | 62,100 | |||
2022 | 15,500 | |||
Total | $ | 409,700 |
2020 | $ | 323,000 | ||
2021 | 323,000 | |||
2022 | 257,000 | |||
2023 | 29,000 | |||
Total | $ | 932,000 |
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | |||||||
220,791 | 182,006 | 185,703 |
2019 | 2018 | 2017 | |||||||
325,229 | 225,992 | 220,791 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 20172019, the Company was contracted for approximately $2,595,000$880,000 of raw materials under such agreements.
Contingencies
The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (collectively, the “CherryBerry Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB Shares, they must first offer such shares to SWRL and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint in the Colorado District Court, and thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion). On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May 9, 2016, the Oklahoma Court granted that application and we filed an answer to this action on June 6, 2016. All parties are currently involved in discovery proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this lawsuit.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Current | ||||||||||||
Federal | $ | 1,411,126 | $ | 1,420,811 | $ | 1,846,365 | ||||||
State | 272,214 | 195,993 | 246,398 | |||||||||
Total Current | 1,683,340 | 1,616,804 | 2,092,763 | |||||||||
Deferred | ||||||||||||
Federal | 240,234 | (1,725,918 | ) | (50,603 | ) | |||||||
State | 22,015 | (152,286 | ) | (4,465 | ) | |||||||
Total Deferred | 262,249 | (1,878,204 | ) | (55,068 | ) | |||||||
Total | $ | 1,945,589 | $ | (261,400 | ) | $ | 2,037,695 |
2019 | 2018 | 2017 | ||||||||||
Current | ||||||||||||
Federal | $ | 653,226 | $ | 1,916,720 | $ | 1,411,127 | ||||||
State | 142,570 | 220,164 | 272,214 | |||||||||
Total Current | 795,796 | 2,136,884 | 1,683,341 | |||||||||
Deferred | ||||||||||||
Federal | (67,410 | ) | 55,658 | 240,233 | ||||||||
State | (11,524 | ) | (32,247 | ) | 22,015 | |||||||
Total Deferred | (78,934 | ) | 23,411 | 262,248 | ||||||||
Total | $ | 716,862 | $ | 2,160,295 | $ | 1,945,589 |
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years endedended February 28 or 29:
2017 | 2016 | 2015 | ||||||||||
Statutory rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.6 | % | 0.8 | % | 2.8 | % | ||||||
Domestic production deduction | (1.1 | %) | (3.0 | %) | (1.6 | %) | ||||||
Work opportunity tax credits | (0.4 | %) | - | - | ||||||||
Statutory rate change | - | (1.6 | %) | - | % | |||||||
Other | 0.0 | % | 0.5 | % | 0.1 | % | ||||||
U-Swirl loss carryforward recognized | - | (1.8 | %) | (3.0 | %) | |||||||
Valuation allowance, U-Swirl Consolidated loss | - | (36.3 | %) | 3.0 | % | |||||||
Effective rate – provision (benefit) | 36.1 | % | (7.4 | %) | 35.3 | % |
2019 | 2018 | 2017 | ||||||||||
Statutory rate | 21.0 | % | 31.9 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.4 | % | 2.4 | % | 3.6 | % | ||||||
Domestic production deduction | 0.0 | % | (0.9 | )% | (1.1 | )% | ||||||
Work opportunity tax credits | (0.7 | )% | (0.2 | )% | (0.4 | )% | ||||||
Other | 0.5 | % | 0.8 | % | 0.0 | % | ||||||
Impact of tax reform | 0.0 | % | 8.2 | % | 0.0 | % | ||||||
Effective rate - provision (benefit) | 24.2 | % | 42.2 | % | 36.1 | % |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes at February 28 or 29 are as follows:
Deferred Tax Assets | 2017 | 2016 | ||||||
Allowance for doubtful accounts and notes | $ | 198,354 | $ | 248,537 | ||||
Inventories | 90,027 | 96,698 | ||||||
Accrued compensation | 188,002 | 183,898 | ||||||
Loss provisions and deferred income | 1,175,351 | 1,299,191 | ||||||
Self-insurance accrual | 37,000 | 28,923 | ||||||
Amortization | 782,683 | 861,594 | ||||||
Restructuring charges | 148,494 | 148,494 | ||||||
U-Swirl accumulated net loss | 164,035 | 346,605 | ||||||
Valuation allowance | (148,494 | ) | (148,494 | ) | ||||
Net deferred tax assets | 2,635,452 | 3,065,446 | ||||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (1,683,778 | ) | (1,537,653 | ) | ||||
Prepaid expenses | (92,800 | ) | (106,138 | ) | ||||
Deferred tax liabilities | $ | (1,776,578 | ) | $ | (1,643,791 | ) | ||
Net deferred tax assets | $ | 858,874 | $ | 1,421,655 |
2019 | 2018 | |||||||
Deferred Tax Assets | ||||||||
Allowance for doubtful accounts and notes | $ | 120,368 | $ | 124,469 | ||||
Inventories | 91,265 | 86,938 | ||||||
Accrued compensation | 87,930 | 130,049 | ||||||
Loss provisions and deferred income | 492,468 | 817,945 | ||||||
Self-insurance accrual | 34,426 | 38,868 | ||||||
Amortization | 217,481 | 520,379 | ||||||
Restructuring charges | 98,693 | 98,728 | ||||||
U-Swirl accumulated net loss | 325,253 | 258,173 | ||||||
Valuation allowance | (98,693 | ) | (98,728 | ) | ||||
Net deferred tax assets | $ | 1,369,191 | $ | 1,976,821 | ||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (682,542 | ) | (1,066,113 | ) | ||||
Prepaid expenses | (79,228 | ) | (75,245 | ) | ||||
Deferred Tax Liabilities | (761,770 | ) | (1,141,358 | ) | ||||
Net deferred tax assets | $ | 607,421 | $ | 835,463 |
The following table summarizes deferred income tax valuation allowances as of February 28 or 29:28:
2017 | 2016 | |||||||
Valuation allowance at beginning of period | $ | 148,494 | $ | 349,010 | ||||
Tax expense (benefits) realized by valuation allowance | - | 81,340 | ||||||
Tax benefits released from valuation allowance | - | (281,856 | ) | |||||
Valuation allowance at end of period | $ | 148,494 | $ | 148,494 |
2019 | 2018 | |||||||
Valuation allowance at beginning of period | $ | 98,728 | $ | 148,494 | ||||
Tax expense (benefits) realized by valuation allowance | (35 | ) | - | |||||
Tax benefits released from valuation allowance | - | - | ||||||
Impact of tax reform | - | (49,766 | ) | |||||
Valuation allowance at end of period | $ | 98,693 | $ | 98,728 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Income tax benefit realizedexpense and the effective income tax rate for the year ended February 29, 2016, compared to the tax expense in the prior years, is primarily due to the tax consequences of a change in the controlling interest in U-Swirl and foreclosure upon the stock of U-Swirl International, Inc. In FY 2014 we did not realize a tax benefit28, 2019 decreased from the SWRL taxable loss causing our effective rate to increase for the year. During FY 2015 the taxable loss at SWRL was lower, resulting in a decrease to our effective rate. During FY 2016 an income tax benefit of approximately $2,149,000 was recognizedyear ended February 28, 2018, primarily as a result of the company foreclosing upon the interest in U-Swirl and recognizingrevaluation of deferred tax assets and loss carry forwards that previously had full valuation allowances when RMCF had less than an 80% ownership interest. Resulting from this foreclosure, RMCF will consolidate U-Swirl International, Inc. resulting in realizationliabilities to the lower enacted U.S. corporate tax rate of U-Swirl International, Inc. deferred tax assets that previously had a full valuation allowance when filed with SWRL income tax returns. U-Swirl International, Inc.21% under the Tax Cuts and RMCF will file consolidated income tax returns beginning with FY 2017. SWRL will continue to file separate tax returns.
ForJobs Act recognized during the year ended February 29, 201628, 2018 and prior periods, the financial statements presented representlower enacted U.S. corporate tax rate of 21% under the consolidated statementsTax Cuts and Jobs Act effective for the year ended February 28, 2019. The revaluation of two separate consolidated groups fordeferred tax assets and liabilities resulted in income tax purposes. RMCF has filed income tax returns consolidatingexpense of approximately $421,000 recognized in consideration of the results of Rocky Mountain Chocolate Factory and its wholly owned subsidiary, Aspen Leaf Yogurt, LLC. U-Swirl Inc. has filed a separate consolidated income tax returnlower enacted rate for the results of U-Swirl, Inc. and its wholly owned subsidiary, U-Swirl International, Inc. RMCF and SWRL have filed separate income tax returns because RMCF owned only 39% of SWRL. Beginning on March 1, 2016 the results of U-Swirl International, Inc. will be included in RMCF’s consolidated income tax return, and on the same date, will be removed from U-Swirl, Inc.’s consolidated tax return. This is a result of the foreclosure of RMCF on the outstanding stock of U-Swirl in satisfaction of debt between RMCF and SWRL. The consolidated tax return for RMCF for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL.year ended February 28, 2018.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2012.2013. The Company’s federal income tax returns have been examined for the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years. The Company’s federal income tax returns are being examined for the years ended February 28 or 29, 2017 and 2016.
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. Management believes that, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2017.2019.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28, 2019 or 29, 2016 or 2015.2018. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28, or 29, 20172019 and 2016.2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 29,29, 2016, we hadthe Company foreclosed on the outstanding equity of U-Swirl International, Inc. and U-Swirl International, Inc. was consolidated for income tax purposes. SWRL, along with U-Swirl International, Inc., has historically filed its own consolidated federal income tax return and reported its own Federal net operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets. This full valuation allowance was eliminated asAs of February 29, 2016, in recognitiona portion of the likelihoodU-Swirl deferred tax assets were recognized as a result of it becoming more likely than not that the loss carry forwardssome of these assets would be realized in the future as a result of RMCF and U-Swirl International, Inc. filing a consolidated income tax return.
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl International, Inc.’sU-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. We haveThe Company has performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest in January 2013.2013 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl International Inc.’sU-Swirl’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
We estimateThe Company estimates that the potential future tax deductions of U-Swirl International, Inc.’sU-Swirl’s Federal net operating losses, limited by section 382, to be approximately $443,000$1,323,000 with a resulting deferred tax asset of approximately $164,000. U-Swirl International Inc.’s$325,000. U-Swirl’s Federal net operating loss carryovers will expire at various dates beginning in 2026.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash dividendsdividend of $0.12 per common share on March 11, 2016, June 17, 2016, September 16, 2016 and December 9, 20162018 to stockholders of record on February 26, 2016,March 6, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 15, 2018 to stockholders of record on June 5, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 14, 2018 to stockholders of record on September 4, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 7, 2016, September 6, 2016 and2018 to stockholders of record on November 25, 2016, respectively.23, 2018. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 9, 2017 payable14, 2019, which was paid on March 10, 201715, 2019 to stockholders of record on February 24, 2017.March 5, 2019.
Future declarationsdeclarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long termlong-term interest of the Company’s stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the nine months ended November 30, 2016,FY 2017, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the three monthsyears ended February 28, 2017.2019 or 2018. As of February 28, 2017,2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (the(as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock awards under the 2007 Plan as of February 28, 2017:2019:
Original share authorization: | 300,000 | |||
Prior plan shares authorized and incorporated in the 2007 | 85,340 | |||
Additional shares authorized through 2007 Plan amendment: | 300,000 | |||
Available for | 685,340 | |||
Cancelled/ | ||||
Shares awarded as unrestricted shares, stock options or restricted stock | ( | ) | ||
Shares available for award: |
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding stock options at beginning of year: | 12,936 | 12,936 | 155,880 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | (142,944 | ) | ||||||||
Cancelled/forfeited | (12,936 | ) | - | - | ||||||||
Outstanding stock options as of February 28 or 29: | - | 12,936 | 12,936 | |||||||||
Weighted average exercise price | n/a | $ | 12.94 | $ | 12.94 | |||||||
Weighted average remaining contractual term (in years) | n/a | 0.04 | 1.04 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding stock options at beginning of year: | - | - | 12,936 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Cancelled/forfeited | - | - | (12,936 | ) | ||||||||
Outstanding stock options as of February 28: | - | - | - | |||||||||
Weighted average exercise price | n/a | n/a | n/a | |||||||||
Weighted average remaining contractual term (in years) | n/a | n/a | n/a |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 181,742 | 237,641 | 295,040 | |||||||||
Granted | - | - | - | |||||||||
Vested | (48,084 | ) | (55,899 | ) | (56,199 | ) | ||||||
Cancelled/forfeited | (10,000 | ) | - | (1,200 | ) | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 123,658 | 181,742 | 237,641 | |||||||||
Weighted average grant date fair value | $ | 12.21 | $ | 12.22 | $ | 12.13 | ||||||
Weighted average remaining vesting period (in years) | 2.23 | 3.22 | 4.08 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 77,594 | 123,658 | 181,742 | |||||||||
Granted | - | - | - | |||||||||
Vested | (49,058 | ) | (44,064 | ) | (48,084 | ) | ||||||
Cancelled/forfeited | (3,534 | ) | (2,000 | ) | (10,000 | ) | ||||||
Outstanding non-vested restricted stock units as of February 28: | 25,002 | 77,594 | 123,658 | |||||||||
Weighted average grant date fair value | $ | 12.05 | $ | 12.16 | $ | 12.21 | ||||||
Weighted average remaining vesting period (in years) | 0.38 | 1.27 | 2.23 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
FY 2019 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,361,528 | $ | 25,324,024 | $ | 1,272,009 | $ | 3,737,606 | $ | - | $ | 35,695,167 | ||||||||||||
Intersegment revenues | (5,236 | ) | (1,144,484 | ) | - | - | - | (1,149,720 | ) | |||||||||||||||
Revenue from external customers | 5,356,292 | 24,179,540 | 1,272,009 | 3,737,606 | - | 34,545,447 | ||||||||||||||||||
Segment profit (loss) | 2,288,871 | 4,310,722 | (52,009 | ) | (32,391 | ) | (3,559,532 | ) | 2,955,661 | |||||||||||||||
Total assets | 1,182,355 | 12,267,458 | 1,001,419 | 5,264,989 | 6,505,920 | 26,222,141 | ||||||||||||||||||
Capital expenditures | 3,548 | 526,402 | 9,617 | 16,512 | 57,707 | 613,786 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,369 | $ | 573,846 | $ | 32,762 | $ | 952,178 | $ | 104,644 | $ | 1,709,799 |
FY 2016 |
Franchising |
Manufacturing |
Retail |
U-Swirl |
Other |
Total | ||||||||||||||||||
Total revenues | $ | 5,947,769 | $ | 27,726,443 | $ | 1,622,906 | $ | 6,535,646 | $ | - | $ | 41,832,764 | ||||||||||||
Intersegment revenues | (5,185 | ) | (1,370,684 | ) | - | - | - | (1,375,869 | ) | |||||||||||||||
Revenue from external customers | 5,942,584 | 26,355,759 | 1,622,906 | 6,535,646 | - | 40,456,895 | ||||||||||||||||||
Segment profit (loss) | 2,608,351 | 6,731,221 | (2,591 | ) | (2,128,649 | ) | (3,663,201 | ) | 3,545,131 | |||||||||||||||
Total assets | 1,205,616 | 11,980,933 | 1,008,783 | 10,126,209 | 5,994,184 | 30,315,725 | ||||||||||||||||||
Capital expenditures | 76,762 | 432,473 | 3,306 | 66,476 | 164,234 | 743,251 | ||||||||||||||||||
Total depreciation & amortization | $ | 36,908 | $ | 406,082 | $ | 18,236 | $ | 802,953 | $ | 156,122 | $ | 1,420,301 |
FY 2018 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 6,004,897 | $ | 27,491,089 | $ | 1,876,021 | $ | 4,142,085 | $ | - | $ | 39,514,092 | ||||||||||||
Intersegment revenues | (4,882 | ) | (1,434,515 | ) | - | - | - | (1,439,397 | ) | |||||||||||||||
Revenue from external customers | 6,000,015 | 26,056,574 | 1,876,021 | 4,142,085 | - | 38,074,695 | ||||||||||||||||||
Segment profit (loss) | 2,623,081 | 5,791,980 | (37,102 | ) | 542,073 | (3,795,829 | ) | 5,124,203 | ||||||||||||||||
Total assets | 1,157,158 | 12,729,659 | 1,134,876 | 8,125,171 | 5,793,771 | 28,940,635 | ||||||||||||||||||
Capital expenditures | 15,429 | 429,545 | 33,056 | 11,899 | 55,027 | 544,956 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,087 | $ | 540,033 | $ | 32,567 | $ | 576,162 | $ | 124,406 | $ | 1,319,255 |
FY 2015 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,976,964 | $ | 27,459,828 | $ | 2,134,976 | $ | 7,501,943 | $ | - | $ | 43,073,711 | ||||||||||||
Intersegment revenues | (342 | ) | (1,564,993 | ) | - | - | - | (1,565,335 | ) | |||||||||||||||
Revenue from external customers | 5,976,622 | 25,894,835 | 2,134,976 | 7,501,943 | - | 41,508,376 | ||||||||||||||||||
Segment profit (loss) | 2,783,734 | 6,993,693 | (51,803 | ) | (245,546 | ) | (3,699,637 | ) | 5,780,441 | |||||||||||||||
Total assets | 1,193,407 | 12,155,004 | 1,157,674 | 12,424,801 | 7,207,327 | 34,138,213 | ||||||||||||||||||
Capital expenditures | 28,806 | 378,060 | 41,361 | 61,053 | 117,464 | 626,744 | ||||||||||||||||||
Total depreciation & amortization | $ | 41,228 | $ | 395,864 | $ | 35,531 | $ | 813,172 | $ | 154,653 | $ | 1,440,448 |
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
Revenue from one customer of the Company’sCompany’s Manufacturing segment represented approximately $4.1$3.1 million, or 10.69.1 percent, of the Company’s revenues from external customers during the year ended February 28, 2017,2019, compared to $5.2$5.1 million, or 12.813.4 percent of the Company’s revenues from external customers during the year ended February 29, 2016.28, 2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For thethe three years ended February 28 or 29:
Cash paid (received) for: | 2017 | 2016 | 2015 | |||||||||
Income taxes paid | $ | 1,997,751 | $ | 1,383,805 | $ | 1,896,274 | ||||||
Interest | 129,927 | 170,709 | 193,022 | |||||||||
Accrued Inventory | 531,017 | 298,032 | 245,183 | |||||||||
Non-Cash Financing Activities: | ||||||||||||
Dividend payable | 702,525 | 700,728 | 721,536 | |||||||||
Non-Cash Investing Activities: | ||||||||||||
Sale or distribution of assets in exchange for notes receivable | ||||||||||||
Long-lived assets | 20,989 | 127,500 | 414,353 | |||||||||
Other assets | $ | - | $ | 75,000 | $ | - |
Cash paid for: | 2019 | 2018 | 2017 | |||||||||
Interest, net | $ | 52,102 | $ | 102,640 | $ | 129,927 | ||||||
Income taxes | 638,252 | 2,431,884 | 1,997,751 | |||||||||
Non-cash Operating Activities | ||||||||||||
Accrued Inventory | 52,918 | 258,247 | 531,017 | |||||||||
Non-cash Financing Activities | ||||||||||||
Dividend payable | $ | 714,939 | $ | 708,652 | 702,525 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’semployee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, the Company’s contribution was approximately $66,000, $62,000,$70,000, $68,000, and $60,000,$66,000, respectively, to the plan.
NOTE 1212 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscalfiscal years ended February 28, or 29, 20172019 and 2016:2018:
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2017 | ||||||||||||||||||||
Total revenue | $ | 9,376,199 | $ | 8,601,962 | $ | 9,955,239 | $ | 10,362,977 | $ | 38,296,377 | ||||||||||
Gross margin | 2,222,405 | 2,289,011 | 2,706,456 | 1,922,896 | 9,140,768 | |||||||||||||||
Net income | 731,834 | 974,813 | 1,011,799 | 731,670 | 3,450,116 | |||||||||||||||
Basic earnings per share | 0.13 | 0.17 | 0.17 | 0.13 | 0.59 | |||||||||||||||
Dilute earnings per share | $ | 0.12 | $ | 0.16 | $ | 0.17 | $ | 0.12 | $ | 0.58 |
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2016 | ||||||||||||||||||||
Total revenue | $ | 10,364,022 | $ | 9,274,554 | $ | 9,807,313 | $ | 11,011,006 | $ | 40,456,895 | ||||||||||
Gross margin | 2,470,383 | 2,536,811 | 2,723,841 | 2,763,228 | 10,494,263 | |||||||||||||||
Net income | 762,959 | 779,796 | 440,801 | 2,442,351 | 4,425,907 | |||||||||||||||
Basic earnings per share | 0.13 | 0.13 | 0.08 | 0.42 | 0.75 | |||||||||||||||
Diluted earnings per share | $ | 0.12 | $ | 0.13 | $ | 0.07 | $ | 0.41 | $ | 0.73 |
Fiscal Quarter | ||||||||||||||||||||
2019 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 8,366,085 | $ | 7,800,088 | $ | 8,949,747 | $ | 9,429,527 | $ | 34,545,447 | ||||||||||
Gross margin | 1,916,807 | 1,852,435 | 1,882,975 | 1,312,026 | 6,964,243 | |||||||||||||||
Net income | 576,944 | 750,815 | 525,361 | 385,679 | 2,238,799 | |||||||||||||||
Basic earnings per share | 0.10 | 0.13 | 0.09 | 0.06 | 0.38 | |||||||||||||||
Diluted earnings per share | $ | 0.10 | $ | 0.13 | $ | 0.09 | $ | 0.06 | $ | 0.37 |
Fiscal Quarter | ||||||||||||||||||||
2018 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 9,346,447 | $ | 8,266,691 | $ | 9,961,572 | $ | 10,499,985 | $ | 38,074,695 | ||||||||||
Gross margin | 2,191,974 | 2,210,910 | 2,311,579 | 2,276,586 | 8,991,049 | |||||||||||||||
Net income | 813,672 | 928,284 | 751,056 | 470,896 | 2,963,908 | |||||||||||||||
Basic earnings per share | 0.14 | 0.16 | 0.13 | 0.08 | 0.50 | |||||||||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.16 | $ | 0.13 | $ | 0.08 | $ | 0.50 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1313 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28 or 29:28:
| 2017 | 2016 | |||||||||||||||||||
Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 211,152 | $ | 220,778 | $ | 209,653 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 92,758 | 459,340 | 51,423 | ||||||||||||||
Franchise Rights | 20 | 5,971,129 | 1,144,957 | 5,914,181 | 760,818 | ||||||||||||||||
Total | 7,459,049 | 2,000,670 | 7,146,102 | 1,573,697 | |||||||||||||||||
Intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment | |||||||||||||||||||||
Company stores goodwill | 1,099,328 | 267,020 | 1,099,328 | 267,020 | |||||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Manufacturing segment-Goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Trademark-indefinite life | 20,000 | - | 20,000 | - | |||||||||||||||||
Total | 1,709,328 | 662,384 | 1,709,328 | 662,384 | |||||||||||||||||
Total intangible assets | $ | 9,168,377 | $ | 2,663,054 | $ | 8,855,430 | $ | 2,236,081 |
2019 | 2018 | |||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 214,152 | $ | 220,778 | $ | 212,653 | |||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | |||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | |||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 223,628 | 715,339 | 136,087 | |||||||||||||||
Franchise rights | 20 | 5,979,637 | 2,300,717 | 5,979,637 | 1,545,710 | |||||||||||||||||
Total | 7,467,557 | 3,290,300 | 7,467,557 | 2,446,253 | ||||||||||||||||||
Intangible assets not subject to amortization | ||||||||||||||||||||||
Franchising segment- | ||||||||||||||||||||||
Company stores goodwill | $ | 1,099,328 | $ | 267,020 | $ | 1,099,328 | $ | 267,020 | ||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Manufacturing segment-goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Trademark | 20,000 | - | 20,000 | - | ||||||||||||||||||
Total goodwill | 1,709,328 | 662,384 | 1,709,328 | 662,384 | ||||||||||||||||||
Total Intangible Assets | $ | 9,176,885 | $ | 3,952,684 | $ | 9,176,885 | $ | 3,108,637 |
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
On February 29, 2016, RMCF foreclosed on all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. As described in Note 1, this was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. We performed a test of impairment in conjunction with the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. We recognized an impairment loss of $1,930,529 to reduce the carrying value of Goodwill to the fair value. In making this determination we reviewed the fair value of U-Swirl compared to its carrying value. In performing this testing we focused on the actual performance of the acquired businesses that created the initial recognition of the goodwill, as well as U-Swirl’s past performance and future expected performance. Because of the significant underperformance of the acquired businesses as well as U-Swirl we determined that the carrying value of the reporting unit exceeded its fair value.
The following are events that have indicated that it is more likely than not that the fair value of goodwill is less than the carrying amount:
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets totaled $427,840, $378,373,$844,320, $446,050, and $361,723$427,840 during the fiscal years ended February 28 or 29, 2019, 2018 and 2017, 2016 and 2015, respectively.
During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 28, 2017,28, 2019, annual amortization of intangible assets, based upon ourthe Company’s existing intangible assets and current useful lives, is estimated to be the following:
2018 | $ | 445,214 | ||
2019 | 451,644 | |||
2020 | 438,487 | |||
2021 | 426,778 | |||
2022 | 403,596 | |||
Thereafter | 3,292,660 | |||
Total | $ | 5,458,379 |
2020 | $ | 706,177 | ||
2021 | 594,229 | |||
2022 | 490,060 | |||
2023 | 411,607 | |||
2024 | 345,642 | |||
Thereafter | 1,629,542 | |||
Total | $ | 4,177,257 |
NOTE 14 – IMPAIRMENT OF LONG-LIVED RETAIL ASSETS, RESTRUCTURING AND ACQUISITION RELATED CHARGESCOSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
In 2014, SWRL entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, SWRL purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store. SWRL also entered into an Asset Purchase Agreement with Yogli Mogli, which was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, SWRL purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February 20, 2014, SWRL entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rightsCosts associated with 17 Fuzzy Peach Frozen Yogurt stores. Associated with these transactions, the Company recorded net restructuring charges of $124,551 during the year ended February 28, 2015. No restructuring charges were incurred during the year ended February 29, 2016.
On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of SWRL. In addition, Messrs. Conte, H. Cartwright and T. Cartwright resigned as officers of U-Swirl. Also on September 4, 2014, the SWRL Board of Directors appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.
In connection with these management changes, SWRL announced an operational restructuring designed to enhance SWRL’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements with the named officers, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement, property and equipment. The Company recorded restructuring charges of $503,526 during year ended February 28, 2015 associated with this operational restructuring.
As described in Note 1 above, effective March 1, 2015, the Company was reorganized to create a holding company structure pursuant to the Agreement and Plan of Merger, dated as of November 10, 2014, among Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and RKB Merger Corp. In connection with the holding company reorganization, the Company recorded restructuring fees of $179,399 during the year ended February 28, 2015.
During the year ended February 29, 2016, we closed an underperforming Company-owned café resulting in an impairment charge of $39,933. As described in Note 1, on February 29, 2016 the Company foreclosed on 100% of the outstanding equity of U-Swirl in full satisfaction of the obligations owed under the SWRL Loan Agreement. The Company reviewed all operating assets possessed as a part of this transaction and made the determination to offer for sale certain retail assets below their carrying value. This determination was made after a review of expected future cash flow. As a result of this review and determination an impairment charge of $356,280 was recorded to reflect these assets at their fair value.
Impairment of long-lived assets and goodwill, restructuring and acquisition charges incurredstore closures at February 28, or 29,2019, 2018 and 2017 2016 and 2015 were comprised of the following:
2017 | 2016 | 2015 | ||||||||||
Professional fees | $ | - | $ | - | $ | 284,275 | ||||||
Severance/transitional compensation | - | - | 212,027 | |||||||||
Leasehold improvements, property and equipment impairment of long-lived assets and goodwill | - | 2,326,742 | 243,000 | |||||||||
Provision for termination of contractual obligations | 60,000 | - | - | |||||||||
Acceleration of restricted stock unit vesting | - | - | 65,049 | |||||||||
Other | - | - | 3,125 | |||||||||
Total | $ | 60,000 | $ | 2,326,742 | $ | 807,476 |
2019 | 2018 | 2017 | ||||||||||
Loss on distribution of assets | $ | 81,981 | $ | - | $ | - | ||||||
Lease settlement costs | 145,000 | - | 60,000 | |||||||||
Total | $ | 226,981 | $ | - | $ | 60,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – RELATED PARTY TRANSACTIONS
Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have, on occasion, provided services to the Company and may provide services in the future. For the year ended February 28, 2017, the Company paid $47,822 and no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of operations.
NOTE 16 – SUBSEQUENT EVENTS
On May 22, 2017,28, 2019, the Company announced that its Board of Directors has declared a first quarter FY2018FY2020 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 16, 201714, 2019 to shareholders of record at the close of business June 6, 2017.4, 2019.
In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period.
NOTE 1716 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company’sCompany’s prior annual consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233 and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.
NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”)
As described in Note 1, effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be 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. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gift Cards
The Company’s franchisees sell gift cards which do not have either 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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
Impact to Prior Periods
The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:
Amount | ||||
Increase in deferred revenue | $ | (1,022,720 | ) | |
Reduction in gift card liabilities | 2,250,743 | |||
Adjustment to deferred income tax assets | (302,094 | ) | ||
Cumulative increase to retained earnings | $ | 925,929 |
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:
CONSOLIDATED BALANCE SHEET | ||||||||||||
AS OF FEBRUARY 28, 2018 | ||||||||||||
Previously Reported | Adjustments | Restated | ||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 6,072,984 | $ | - | $ | 6,072,984 | ||||||
Accounts receivable, net | 3,897,334 | - | 3,897,334 | |||||||||
Notes receivable, current portion, net | 105,540 | - | 105,540 | |||||||||
Refundable income taxes | 342,863 | - | 342,863 | |||||||||
Inventories, net | 4,842,474 | - | 4,842,474 | |||||||||
Other | 310,173 | - | 310,173 | |||||||||
Total current assets | 15,571,368 | - | 15,571,368 | |||||||||
Property and Equipment, Net | 6,166,240 | - | 6,166,240 | |||||||||
Other Assets | ||||||||||||
Notes receivable, less current portion, net | 235,983 | - | 235,983 | |||||||||
Goodwill, net | 1,046,944 | - | 1,046,944 | |||||||||
Franchise rights, net | 4,433,927 | - | 4,433,927 | |||||||||
Intangible assets, net | 587,377 | - | 587,377 | |||||||||
Deferred income taxes | 835,463 | (302,094 | ) | 533,369 | ||||||||
Other | 63,333 | - | 63,333 | |||||||||
Total other assets | 7,203,027 | (302,094 | ) | 6,900,933 | ||||||||
Total Assets | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 | |||||
Liabilities and Stockholders' Equity | ||||||||||||
Current Liabilities | ||||||||||||
Current maturities of long-term debt | $ | 1,352,893 | - | $ | 1,352,893 | |||||||
Accounts payable | 1,647,991 | - | 1,647,991 | |||||||||
Accrued salaries and wages | 644,005 | - | 644,005 | |||||||||
Gift card liabilities | 3,057,131 | (2,250,743 | ) | 806,388 | ||||||||
Other accrued expenses | 325,034 | - | 325,034 | |||||||||
Dividend payable | 708,652 | - | 708,652 | |||||||||
Deferred revenue | 471,910 | (143,445 | ) | 328,465 | ||||||||
Total current liabilities | 8,207,616 | (2,394,188 | ) | 5,813,428 | ||||||||
Long-Term Debt, Less Current Maturities | 1,176,416 | - | 1,176,416 | |||||||||
Deferred Revenue, Less Current Portion | - | 1,166,165 | 1,166,165 | |||||||||
Commitments and Contingencies | ||||||||||||
Stockholders' Equity | ||||||||||||
Preferred stock | ||||||||||||
Common stock | 5,903 | - | 5,903 | |||||||||
Additional paid-in capital | 6,131,147 | - | 6,131,147 | |||||||||
Retained earnings | 13,419,553 | 925,929 | 14,345,482 | |||||||||
Total stockholders' equity | 19,556,603 | 925,929 | 20,482,532 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
For the Years Ended February 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Franchise Fees contained within the Statement of Income: | $ | 335,028 | $ | 681,613 | $ | 324,718 | ||||||
Adjustment required to conform revenue to prior period method: | (53,528 | ) | - | - | ||||||||
Comparable franchise fees: | $ | 281,500 | $ | 681,613 | $ | 324,718 |
On February 28, 2019, 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:
2020 | $ | 256,093 | ||
2021 | 204,071 | |||
2022 | 190,524 | |||
2023 | 176,394 | |||
2024 | 137,477 | |||
Thereafter | 388,013 | |||
Total | $ | 1,352,572 |
NOTE 18 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2019 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchise fees | $ | 199,362 | $ | - | $ | - | $ | 135,666 | $ | 335,028 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 24,179,540 | - | - | 24,179,540 | |||||||||||||||
Retail sales | - | - | 1,272,009 | 2,112,245 | 3,384,254 | |||||||||||||||
Royalty and marketing fees | 5,156,930 | - | - | 1,489,695 | 6,646,625 | |||||||||||||||
Total | $ | 5,356,292 | $ | 24,179,540 | $ | 1,272,009 | $ | 3,737,606 | $ | 34,545,447 |
ITEMITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systems to future periods are subject to the risk that such controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all errors or all fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These reports by management, including the CEO and CFO, on the effectiveness of the Company’s Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act), that are designed to ensure that material information relating to the Company is made known to the officers who certify the Company’s 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 the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’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.
Management, under the supervision and with the participation of the CEO and CFO, has evaluated the effectiveness,effectiveness, as of February 28, 2017,2019, of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of February 28, 2017.2019.
Management’sManagement’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed under supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2017,2018, of the Company’s internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its publication Internal Control-Integrated Framework (2013). Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of February 28, 2017.2019.
Changes in Internal Control over Financial Reporting —There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended February 28, 20172019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to the Company’sCompany’s equity compensation plansplan, as of February 28, 2017,2019, which consists solely of the Company’s 2007 Equity Incentive Plan.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) | ||||||||
(a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 123,658 |
n/a | 332,589 | ||||||||
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- | ||||||||
Total | 123,658 | n/a | 332,589 |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | 25,002 |
n/a | 327,790 |
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- |
Total | 25,002 | n/a | 327,790 |
(1) Awards outstanding under the 2007 Equity Incentive Plan as of February 28, 20172019 consist of 123,65825,002 unvested restricted stock units. The weighted-average exercise price is calculated solely with respect to the outstanding stock options.
(2)(2) Represents shares remaining available under the Company’s 2007 Equity Incentive Plan. Shares available for future issuances under the 2007 Equity Incentive Plan may be issued in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and performance units, and other stock- and cash-based awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | The following documents are filed as part of this Annual Report: |
1. |
|
Page | |
| 33-34 |
Consolidated Statements of Income | 35 |
Consolidated Balance Sheets | 36 |
Consolidated Statements of Changes in | 37 |
Consolidated Statements of Cash Flows | 38 |
Notes to Consolidated Financial Statements | 39 |
2. | Financial Statement Schedule |
2. Financial Statement Schedule
SCHEDULE II - Valuation and Qualifying Accounts
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |||||||||||||
Year Ended February 28, 2017 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 137,316 | 271,694 | 536,093 | ||||||||||||
Year Ended February 29, 2016 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 729,060 | 171,000 | 229,589 | 670,471 | ||||||||||||
Year Ended February 28, 2015 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 600,930 | 214,600 | 86,470 | 729,060 |
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |
Year Ended February 28, 2019 | ||||
Valuation Allowance for Accounts and Notes Receivable | 505,972 | 143,214 | 159,684 | 489,502 |
Year Ended February 29, 2018 | ||||
Valuation Allowance for Accounts and Notes Receivable | 536,093 | 166,868 | 196,989 | 505,972 |
Year Ended February 28, 2017 | ||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 138,125 | 272,503 | 536,093 |
3. |
|
The following exhibits listed in the Exhibit Index are filed with, or incorporated by reference, in this Annual Report.
Exhibit Number | Description | Incorporated by Reference to | |||
3.1 | Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.2 | Certificate of Designations of Series A Junior Participating Preferred Stock, Par Value $0.001 Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.3 | Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.3 to the Current Report on Form 8-K filed on March 2, 2015 | |||
4.1 | Description of Capital Stock | Filed herewith | |||
10.1** | Form of Employment Agreement (Officers) | Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.2 | Form of Franchise Agreement for Rocky Mountain Chocolate Factory | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2010 (File No. 000-14749) | |||
10.3** | 2007 Equity Incentive Plan (As Amended and Restated) | Exhibit 10.1 to the Current Report on Form 8-K filed on August 9, 2013 (File No. 000-14749) | |||
10.4** | Form of Indemnification Agreement (Directors) | Exhibit 10.7 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.5** | Form of Indemnification Agreement (Officers) | Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.6* | Master License Agreement, dated August 17, 2009, between Kahala Franchise Corp. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2009 (File No. 000-14749) | |||
10.7 | Revolving Line of Credit Note, dated September 13, 2017, between Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank, National Association | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2017 | |||
10.8 | Business Loan Agreement, dated August 2, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2013 (File No. 000-14749) | |||
10.9 | Business Loan Agreement, dated December 27, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 99.3 to the Current Report on Form 8-K filed on January 22, 2014 (File No. 000-14749) | |||
10.10* | Master License Agreement, dated April 27, 2012, between RMCF Asia, Ltd. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2012 (File No. 000-14749) |
Exhibit Number | Description | Incorporated by Reference to | |||
10.11 | Exhibit 99.4 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.12 | Exhibit 99.5 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.13 | Investor Rights Agreement, dated January 14, 2013 between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC | Exhibit 99.6 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | |||
10.14** | Filed herewith | ||||
10.15** | Filed herewith | ||||
21.1 | Filed herewith | ||||
23.1 | Filed herewith | ||||
23.2 | Filed herewith | ||||
31.1 | Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | |||
32.1 | Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
101.INS | XBRL Instance Document | Filed herewith | |||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | |||
* | Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. | ||||
** | Management contract or compensatory plan. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. | ||||
|
|
|
| ||
|
|
|
| ||
Date: May | /s/ Bryan J. Merryman |
|
| ||
|
| BRYAN J. MERRYMAN | |||
Chief | |||||
Financial Officer, Treasurer and
| |||||
Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| |||
| ||||
| ||||
Date: May | /s/ Bryan J. Merryman | |||
BRYAN J. MERRYMAN | ||||
Chief Executive Officer, Chief | ||||
Financial Officer, Treasurer and | ||||
Director | ||||
(Principal Executive, Financial | ||||
and Accounting Officer) | ||||
Date: May 29, 2019 | /s/ Brett P. Seabert | |||
Brett P. Seabert, Director | ||||
Date: May | ||||
/s/ Clyde Wm. Engle | ||||
CLYDE Wm. ENGLE, Director | ||||
Date: May | /s/ Scott G. Capdevielle | |||
SCOTT G. CAPDEVIELLE, Director |
EXHIBIT INDEX
|
|
| ||||||||||
|
|
| ||||||||||
Date: May 29, 2019 | ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
| ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
/s/ Franklin E. Crail | ||||||||||||
6361
2019
2018
Change
Change
Factory gross margin
Retail
Retail gross margin
Total
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 24.6 | % | 27.3 | % | (2.7% | ) | (9.9 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6% | ) | (0.9 | %) | ||||||||
Total | 30.6 | % | 33.5 | % | (2.9% | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28, | % | % | ||||||||||||||
(Percent) | 2019 | 2018 | Change | Change | ||||||||||||
| ||||||||||||||||
Factory gross margin | 19.9 | % | 24.4 | % | (4.5 | )% | (18.4 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total | 25.3 | % | 29.8 | % | (4.5 | )% | (15.1 | )% |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 6,242.8 | $ | 7,204.1 | $ | ( 961.3 | ) | (13.3 | %) | |||||||
Plus: depreciation and amortization | 447.7 | 404.4 | 43.3 | 10.7 | % | |||||||||||
Factory adjusted gross margin | 6,609.5 | 7,608.5 | (999.0 | ) | (13.1 | %) | ||||||||||
Retail | 2,897.9 | 3,290.2 | (392.3 | ) | (11.9 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 9,507.4 | $ | 10,898.7 | $ | (1,391.3 | ) | (12.8 | %) | |||||||
Factory adjusted gross margin | 26.0 | % | 28.9 | % | (2.9 | %) | (10.0 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6 | %) | (0.9 | %) | ||||||||
Total Adjusted Gross Margin | 31.8 | % | 34.8 | % | (3.0 | %) | (8.6 | %) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,819.0 | $ | 6,353.0 | $ | (1,534.0 | ) | (24.1 | )% | |||||||
Plus: depreciation and amortization | 555.9 | 523.0 | 32.9 | 6.3 | % | |||||||||||
Factory adjusted gross margin | 5,374.9 | 6,876.0 | (1,501.1 | ) | (21.8 | )% | ||||||||||
Retail gross margin | 2,145.3 | 2,638.1 | (492.8 | ) | (18.7 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 7,520.2 | $ | 9,514.1 | $ | (1,993.9 | ) | (21.0 | )% | |||||||
Factory adjusted gross margin | 22.2 | % | 26.4 | % | (4.2 | )% | (15.9 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 31.5 | % | (4.2 | )% | (13.3 | )% |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 270450 basis points during FY 20172019 compared to FY 20162018 due primarily to increasedlower efficiencies associated with a 13.9% decrease in production volume and higher costs associated with inventory obsolescence. Costs associated with inventory obsolescence were generally the result of laborthe initiation of product rationalization resulting from lower volume and overhead related to maintenance, equipment issues and product mix shift, partially offset by lower costs of certain materials.underperforming products. The decrease in Company-owned store margin is due primarily to product mix shift primarily resultinga decrease in Company-owned café revenue from the sale or closure of certain underperforming Company-owned storesyogurt and Cafés.the associated higher margins.
Franchise Costs
The decrease in franchise costs for FY 20172019 compared to FY 20162018 is due primarily to a decrease in professional fees and lower franchise costs associated with supporting U-Swirl franchise unitslower international development in FY 20172019 compared to FY 2016 as a result of fewer store openings in FY 2017.2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreasedincreased to 24.6%28.4% during FY 20172019 from 27.0%26.5% during FY 2016.2018. This decreaseincrease as a percentage of royalty, marketing and franchise fees is primarily a result of a 15.7%an 11.7% decrease in total royalty and marketing fees and franchise costsfee revenue during FY 20172019 compared to FY 2016.2018.
Sales and Marketing
The increasedecrease in sales and marketing costs during FY 20172019 compared to FY 20162018 is primarily due to higher marketing relatedlower marketing-related compensation and professional fees partially offset by lower marketing-related costs associated with U-Swirl franchise locations. Marketing costs for U-Swirl franchise locations declined because of lower marketing fee revenues resulting from fewer franchise stores in operation.
General and Administrative
The decrease in general and administrative costs during FY 20172019 compared to FY 20162018 is due primarily to lower professional fees, the foreclosureresult of U-Swirl in the prior yearresolving legal proceedings, and the associated focus on reduction of duplicative general and administrativelower compensation costs. During FY 2017,2019, approximately $460,000$103,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,291,000$307,000 during FY 2016.2018. As a percentage of total revenues, general and administrative expenses decreased to 10.5%9.9% in FY 20172019 compared to 11.5%10.3% in FY 2016.2018.
Retail Operating Expenses
The decrease in retailRetail operating expenses decreased during FY 20172019 compared to FY 2016 was2018 due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of a certain underperforming Company-owned units.location, offset by the acquisition of a franchised location. Retail operating expenses, as a percentage of retail sales, decreased to 54.0%57.2% during FY 20172019 from 59.0%58.1% during FY 2016.2018. This is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $841,000$1,154,000 during FY 2017, a decrease2019, an increase of 17.2%45.0% from $1,016,000$796,000 incurred during FY 2016.2018. This decreaseincrease was the result of fewer Company-owned store assetsa change in service duemanagement’s estimates related to the sale or closurefuture value of U-Swirl intangibles and the associated acceleration of amortization expense. During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain Company-owned stores and cafés.intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Depreciation and amortization included in cost of sales increased 10.7%6.3% from $404,000$523,000 during FY 20162018 to $448,000$556,000 during FY 2017.2019. This increase was the result of an increase in production assets in service.
Other Income (Expense)
Net interest expense was $128,800$50,300 in FY 20172019 compared to net interest expense of $167,900$96,700 in FY 2016.2018. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions by U-Swirl.
Income Tax Expense
We realized an income tax expense of $1,946,000$717,000 in FY 20172019 compared to an income tax benefitexpense of $261,400$2,160,000 during FY 2016. As described further in Note 6 to the consolidated financial statements, the increase in the effective tax rate is primarily due to the tax consequences of acquiring a 100% controlling interest in U-Swirl during FY 2016.
Fiscal 2016 Compared To Fiscal 2015
Results Summary
Basic earnings per share increased 17.2% from $0.64 in FY 2015 to $0.75 in FY 2016. Revenues decreased 2.5% from $41.5 million for FY 2015 to $40.5 million for FY 2016. Operating income decreased 5.4% from $6.0 million in FY 2015 to $5.6 million in FY 2016. Net income increased 12.4% from $3.9 million in FY 2015 to $4.4 million in FY 2016. The decrease in operating income for FY 2016 compared to FY 2015 is due primarily to a decrease in revenues. The increase in net income is primarily the result of an impairment charge associated with U-Swirl goodwill and certain long lived assets more than offset by income tax benefit recognized.
Revenues
For the Year Ended | ||||||||||||||||
February 29 or 28, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory sales | $ | 26,355.8 | $ | 25,894.6 | $ | 461.2 | 1.8 | % | ||||||||
Retail sales | 5,005.0 | 6,206.0 | (1,201.0 | ) | (19.4% | ) | ||||||||||
Royalty and marketing fees | 8,547.6 | 8,821.0 | (273.4 | ) | (3.1% | ) | ||||||||||
Franchise fees | 548.5 | 586.8 | (38.3 | ) | (6.5% | ) | ||||||||||
Total | $ | 40,456.9 | $ | 41,508.4 | $ | (1,051.5 | ) | (2.5% | ) |
Factory Sales
The increase in factory sales for FY 2016 compared to FY 2015 was primarily due to an 8.1% increase in shipments of product to customers outside our network of franchised retail stores. This increase was partially offset by a 5.3% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation and a 1.5% decrease in same-store pounds purchased by franchise and co-branded license locations during FY 2016 compared with FY 2015.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of five Company-owned locations and the closure of two underperforming Company-owned cafés. Same store sales at all Company-owned stores and cafés decreased 0.8% during FY 2016 compared with FY 2015. Same-store sales at U-Swirl cafés decreased 1.0% during FY 2016 compared to FY 2015.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 2016 compared to FY 2015 resulted from an 11.1% decrease in franchise units in operation and lower same store sales. The average number of total franchise stores in operation decreased from 476 during FY 2015 to 423 during FY 2016. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation increased 0.7% during FY 2016 compared to FY 2015. Franchise fee revenues decreased as a result of fewer international license fees during FY 2016 compared to FY 2015.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2016, U-Swirl revenue decreased 15.7% to $6,535,600 compared with $7,753,000 of U-Swirl revenue consolidated within our results for FY 2015. The decrease resulted from a 15.1% decrease in average domestic U-Swirl franchise cafés in operation during FY 2016 compared to FY 2015, primarily as a result of store closings exceeding store openings and acquired franchisees.
COSTS AND EXPENSES
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Cost of sales – factory adjusted | $ | 19,151.7 | $ | 18,432.3 | $ | 719.4 | 3.9 | % | ||||||||
Cost of sales – retail | 1,714.8 | 2,177.3 | (462.5 | ) | (21.2 | %) | ||||||||||
Franchise costs | 2,452.6 | 2,264.1 | 188.5 | 8.3 | % | |||||||||||
Sales and marketing | 2,466.5 | 2,474.0 | (7.5 | ) | (0.3 | %) | ||||||||||
General and administrative | 4,663.9 | 4,831.9 | (168.0 | ) | (3.5 | %) | ||||||||||
Retail operating | 2,951.8 | 3,509.6 | (557.8 | ) | (15.9 | %) | ||||||||||
Total | $ | 33,401.3 | $ | 33,689.2 | $ | ( 287.9 | ) | (0.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total | $ | 10,494.3 | $ | 11,491.0 | $ | ( 996.7 | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 27.3 | % | 28.8 | % | (1.5% | ) | (5.2% | ) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total | 33.5 | % | 35.8 | % | (2.3% | ) | (6.4% | ) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Plus: depreciation and amortization | 404.4 | 393.8 | 10.6 | 2.7 | % | |||||||||||
Factory adjusted gross margin | 7,608.5 | 7,856.1 | (247.6 | ) | (3.2 | %) | ||||||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 10,898.7 | $ | 11,884.8 | $ | ( 986.1 | ) | (8.3 | %) | |||||||
Factory adjusted gross margin | 28.9 | % | 30.3 | % | (1.4 | %) | (4.6 | %) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total Adjusted Gross Margin | 34.8 | % | 37.0 | % | (2.2 | %) | (5.9 | %) |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 150 basis points during FY 2016 compared to FY 2015 due primarily to increased costs of certain materials and a shift in product and customer mix. The increase in Company-owned store margin is due primarily to the sale or closure of certain underperforming Company-owned stores and cafés.
Franchise Costs
The increase in franchise costs for FY 2016 compared to FY 2015 is due primarily to franchise costs associated with supporting U-Swirl franchise units. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.0% during FY 2016 from 24.1% during FY 2015. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of a 3.3% decrease in royalty, marketing and franchise fee revenue as a result of a decrease in the number of domestic franchise stores during FY 2016 compared to FY 2015.
Sales and Marketing
Sales and marketing costs were approximately unchanged during FY 2016 compared to FY 2015.
General and Administrative
The decrease in general and administrative costs during FY 2016 compared to FY 2015 is due primarily to the reorganization of U-Swirl in the prior year and the associated focus on reduction of duplicative general and administrative costs, partially offset by an increase in professional fees. During FY 2016, approximately $1,291,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,651,000 during FY 2015. As a percentage of total revenues, general and administrative expenses decreased to 11.5% in FY 2016 compared to 11.6% in FY 2015.
Retail Operating Expenses
The decrease in retail operating expense was due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of certain underperforming Company-owned units. The average number of Company-owned stores in operation decreased from 16 during FY 2015 to 12 units during FY 2016. Retail operating expenses, as a percentage of retail sales, increased from 56.6% during FY 2015 to 59.0% in FY 2016. This increase is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $1,016,000 during FY 2016, a decrease of 3.0% from $1,047,000 incurred during FY 2015. This decrease is due to a decrease in amortization related to franchise rights, trademark and intangible assets. Depreciation and amortization included in cost of sales increased 2.5% from $394,000 during FY 2015 to $404,000 during FY 2016. This increase was the result of an increase in production assets in service.
Other Income
Net interest expense was $167,900 in FY 2016 compared to net interest expense of $184,500 in FY 2015. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions of U-Swirl.
Income Tax Expense
We realized an income tax benefit of $261,400 in FY 2016 compared to expense of $2,037,695, an effective rate of 35.3%, during FY 2015.2018. As described further in Note 6 to the consolidated financial statements, the decrease in the effective tax rate is primarily due to the revaluation of deferred tax consequencesassets and liabilities to the lower enacted U.S. corporate tax rate of 21% under the recent Tax Cuts and Jobs Act recognized during FY 2018, with no comparable revaluation recognized during FY 2019. Additionally, the decrease in the effective tax rate during FY 2019 compared to 2018 was due to the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act being effective for all of FY 2019 and only two months of FY 2018.
Fiscal 2018 Compared To Fiscal 2017
A discussion of our controlling interestresults of operations for FY 2018 in U-Swirl.comparison to FY 2017 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Fiscal Year Ended February 28, 2018.
Liquidity and Capital Resources
As of February 28, 2017,28, 2019, working capital was $7.1$9.5 million compared with $7.2$7.4 million as of February 29, 2016.28, 2018. The decreaseincrease in working capital was due primarily to the impact of the adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 and our operating results less the payment of $2.8 million in cash dividends, $1.4 million in debt repayments and the purchase of $1.2 million$614,000 of property and equipment and $1.3 million in debt repayments.equipment. We have historically generated excess operating cash flow. We review our working capital needs and projections and when we believe that we have greater working capital than necessary we have historically utilized that excess working capital to repurchase common stock and pay dividends to our stockholders. This trend continued during FY 2017, resulting in the decrease in working capital at February 28, 2017 compared with February 29, 2016.
Cash and cashcash equivalent balances decreased from $6.2 million as of February 29, 2016 to $5.8$6.1 million as of February 28, 20172018 to $5.4 million as of February 28, 2019 as a result of cash flows generated by operating activities being less than cash flows used in financing and investing activities. The Company’sOur current ratio was 3.0 to 1.0 at February 28, 2019 compared to 1.9 to 1.0 at February 28, 2017, which was the same at February 29, 2016. The Company monitors2018. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2017,2019, we had net income of $3.45$2.2 million. Operating activities provided cash of $5.3$4.0 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.7 million and stock compensation expense of $520,000. During FY 2018, we had net income of $3.0 million. Operating activities provided cash of $4.8 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock compensation expense of $0.6 million. During FY 2016, we had net income of $3.8 million, and operating activities provided cash of $6.8 million. The principal adjustment to reconcile the net income to net cash provided by operating activities was asset impairments of $2.3 million, depreciation and amortization of $1.4 million and stock compensation expense of $0.8 million.
During FY 2017,2019, investing activities used cash of $1.3 million,$506,000, primarily due to the purchases of property and equipment of $1.2 million$614,000 the result of investment in factory infrastructure improvements.improvements, partially offset by proceeds received on notes receivable of $102,000. In comparison, investing activities used cash of $0.7 million$340,000 during FY 20162018 primarily due to the purchases of property and equipment of $0.7 million.$545,000 the result of investment in factory infrastructure improvements, partially offset by proceeds received on notes receivable of $231,000.
Financing activities used cash of $4.4$4.2 million during FY 20172019 and used cash of $7.1$4.1 million during the prior year. ThisThe increase in cash used in financing activities was primarily due to a decreasean increase in the amount of common stock repurchased during FY 2017.debt service being applied to principal, the result of lower interest expense.
The Company has a $5$5.0 million credit line for general corporate and working capital purposes, of which $5$5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2017,2019. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (4.7% at February 28, 2019). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2017.2019 and the Company believes it is likely to be renewed on terms similar to the current terms.
The Company’sCompany’s long-term debt is comprised of a promissory note used to finance prior business acquisitions of U-Swirlby SWRL (unpaid balance as of February 28, 2017, $3.82019, $1.2 million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. This promissory note matures in January 2020. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of February 28, 2017,2019, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets
TheThe table below presents significant contractual obligations of the Company at February 28, 2017.2019.
(Amounts in thousands)
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | 3,832 | 1,303 | 2,529 | - | - | |||||||||||||||
Operating leases | 2,166 | 817 | 980 | 176 | 193 | |||||||||||||||
Other long-term obligations | 472 | 189 | 171 | 112 | - | |||||||||||||||
Total | 6,470 | 2,309 | 3,680 | 288 | 193 |
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | $ | 1,176 | $ | 1,176 | $ | - | $ | - | $ | - | ||||||||||
Operating leases | 2,949 | 758 | 1,333 | 683 | 175 | |||||||||||||||
Purchase contracts | 880 | 880 | - | - | - | |||||||||||||||
Other long-term obligations | 231 | 135 | 96 | - | - | |||||||||||||||
Total | $ | 5,236 | $ | 2,949 | $ | 1,429 | $ | 683 | $ | 175 |
For FY 2018,2020, the Company anticipates making capital expenditures of approximately $1.0 million,$900,000, which will be used to maintain and improve existing factory and administrative infrastructure. The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2018.2020. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
Operating leases: Our Company-owned stores are occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, some of which contain optional renewal rights. We also lease warehouse facilities to support our manufacturing operations and we lease most of our transportation equipment. We do not deem any individual lease to be significant in relation to our overall operations.
Purchase obligations: As of February 28, 2017,28, 2019, we had no off-balance sheet arrangements or obligations.purchase obligations of approximately $880,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’sCompany’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s 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 the Company’s 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria. We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we ordinarily extend credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
We recorded an average expense of approximately $174,300$149,000 per year for potential uncollectible accounts over the three-year period ended February 28, 2017.2019. Write-offs of uncollectible accounts net of recoveries averaged approximately $195,900$209,500 over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over the past three years, the allowances for doubtful notes and accounts have ranged from 10.7%10.0% to 12.6%10.7% of gross receivables.
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. FranchiseBeginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of the associated agreement, which is generally a period of 10-15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon the opening of the store. International license fees are recognizedfranchise store, or upon the execution of thean international license agreement and payment of the license fee.agreement. We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with franchise store openings in the third quarter of FY 2004, we modified our royalty structure. Under the current structure, we recognizeThe Company recognizes no royalty on Rocky Mountain Chocolate Factory franchised stores’ retail sales of products purchased from usthe Company and recognizerecognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. ForRoyalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise stores opened priorrights and range from 2.5% to the third quarter6% of FY 2004 we recognize a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28, 2017,2019, the Company recorded expense averaging $110,600$228,900 per year for potential inventory losses, or approximately 0.5%1.1% of total cost of sales for that period.
Consolidation – The consolidated financial statements in this Annual Report include the accounts of the Company and its subsidiaries. On January 14, 2013 we acquired a controlling interest in U-Swirl. Prior to January 14, 2013, our consolidated financial statements exclude the financial information of U-Swirl. Beginning on January 14, 2013 and continuing through February 28, 2017,2019, the results of operations, assets and liabilities of U-Swirl have been included in our consolidated financial statements. All material inter-Company balances have been eliminated upon consolidation.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. We previously entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with acquisitions of SWRL (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. On February 29, 2016, RMCF repossessed all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement with SWRL. As described in Note 1 below, this was the result of SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants.Agreement. As of February 29, 2016 U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. RMCFWe performed a test of impairment as a result of the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the financial statements.
Franchise Rights – Franchise rights consists of the purchase price paid in consideration of certain rights associated with franchise agreements. These franchise agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.
Other accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with its evaluation of the recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrumentsinstruments for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 2017,2019, based on future contractual obligations for chocolate products, we estimate that a 10% increase or decrease in the prices of contracted ingredients would result in a $259,000an $88,000 favorable or unfavorable price benefit or cost resulting from our commodity purchase contracts.
The Company has a $5$5 million bank line of credit that bears interest at a variable rate. As of February 28, 2017,2019, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of February 28, 2017, $3.82019, $1.2 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.
ITEMITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page | |
|
|
35 | |
36 | |
37 | |
38 | |
39 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders of
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Durango, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Rocky Mountain Chocolate Factory, Inc. and Subsidiaries (the “Company”) as of February 28, 2017 and February 29, 2016, and28, 2019, the related consolidated statementsstatement of income, changes in stockholders’stockholders' equity, and cash flows for each of the years in the three-year periodyear ended February 28, 2017. Our audits also included2019, and the consolidatedrelated notes (collectively referred to as the “financial statements”). In our opinion, the financial statement schedule listedstatements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and the results of its operations and its cash flows for the year ended February 28, 2019, in conformity with accounting principles generally accepted in the Index at Item 15. These consolidatedUnited States of America.
As discussed in Note 1 to the financial statements, and schedule are the responsibility ofCompany adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the Company’s management.modified retrospective adoption method on March 1, 2018.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements and schedule based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting (“Internal Control”). Ourreporting. As part of our audit included considerationwe are required to obtain an understanding of Internal Control as a basis for designing audit procedures that are appropriate in the circumstances,internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s Internal Control.Company's internal control over financial reporting. Accordingly, we express no such opinion. An
Our audit also includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidatedpresentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 and 17 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on March 1, 2018.
We have audited the impact to the 2018 financial statements as disclosed under the modified retrospective method as a result of the adoption of ASC Topic 606, “Revenue from Contracts with Customers”, as described in Note 1 and 17 to the financial statements. In our opinion, the consolidatedimpacts are appropriate and have been properly disclosed. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the impacts disclosed and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements taken as a whole.
/s/ Plante & Moran, PLLC
Denver, Colorado
May 8, 2019
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2018, the related statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. and Subsidiariesthe Company as of February 28,28, 2018 and 2017, and February 29, 2016, and the results of theirits operations and theirits cash flows for each of the years in the three-yeartwo-year period ended February 28, 20172018, in conformity with accounting principles generally accepted in the United States of America. Also, in
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our opinion,audits. We are a public accounting firm registered with the related financial statement schedule, when considered in relationPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the basic consolidatedCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements taken as a whole, presents fairly in allare free of material respects,misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the information set forth therein.purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EKS&H LLLP
May 23, 2017
Denver, Colorado
May 15, 2018
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 29,876,507 | $ | 31,360,745 | $ | 32,100,824 | ||||||
Franchise and royalty fees | 8,419,870 | 9,096,150 | 9,407,552 | |||||||||
Total revenues | 38,296,377 | 40,456,895 | 41,508,376 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,735,739 | 20,866,482 | 20,609,609 | |||||||||
Franchise costs | 2,067,530 | 2,452,609 | 2,264,138 | |||||||||
Sales & marketing | 2,658,421 | 2,466,469 | 2,474,027 | |||||||||
General and administrative | 4,005,142 | 4,663,914 | 4,831,903 | |||||||||
Retail operating | 2,404,003 | 2,951,783 | 3,509,584 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $447,651, $404,391 and $393,776, respectively, included in cost of sales | 841,058 | 1,015,910 | 1,046,672 | |||||||||
Impairment of long-lived assets and goodwill | - | 2,326,742 | - | |||||||||
Restructuring and acquisition related charges | 60,000 | - | 807,476 | |||||||||
Total costs and expenses | 32,771,893 | 36,743,909 | 35,543,409 | |||||||||
Operating Income | 5,524,484 | 3,712,986 | 5,964,967 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (170,351 | ) | (216,600 | ) | (243,188 | ) | ||||||
Interest income | 41,572 | 48,745 | 58,662 | |||||||||
Other, net | (128,779 | ) | (167,855 | ) | (184,526 | ) | ||||||
Income Before Income Taxes | 5,395,705 | 3,545,131 | 5,780,441 | |||||||||
Income Tax Expense (Benefit) | 1,945,589 | (261,400 | ) | 2,037,695 | ||||||||
Net Income | 3,450,116 | 3,806,531 | 3,742,746 | |||||||||
Less: Net loss attributable to non-controlling interest | - | (619,376 | ) | (195,094 | ) | |||||||
Net Income attributable to RMCF stockholders | $ | 3,450,116 | $ | 4,425,907 | $ | 3,937,840 | ||||||
Basic Earnings per Common Share | $ | 0.59 | $ | 0.75 | $ | 0.64 | ||||||
Diluted Earnings per Common Share | $ | 0.58 | $ | 0.73 | $ | 0.61 | ||||||
Weighted Average Common Shares Outstanding | 5,843,245 | 5,893,618 | 6,144,426 | |||||||||
Dilutive Effect of Employee Stock Awards | 150,447 | 201,856 | 268,913 | |||||||||
Weighted Average Common Shares Outstanding, Assuming Dilution | 5,993,692 | 6,095,474 | 6,413,339 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 27,563,794 | $ | 30,167,760 | $ | 29,876,507 | ||||||
Franchise and royalty fees | 6,981,653 | 7,906,935 | 8,419,870 | |||||||||
Total Revenue | 34,545,447 | 38,074,695 | 38,296,377 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,599,551 | 21,176,711 | 20,735,739 | |||||||||
Franchise costs | 1,980,781 | 2,097,555 | 2,067,530 | |||||||||
Sales and marketing | 2,210,800 | 2,489,483 | 2,658,421 | |||||||||
General and administrative | 3,432,618 | 3,904,560 | 4,005,142 | |||||||||
Retail operating | 1,934,891 | 2,389,296 | 2,404,003 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $555,926, $523,034, and $447,651, respectively, included in cost of sales | 1,153,873 | 796,221 | 841,058 | |||||||||
Costs associated with Company-owned store closures | 226,981 | - | 60,000 | |||||||||
Total costs and expenses | 31,539,495 | 32,853,826 | 32,771,893 | |||||||||
Income from Operations | 3,005,952 | 5,220,869 | 5,524,484 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (70,787 | ) | (121,244 | ) | (170,351 | ) | ||||||
Interest income | 20,496 | 24,578 | 41,572 | |||||||||
Other expense, net | (50,291 | ) | (96,666 | ) | (128,779 | ) | ||||||
Income Before Income Taxes | 2,955,661 | 5,124,203 | 5,395,705 | |||||||||
Income Tax Provision | 716,862 | 2,160,295 | 1,945,589 | |||||||||
Consolidated Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Basic Earnings per Common Share | $ | 0.38 | $ | 0.50 | $ | 0.59 | ||||||
Diluted Earnings per Common Share | $ | 0.37 | $ | 0.50 | $ | 0.58 | ||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Basic | 5,931,431 | 5,884,337 | 5,843,245 | |||||||||
Dilutive Effect of Employee | ||||||||||||
Stock Awards | 51,207 | 96,099 | 150,447 | |||||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Diluted | 5,982,638 | 5,980,436 | 5,993,692 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28 or 29, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,779,195 | $ | 6,194,948 | ||||
Accounts receivable, less allowance for doubtful accounts of $487,446 and $595,471, respectively | 3,855,823 | 3,799,691 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $22,147 and $0, respectively | 235,612 | 317,248 | ||||||
Refundable income taxes | 47,863 | - | ||||||
Inventories, less reserve for slow moving inventory of $249,051 and $261,346, respectively | 4,975,779 | 4,840,108 | ||||||
Other | 256,548 | 286,859 | ||||||
Total current assets | 15,150,820 | 15,438,854 | ||||||
Property and Equipment, Net | 6,457,931 | 6,010,303 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and allowance for doubtful accounts of $26,500 and $75,000, respectively | 370,769 | 530,446 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights | 4,826,172 | 5,153,363 | ||||||
Intangible assets, net | 632,207 | 419,042 | ||||||
Deferred income taxes | 858,874 | 1,421,655 | ||||||
Other | 74,639 | 295,118 | ||||||
Total other assets | 7,809,605 | 8,866,568 | ||||||
Total Assets | $ | 29,418,356 | $ | 30,315,725 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,302,501 | $ | 1,254,007 | ||||
Accounts payable | 1,820,470 | 1,663,245 | ||||||
Accrued salaries and wages | 608,510 | 683,863 | ||||||
Gift card liabilities | 2,921,585 | 2,835,943 | ||||||
Other accrued expenses | 253,497 | 364,955 | ||||||
Dividend payable | 702,525 | 700,728 | ||||||
Deferred income | 451,171 | 502,950 | ||||||
Total current liabilities | 8,060,259 | 8,005,691 | ||||||
Long-Term Debt, Less Current Maturities | 2,529,240 | 3,831,126 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock, authorized 50,000 shares | - | - | ||||||
Undesignated series, authorized 200,000 shares | - | - | ||||||
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,854,372 and 5,839,396 issued, and 5,854,372 and 5,839,396 outstanding, respectively | 5,854 | 5,839 | ||||||
Additional paid-in capital | 5,539,357 | 5,340,190 | ||||||
Retained earnings | 13,283,646 | 13,132,879 | ||||||
Total stockholders’ equity | 18,828,857 | 18,478,908 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 29,418,356 | $ | 30,315,725 |
AS OF FEBRUARY 28, | ||||||||
2019 | 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,384,027 | $ | 6,072,984 | ||||
Accounts receivable, less allowance for doubtful accounts of $489,502 and $479,472, respectively | 3,993,262 | 3,897,334 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $0 and $9,000, respectively | 110,162 | 105,540 | ||||||
Refundable income taxes | 190,201 | 342,863 | ||||||
Inventories, less reserve for slow moving inventory of $371,147 and $357,706, respectively | 4,270,357 | 4,842,474 | ||||||
Other | 318,126 | 310,173 | ||||||
Total current assets | 14,266,135 | 15,571,368 | ||||||
Property and Equipment, Net | 5,786,139 | 6,166,240 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and valuation allowance of $0 and $17,500, respectively | 281,669 | 235,983 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights, net | 3,678,920 | 4,433,927 | ||||||
Intangible assets, net | 498,337 | 587,377 | ||||||
Deferred income taxes | 607,421 | 835,463 | ||||||
Other | 56,576 | 63,333 | ||||||
Total other assets | 6,169,867 | 7,203,027 | ||||||
Total Assets | $ | 26,222,141 | $ | 28,940,635 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,176,488 | $ | 1,352,893 | ||||
Accounts payable | 897,074 | 1,647,991 | ||||||
Accrued salaries and wages | 655,853 | 644,005 | ||||||
Gift card liabilities | 742,289 | 3,057,131 | ||||||
Other accrued expenses | 293,094 | 325,034 | ||||||
Dividend payable | 714,939 | 708,652 | ||||||
Contract liabilities | 256,094 | 471,910 | ||||||
Total current liabilities | 4,735,831 | 8,207,616 | ||||||
Long-Term Debt, Less Current Maturities | - | 1,176,416 | ||||||
Contract Liabilities, Less Current Portion | 1,096,478 | - | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock; 50,000 authorized; -0- shares issued and outstanding | - | - | ||||||
Undesignated series; 200,000 shares authorized; -0- shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 5,957,827 shares and 5,903,436 shares issued and outstanding, respectively | 5,958 | 5,903 | ||||||
Additional paid-in capital | 6,650,864 | 6,131,147 | ||||||
Retained earnings | 13,733,010 | 13,419,553 | ||||||
Total stockholders' equity | 20,389,832 | 19,556,603 | ||||||
Total Liabilities and Stockholders' Equity | $ | 26,222,141 | $ | 28,940,635 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,839 | $ | 180,384 | $ | 184,206 | ||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | (174,371 | ) | - | ||||||||
Repurchase and retirement of common stock | (35 | ) | (233 | ) | (7,383 | ) | ||||||
Issuance of common stock | 2 | 4 | 120 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48 | 55 | 3,441 | |||||||||
Balance at end of year | 5,854 | 5,839 | 180,384 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 5,340,190 | 7,163,092 | 8,921,723 | |||||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | 174,371 | - | |||||||||
Repurchase and retirement of common stock | (351,548 | ) | (3,030,475 | ) | (3,120,241 | ) | ||||||
Issuance of common stock | 20,418 | 61,036 | 47,360 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 564,425 | 602,498 | 731,400 | |||||||||
Transfers from non-controlling interest | - | 349,800 | 382,306 | |||||||||
Tax (expense) benefit from employee stock transactions | (34,128 | ) | 19,868 | 200,544 | ||||||||
Balance at end of year | 5,539,357 | 5,340,190 | 7,163,092 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,132,879 | 11,524,708 | 10,344,794 | |||||||||
Net income attributable to RMCF stockholders | 3,450,116 | 4,425,907 | 3,937,840 | |||||||||
Cash dividends declared | (2,806,583 | ) | (2,817,736 | ) | (2,757,926 | ) | ||||||
Correction of immaterial error1 | (492,766 | ) | - | - | ||||||||
Balance at end of year | 13,283,646 | 13,132,879 | 11,524,708 | |||||||||
Non-controlling Interest in Equity of Subsidiary | ||||||||||||
Balance at beginning of year | - | 869,671 | 401,655 | |||||||||
Net loss | - | (619,376 | ) | (195,094 | ) | |||||||
Deductions | - | (310,995 | ) | - | ||||||||
Contributions | - | 60,700 | 663,110 | |||||||||
Balance at end of year | - | - | 869,671 | |||||||||
Total Stockholders’ Equity | $ | 18,828,857 | $ | 18,478,908 | $ | 19,737,855 | ||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,839,396 | 6,012,799 | 6,140,200 | |||||||||
Repurchase and retirement of common stock | (35,108 | ) | (233,302 | ) | (246,106 | ) | ||||||
Issuance of common stock | 2,000 | 4,000 | 4,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48,084 | 55,899 | 114,705 | |||||||||
Balance at end of year | 5,854,372 | 5,839,396 | 6,012,799 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,903 | $ | 5,854 | $ | 5,839 | ||||||
Repurchase and retirement of common stock | - | - | (35 | ) | ||||||||
Issuance of common stock | 6 | 5 | 2 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49 | 44 | 48 | |||||||||
Balance at end of year | 5,958 | 5,903 | 5,854 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 6,131,147 | 5,539,357 | 5,340,190 | |||||||||
Repurchase and retirement of common stock | - | - | (351,548 | ) | ||||||||
Issuance of common stock | 55,971 | 59,095 | 20,418 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 463,746 | 532,695 | 564,425 | |||||||||
Tax (expense) benefit from employee stock transactions | - | - | (34,128 | ) | ||||||||
Balance at end of year | 6,650,864 | 6,131,147 | 5,539,357 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,419,553 | 13,283,646 | 13,132,879 | |||||||||
Net income attributable to RMCF stockholders | 2,238,799 | 2,963,908 | 3,450,116 | |||||||||
Cash dividends declared | (2,851,271 | ) | (2,828,001 | ) | (2,806,583 | ) | ||||||
Correction of immaterial error1 | - | - | (492,766 | ) | ||||||||
Adoption of ASC 6062 | 925,929 | - | - | |||||||||
Balance at end of year | 13,733,010 | 13,419,553 | 13,283,646 | |||||||||
Total Stockholders' Equity | 20,389,832 | 19,556,603 | 18,828,857 | |||||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,903,436 | 5,854,372 | 5,839,396 | |||||||||
Repurchase and retirement of common stock | - | - | (35,108 | ) | ||||||||
Issuance of common stock | 5,333 | 5,000 | 2,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49,058 | 44,064 | 48,084 | |||||||||
Balance at end of year | 5,957,827 | 5,903,436 | 5,854,372 |
1 As revised. Refer to Note 1716 for information on immaterial correction of errors in prior period.
2 Refer to Note 17 for information on the adoption of ASC 606.
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 3,450,116 | $ | 3,806,531 | $ | 3,742,746 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,288,709 | 1,420,301 | 1,440,448 | |||||||||
Provision for loss on accounts and notes receivable | 138,125 | 171,000 | 214,600 | |||||||||
Provision for inventory loss | 100,049 | 76,695 | 58,836 | |||||||||
Asset impairment and store closure losses | - | 2,319,003 | 225,640 | |||||||||
(Gain) loss on sale of assets | 37,112 | 90,149 | (46,857 | ) | ||||||||
Expense recorded for stock compensation | 584,893 | 763,094 | 865,240 | |||||||||
Deferred income taxes | 262,248 | (1,878,205 | ) | (55,068 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (128,404 | ) | 364,767 | 662,625 | ||||||||
Refundable income taxes | (47,863 | ) | 172,945 | (12,055 | ) | |||||||
Inventories | (2,735 | ) | 144,454 | (202,333 | ) | |||||||
Other assets | 29,442 | 24,415 | (16,087 | ) | ||||||||
Accounts payable | (87,657 | ) | (310,533 | ) | (451,080 | ) | ||||||
Accrued liabilities | (293,402 | ) | 154,800 | 325,544 | ||||||||
Deferred income | (9,619 | ) | (531,331 | ) | (880,684 | ) | ||||||
Net cash provided by operating activities | 5,321,014 | 6,788,085 | 5,871,515 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Additions to notes receivable | (133,202 | ) | (46,489 | ) | (179,569 | ) | ||||||
Proceeds received on notes receivable | 318,219 | 368,122 | 488,691 | |||||||||
Proceeds from sale or distribution of assets | 39,045 | 23,692 | 530,175 | |||||||||
Intangible assets | (312,947 | ) | (83,103 | ) | - | |||||||
Decrease (increase) in other assets | 34,479 | (212,860 | ) | (2,395 | ) | |||||||
Purchase of property and equipment | (1,238,472 | ) | (743,251 | ) | (626,744 | ) | ||||||
Net cash (used in) provided by investing activities | (1,292,878 | ) | (693,889 | ) | 210,158 | |||||||
Cash Flows From Financing Activities: | ||||||||||||
Payments on long-term debt | (1,253,392 | ) | (1,207,234 | ) | (107,633 | ) | ||||||
Repurchase of common stock | (351,583 | ) | (3,030,708 | ) | (3,127,624 | ) | ||||||
Issuance of common stock | - | - | 69,599 | |||||||||
Proceeds from issuance of common stock in subsidiary | - | - | 892,895 | |||||||||
Tax (expense) benefit of stock option exercise | (34,128 | ) | 19,868 | 200,544 | ||||||||
Dividends paid | (2,804,786 | ) | (2,838,545 | ) | (2,711,812 | ) | ||||||
Net cash used in financing activities | (4,443,889 | ) | (7,056,619 | ) | (4,784,031 | ) | ||||||
Net (Decrease) Increase In Cash And Cash Equivalents | (415,753 | ) | (962,423 | ) | 1,297,642 | |||||||
Cash And Cash Equivalents At Beginning Of Year | 6,194,948 | 7,157,371 | 5,859,729 | |||||||||
Cash And Cash Equivalents At End Of Year | $ | 5,779,195 | $ | 6,194,948 | $ | 7,157,371 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,709,799 | 1,319,255 | 1,288,709 | |||||||||
Provision for obsolete inventory | 325,478 | 166,868 | 138,125 | |||||||||
Provision for loss on accounts and notes receivable | 155,600 | 225,858 | 100,049 | |||||||||
Asset impairment and store closure losses | 67,822 | - | - | |||||||||
Loss on sale or disposal of property and equipment | 36,024 | 38,496 | 37,112 | |||||||||
Expense recorded for stock compensation | 519,772 | 591,839 | 584,893 | |||||||||
Deferred income taxes | (78,934 | ) | 23,411 | 262,248 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (390,663 | ) | (229,948 | ) | (128,404 | ) | ||||||
Refundable income taxes | 157,544 | (295,000 | ) | (47,863 | ) | |||||||
Inventories | 41,310 | (365,323 | ) | (2,735 | ) | |||||||
Other current assets | (8,225 | ) | (54,091 | ) | 29,442 | |||||||
Accounts payable | (545,588 | ) | 96,491 | (87,657 | ) | |||||||
Accrued liabilities | (84,191 | ) | 242,578 | (293,402 | ) | |||||||
Contract Liabilities | (129,527 | ) | 33,270 | (9,619 | ) | |||||||
Net cash provided by operating activities | 4,015,020 | 4,757,612 | 5,321,014 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Addition to notes receivable | - | (14,293 | ) | (133,202 | ) | |||||||
Proceeds received on notes receivable | 102,256 | 230,637 | 318,219 | |||||||||
Purchase of intangible assets | - | (8,508 | ) | (312,947 | ) | |||||||
Proceeds from (cost of) sale or distribution of assets | 13,498 | (7,926 | ) | 39,045 | ||||||||
Purchases of property and equipment | (613,786 | ) | (544,956 | ) | (1,238,472 | ) | ||||||
(Increase) decrease in other assets | (8,140 | ) | 5,529 | 34,479 | ||||||||
Net cash used in investing activities | (506,172 | ) | (339,517 | ) | (1,292,878 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Payments on long-term debt | (1,352,821 | ) | (1,302,432 | ) | (1,253,392 | ) | ||||||
Repurchase of common stock | - | - | (351,583 | ) | ||||||||
Tax expense of stock option exercise | - | - | (34,128 | ) | ||||||||
Dividends paid | (2,844,984 | ) | (2,821,874 | ) | (2,804,786 | ) | ||||||
Net cash used in financing activities | (4,197,805 | ) | (4,124,306 | ) | (4,443,889 | ) | ||||||
Net Decrease in Cash and Cash Equivalents | (688,957 | ) | 293,789 | (415,753 | ) | |||||||
Cash and Cash Equivalents, Beginning of Period | 6,072,984 | 5,779,195 | 6,194,948 | |||||||||
Cash and Cash Equivalents, End of Period | $ | 5,384,027 | $ | 6,072,984 | $ | 5,779,195 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS 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) and, Aspen Leaf Yogurt, LLC (“ALY”), its 39%-owned subsidiary, U-Swirl, Inc. (“SWRL”), and U-Swirl International, Inc. (“U-Swirl”), a wholly-ownedand its 46%-owned subsidiary, as of February 29, 2016U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.
Effective March 1, 2015, the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03 per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001, of Newco. The new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), the Company entered into two agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to SWRL, in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of February 29, 2016 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. As of February 28, 2017, the Company held a 39% interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving as the Company’s Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. becoming a wholly-owned subsidiary of the Company as of February 29, 2016. As of February 29, 2016 U-Swirl, Inc. had no assets.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’sCompany’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2017:2019:
Sold, Not Yet Open |
Open |
Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 4 | 4 | |||||||||
Franchise stores – Domestic stores and kiosks | 6 | 189 | 195 | |||||||||
International License Stores | - | 94 | 94 | |||||||||
Cold Stone Creamery – co-branded | 5 | 83 | 88 | |||||||||
U-Swirl cafés (Including all associated brands) | ||||||||||||
Company-owned cafés | - | 2 | 2 | |||||||||
Company-owned cafés – co-branded | - | 3 | 3 | |||||||||
Franchise stores – North American cafés | * | 129 | 129 | |||||||||
Franchise stores – North American – co-branded | * | 16 | 16 | |||||||||
International License cafés | - | 2 | 2 | |||||||||
Total | 11 | 522 | 533 |
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Sold, Not Yet Open | Open | Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 2 | 2 | |||||||||
Franchise stores - Domestic stores and kiosks | 4 | 183 | 187 | |||||||||
International license stores | 1 | 64 | 65 | |||||||||
Cold Stone Creamery - co-branded | 11 | 91 | 102 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores | - | 1 | 1 | |||||||||
Company-owned stores - co-branded | - | 3 | 3 | |||||||||
Franchise stores - Domestic stores | - | 87 | 87 | |||||||||
Franchise stores - Domestic - co-branded | - | 9 | 9 | |||||||||
International license stores | - | 2 | 2 | |||||||||
Total | 16 | 442 | 458 |
Consolidation
ManagementManagement accounts for the activities of the Company and its subsidiaries, and the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As described above, on January 14, 2013, the Company acquired a controlling interest in SWRL. Prior to January 14, 2013, the Company’s consolidated financial statements excludeexcluded the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets and liabilities of SWRL have been included in these consolidated financial statements. The Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under a loan and security agreement with SWRL to cover the SWRLpurchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement.Agreement”). This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February 29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $5.3$4.9 million at February 28, 2017.2019.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business, we extendthe Company extends credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At February 28, 2017,2019, the Company has $655,028had $391,831 of notes receivable outstanding and an allowance for doubtful accounts of $48,647$0 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through September, 2022November 2023 and approximately $579,000$375,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’sCompany’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.
Income Taxes
We provideThe 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 bases 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. Due to historical U-Swirl losses, prior to FY 2016 wethe Company established a full valuation allowance on ourthe Company’s deferred tax assets. During FY 2016 wethe Company took possession of the outstanding equity in U-Swirl International, Inc.U-Swirl. As a result of ourthe Company’s ownership increasing to 100%, wethe Company began filing consolidated income tax returns in FY 2017. Because of this change, we havethe Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 wethe Company further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The correction of this immaterial error to ourthe Company’s balance sheet is further described in Note 17.16. The Company's temporary differences are listed in Note 6.
Gift Card Breakage
The Company and ourits franchisees sell gift cards that are redeemable for product in our stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on ourthe Company’s gift cards, and we dothe Company does not charge any service fees. While ourthe Company’s franchisees continue to honor all gift cards presented for payment, wethe Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is inredeemed by the processcustomer or the Company determines the likelihood of accumulating sufficient historical redemption patterns to calculate breakage estimates related to unredeemedthe gift cards. Thiscard being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based on a percentage of sales when the likelihood of the redemption of the gift card becomes remote. When the Company has sufficientupon Company-specific historical redemption patterns to calculate breakage estimates, the gift card breakage will be recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. As the Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage estimates, the Company did not recognize gift card breakage during the year ended February 28 or 29, 2017 or 2016.patterns. Accrued gift card liability was $2,921,585$742,289 and $2,835,943$3,057,131 at February 28, or 29, 20172019 and 2016,2018, respectively. The Company recognized breakage of $139,188 and $0 during FY 2019 and FY 2018, respectively. See Note 17 to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC 606.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of ourthe Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the SWRL Loan Agreement with SWRL.Agreement. This was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of goodwill recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership and the result of ourthe Company’s test indicated a full impairment of the U-Swirl goodwill. OurThe Company’s testing and impairment is described in Note 13 to the financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under the acquisition method, the purchase price of the acquisition is allocated to the underlying tangible and intangible assets acquired based on their respective fair values. Fair values are derived from various observable and unobservable inputs and assumptions. The Company utilizes third-party valuation specialists to assist in the allocation. Initial purchase price allocations are preliminary and are subject to revision within the measurement period, not to exceed one year from the date of acquisition. The costs of the business acquisitions are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Moreover, unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to ourthe Company’s franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’sCompany’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
FranchiseBeginning in FY 2019, upon adoption of adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with Rocky Mountain Chocolate Factory franchise store openings in the third quarter of FY 2004, the Company modified its royalty structure. Under the current structure, theThe Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 the Company recognizes a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain instances, we arethe Company is required to pay a portion of franchise fee revenue, or royalty fees to parties we’vethe Company has contracted with to assist in developing and growing a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the ongoing royalty fees, or both. When such agreements exist, we reportthe Company reports franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of the Company’s Manufacturingour manufacturing segment represented approximately $4.1$3.1 million or 11%9% of the Company’sour total revenues during the year ended February 28, 2017. The Company’s2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by a changefurther decreases in the purchases of this customer.customer or the loss of this customer entirely.
Stock-Based Compensation
At February 28, 2017,28, 2019, the Company had one stock-based compensation plans, which currently consists solely ofplan, the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $584,893, $763,094,$519,772, $591,839, and $865,240$584,893 related to equity-based compensation expense during the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
TaxBeginning March 1, 2017, the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement. Prior to March 1, 2017 tax benefits or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the accompanying Statements of Cash Flows. The excess tax benefit or (expense)expense included in net cash provided by financing activities for the years ended February 28, or 29, 2017 2016 and 2015 was $(34,128), $19,868 and $200,544, respectively.$34,128.
During FY 20172019 and 2016,2018, the Company granted no restricted stock units. There were no stock options granted to employees during FY 20172019 or FY 2016.2018. The restricted stock unit grants generally vest 17-20%17 to 20% annually over a period of five to six years. The Company recognized $564,473$463,795 of consolidated stock-based compensation expense related to these grants made in prior years during FY 20172019 compared with $602,554$532,739 in FY 2016.2018 and $564,473 in FY 2017. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 20172019 was $1,179,492,$114,183, which is expected to be recognized over the weighted average period of 2.20.4 years.
During FY 2017, theThe Company issued 2,000 fully-vested, unrestricted shares to non-employee directors compared with 4,000 fully-vested,fully vested, unrestricted shares of stock to non-employee directors in FY 2016.during the year ended February 28, 2019 compared to no shares issued during the year ended February 28, 2018 and 2,000 issued during the year ended February 28, 2017. In connection with these non-employee director stock issuances, the Company recognized $20,420$24,480, $0 and $61,040$20,420 of stock-based compensation expense during FYyear ended February 28, 2019, 2018 and 2017, respectively.
During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and FY 2016, respectively.based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized $31,497 in stock-based compensation expense during the year ended February 28, 2019.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. DuringFollowing the expiration of all outstanding options, during FY 2017, FY 2016 and FY 2015, 0, 12,936, and 12,936, respectively, ofno stock options were excluded from diluted shares as their effect was anti-dilutive.shares.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $279,698, $215,314,$275,441, $355,678, and $244,946$279,698 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Total advertising expense for U-Swirl and its brands amounted to $335,771, $460,034,$168,000, $222,093, and $399,414$335,771 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The Company’sCompany’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable and notes receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, FASB issued ASU 2016-15, Statement2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 clarifies and provides specific guidancechanges in stockholders’ equity in the interim financial statements included in Quarterly Reports on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduceForm 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current diversity in practice. ASU No. 2016-15 isand comparative quarter and year-to-date interim periods. The amendments are effective for public business entities for annual periods, including interim periods within those annual periods, beginningall filings made on or after December 15, 2017, with early application permitted. This guidance is applicableNovember 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the Company's fiscal year beginning March 1, 2018.filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Quarterly Report on Form 10-Q. The Company does not anticipate that this guidancethe adoption of these SEC amendments will have a material impacteffect on its consolidatedthe Company’s financial statements.position, results of operations, cash flows or stockholders’ equity.
In June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting 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- 132016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU No. 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2017. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the process of assessing the impact of the adoption of ASU No. 2016-09 on its consolidated financial statements. During the fiscal years ended February 28, 2017 and February 29, 2016 the Company would have realized additional expense of $34,000 and additional income of $20,000, respectively, if this guidance had been applied.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are requiredThe Company will adopt this guidance effective with the three month period ending May 31, 2019 (the first quarter of Fiscal Year 2020). The Company can elect to apply the amendments atrecord a cumulative-effect adjustment as of the beginning of the earliest period presented usingyear of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments (see note 5) will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, The Company anticipates ASU 2016-02 will have a material impact on the FASB issuedconsolidated balance sheet. The impact of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The cumulative adjustment to be recorded as right-of-use assets and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 willoperating lease liabilities, upon adoption, is expected to be effective for us in the first quarterrange of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.$3,500,000 to $3,900,000.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASC 606”). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in TopicASC 605 Revenue“Revenue Recognition.” ASC 606 provides that revenues are to be 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. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early applicationnew standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in Company-owned stores as those sales are recognized at the time of the guidance is permittedunderlying sale and are presented net of sales taxes and discounts. The standard also did not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard changed the timing in which the Company recognizes initial fees from franchisees and licensees for annual reporting periods beginning after December 31, 2016. This guidance is applicablenew franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store opening and renewals that impact the Company's fiscal year beginning March 1, 2018. The Company expectsterm of the adoption offranchise agreement upon renewal. In accordance with the new guidance, to change the timinginitial franchise services are not distinct from the continuing rights or services offered during the term of recognition ofthe franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees including master license and territory fees for our international business, and renewal fees. Currently, these fees are generallybeing recognized upfront upon either opening ofas the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognizedCompany satisfies the performance obligation over the term of the relatedfranchise agreement, which we expect will result in a material impactis generally 10 to revenue recognized for franchise fees, license fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. 15 years.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Ingredients and supplies | $ | 3,021,220 | $ | 2,868,157 | ||||
Finished candy | 2,137,609 | 2,138,952 | ||||||
U-Swirl food and packaging | 66,001 | 94,345 | ||||||
Reserve for slow moving inventory | (249,051 | ) | (261,346 | ) | ||||
Total inventories | $ | 4,975,779 | $ | 4,840,108 |
2019 | 2018 | |||||||
Ingredients and supplies | $ | 2,612,954 | $ | 2,764,727 | ||||
Finished candy | 1,983,854 | 2,371,610 | ||||||
U-Swirl food and packaging | 44,696 | 63,843 | ||||||
Reserve for slow moving inventory | (371,147 | ) | (357,706 | ) | ||||
Total inventories | $ | 4,270,357 | $ | 4,842,474 |
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 4,787,855 | 4,784,272 | ||||||
Machinery and equipment | 10,598,355 | 9,987,906 | ||||||
Furniture and fixtures | 1,047,319 | 1,169,475 | ||||||
Leasehold improvements | 1,531,112 | 1,862,603 | ||||||
Transportation equipment | 418,402 | 438,601 | ||||||
Asset impairment | (47,891 | ) | (568,803 | ) | ||||
18,848,770 | 18,187,672 | |||||||
Less accumulated depreciation | 12,390,839 | 12,177,369 | ||||||
Property and equipment, net | $ | 6,457,931 | $ | 6,010,303 |
2019 | 2018 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 5,031,395 | 4,905,103 | ||||||
Machinery and equipment | 10,263,119 | 10,686,631 | ||||||
Furniture and fixtures | 864,944 | 1,067,788 | ||||||
Leasehold improvements | 1,131,659 | 1,568,260 | ||||||
Transportation equipment | 422,458 | 434,091 | ||||||
Asset impairment | (30,000 | ) | (62,891 | ) | ||||
18,197,193 | 19,112,600 | |||||||
Less accumulated depreciation | (12,411,054 | ) | (12,946,360 | ) | ||||
Property and equipment, net | $ | 5,786,139 | $ | 6,166,240 |
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2017,28, 2019, the Company had a $5$5.0 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (3.0%(4.7% at February 28, 2017)2019). At February 28, 2017, $52019, $5.0 million was available for borrowings under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 20172019 and we believethe Company believes it is likely to be renewed on terms similar to current terms. At February 28, 2019 and 2018 there was no amount outstanding under this line of credit.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets, including the SWRL Loan Agreement.assets. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. As of February 28, 2019, the Company was in compliance with all such covenants. The Wells Fargo Loan Agreement also contains customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by substantially all business assets. | $ | 3,831,741 | $ | 5,085,133 | ||||
Less current maturities | 1,302,501 | 1,254,007 | ||||||
Long-term obligations | $ | 2,529,240 | $ | 3,831,126 |
The following is a schedule by year of maturities of long-term debt for the years ending February 28 or 29:
2018 | $ | 1,302,501 | ||
2019 | 1,352,900 | |||
2020 | 1,176,340 | |||
Total | $ | 3,831,741 |
2019 | 2018 | ||||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by sustantially all business assets | $ | 1,176,488 | $ | 2,529,309 | |||||
Less current maturities | 1,176,488 | 1,352,893 | |||||||
Long-term obligations | $ | - | $ | 1,176,416 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under fivenon-cancelable operating leases of up to ten-year non-cancelable operating leases.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 following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 603,000 | ||
2019 | 561,000 | |||
2020 | 272,000 | |||
2021 | 49,000 | |||
2022 | 49,000 | |||
Thereafter | 194,000 | |||
Total | $ | 1,728,000 |
2020 | $ | 318,000 | ||
2021 | 259,000 | |||
2022 | 249,000 | |||
2023 | 243,000 | |||
2024 | 249,000 | |||
Thereafter | 175,000 | |||
Total | $ | 1,493,000 |
We actThe Company acts as primary lessee of some franchised store premises, which wethe Company then subleasesubleases to franchisees, but the majority of existing locations are leased by the franchisee directly. OurThe Company’s current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we wereFebruary 28, 2019, the Company was the primary lessee at fivefour of our 332the Company’s 313 domestic franchised stores and 1 former office space.stores.
InIn 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's liability as primary lessee on sublet franchise outlets, all of which is fully offset by sublease rentals, is as follows for the years ending February 28 or 29:
2018 | $ | 189,000 | ||
2019 | 90,000 | |||
2020 | 81,000 | |||
2021 | 83,000 | |||
2022 | 29,000 | |||
Total | $ | 472,000 |
2020 | $ | 92,000 | ||
2021 | 75,000 | |||
2022 | 21,000 | |||
Total | $ | 188,000 |
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Minimum rentals | $ | 944,938 | $ | 1,187,003 | $ | 1,282,363 | ||||||
Less sublease rentals | (318,000 | ) | (479,000 | ) | (468,000 | ) | ||||||
Contingent rentals | 25,200 | 22,200 | 22,200 | |||||||||
$ | 652,138 | $ | 730,203 | $ | 836,563 |
2019 | 2018 | 2017 | ||||||||||
Minimum rentals | $ | 1,030,536 | $ | 1,270,240 | $ | 944,938 | ||||||
Less sublease rentals | (572,000 | ) | (603,000 | ) | (318,000 | ) | ||||||
Contingent rentals | 22,800 | 26,100 | 25,200 | |||||||||
$ | 481,336 | $ | 693,340 | $ | 652,138 |
In FY 2013,2019, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule, by year, of future minimum rental payments required under such lease for the years ending February 28:28 or 29:
2018 | $ | 28,000 | ||
Total | $ | 28,000 |
2020 | $ | 116,000 | ||
2021 | 121,000 | |||
2022 | 125,000 | |||
2023 | 129,000 | |||
2024 | 33,000 | |||
Total | $ | 524,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 185,700 | ||
2019 | 84,300 | |||
2020 | 62,100 | |||
2021 | 62,100 | |||
2022 | 15,500 | |||
Total | $ | 409,700 |
2020 | $ | 323,000 | ||
2021 | 323,000 | |||
2022 | 257,000 | |||
2023 | 29,000 | |||
Total | $ | 932,000 |
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | |||||||
220,791 | 182,006 | 185,703 |
2019 | 2018 | 2017 | |||||||
325,229 | 225,992 | 220,791 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 20172019, the Company was contracted for approximately $2,595,000$880,000 of raw materials under such agreements.
Contingencies
The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (collectively, the “CherryBerry Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB Shares, they must first offer such shares to SWRL and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint in the Colorado District Court, and thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion). On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May 9, 2016, the Oklahoma Court granted that application and we filed an answer to this action on June 6, 2016. All parties are currently involved in discovery proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this lawsuit.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Current | ||||||||||||
Federal | $ | 1,411,126 | $ | 1,420,811 | $ | 1,846,365 | ||||||
State | 272,214 | 195,993 | 246,398 | |||||||||
Total Current | 1,683,340 | 1,616,804 | 2,092,763 | |||||||||
Deferred | ||||||||||||
Federal | 240,234 | (1,725,918 | ) | (50,603 | ) | |||||||
State | 22,015 | (152,286 | ) | (4,465 | ) | |||||||
Total Deferred | 262,249 | (1,878,204 | ) | (55,068 | ) | |||||||
Total | $ | 1,945,589 | $ | (261,400 | ) | $ | 2,037,695 |
2019 | 2018 | 2017 | ||||||||||
Current | ||||||||||||
Federal | $ | 653,226 | $ | 1,916,720 | $ | 1,411,127 | ||||||
State | 142,570 | 220,164 | 272,214 | |||||||||
Total Current | 795,796 | 2,136,884 | 1,683,341 | |||||||||
Deferred | ||||||||||||
Federal | (67,410 | ) | 55,658 | 240,233 | ||||||||
State | (11,524 | ) | (32,247 | ) | 22,015 | |||||||
Total Deferred | (78,934 | ) | 23,411 | 262,248 | ||||||||
Total | $ | 716,862 | $ | 2,160,295 | $ | 1,945,589 |
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years endedended February 28 or 29:
2017 | 2016 | 2015 | ||||||||||
Statutory rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.6 | % | 0.8 | % | 2.8 | % | ||||||
Domestic production deduction | (1.1 | %) | (3.0 | %) | (1.6 | %) | ||||||
Work opportunity tax credits | (0.4 | %) | - | - | ||||||||
Statutory rate change | - | (1.6 | %) | - | % | |||||||
Other | 0.0 | % | 0.5 | % | 0.1 | % | ||||||
U-Swirl loss carryforward recognized | - | (1.8 | %) | (3.0 | %) | |||||||
Valuation allowance, U-Swirl Consolidated loss | - | (36.3 | %) | 3.0 | % | |||||||
Effective rate – provision (benefit) | 36.1 | % | (7.4 | %) | 35.3 | % |
2019 | 2018 | 2017 | ||||||||||
Statutory rate | 21.0 | % | 31.9 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.4 | % | 2.4 | % | 3.6 | % | ||||||
Domestic production deduction | 0.0 | % | (0.9 | )% | (1.1 | )% | ||||||
Work opportunity tax credits | (0.7 | )% | (0.2 | )% | (0.4 | )% | ||||||
Other | 0.5 | % | 0.8 | % | 0.0 | % | ||||||
Impact of tax reform | 0.0 | % | 8.2 | % | 0.0 | % | ||||||
Effective rate - provision (benefit) | 24.2 | % | 42.2 | % | 36.1 | % |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes at February 28 or 29 are as follows:
Deferred Tax Assets | 2017 | 2016 | ||||||
Allowance for doubtful accounts and notes | $ | 198,354 | $ | 248,537 | ||||
Inventories | 90,027 | 96,698 | ||||||
Accrued compensation | 188,002 | 183,898 | ||||||
Loss provisions and deferred income | 1,175,351 | 1,299,191 | ||||||
Self-insurance accrual | 37,000 | 28,923 | ||||||
Amortization | 782,683 | 861,594 | ||||||
Restructuring charges | 148,494 | 148,494 | ||||||
U-Swirl accumulated net loss | 164,035 | 346,605 | ||||||
Valuation allowance | (148,494 | ) | (148,494 | ) | ||||
Net deferred tax assets | 2,635,452 | 3,065,446 | ||||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (1,683,778 | ) | (1,537,653 | ) | ||||
Prepaid expenses | (92,800 | ) | (106,138 | ) | ||||
Deferred tax liabilities | $ | (1,776,578 | ) | $ | (1,643,791 | ) | ||
Net deferred tax assets | $ | 858,874 | $ | 1,421,655 |
2019 | 2018 | |||||||
Deferred Tax Assets | ||||||||
Allowance for doubtful accounts and notes | $ | 120,368 | $ | 124,469 | ||||
Inventories | 91,265 | 86,938 | ||||||
Accrued compensation | 87,930 | 130,049 | ||||||
Loss provisions and deferred income | 492,468 | 817,945 | ||||||
Self-insurance accrual | 34,426 | 38,868 | ||||||
Amortization | 217,481 | 520,379 | ||||||
Restructuring charges | 98,693 | 98,728 | ||||||
U-Swirl accumulated net loss | 325,253 | 258,173 | ||||||
Valuation allowance | (98,693 | ) | (98,728 | ) | ||||
Net deferred tax assets | $ | 1,369,191 | $ | 1,976,821 | ||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (682,542 | ) | (1,066,113 | ) | ||||
Prepaid expenses | (79,228 | ) | (75,245 | ) | ||||
Deferred Tax Liabilities | (761,770 | ) | (1,141,358 | ) | ||||
Net deferred tax assets | $ | 607,421 | $ | 835,463 |
The following table summarizes deferred income tax valuation allowances as of February 28 or 29:28:
2017 | 2016 | |||||||
Valuation allowance at beginning of period | $ | 148,494 | $ | 349,010 | ||||
Tax expense (benefits) realized by valuation allowance | - | 81,340 | ||||||
Tax benefits released from valuation allowance | - | (281,856 | ) | |||||
Valuation allowance at end of period | $ | 148,494 | $ | 148,494 |
2019 | 2018 | |||||||
Valuation allowance at beginning of period | $ | 98,728 | $ | 148,494 | ||||
Tax expense (benefits) realized by valuation allowance | (35 | ) | - | |||||
Tax benefits released from valuation allowance | - | - | ||||||
Impact of tax reform | - | (49,766 | ) | |||||
Valuation allowance at end of period | $ | 98,693 | $ | 98,728 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Income tax benefit realizedexpense and the effective income tax rate for the year ended February 29, 2016, compared to the tax expense in the prior years, is primarily due to the tax consequences of a change in the controlling interest in U-Swirl and foreclosure upon the stock of U-Swirl International, Inc. In FY 2014 we did not realize a tax benefit28, 2019 decreased from the SWRL taxable loss causing our effective rate to increase for the year. During FY 2015 the taxable loss at SWRL was lower, resulting in a decrease to our effective rate. During FY 2016 an income tax benefit of approximately $2,149,000 was recognizedyear ended February 28, 2018, primarily as a result of the company foreclosing upon the interest in U-Swirl and recognizingrevaluation of deferred tax assets and loss carry forwards that previously had full valuation allowances when RMCF had less than an 80% ownership interest. Resulting from this foreclosure, RMCF will consolidate U-Swirl International, Inc. resulting in realizationliabilities to the lower enacted U.S. corporate tax rate of U-Swirl International, Inc. deferred tax assets that previously had a full valuation allowance when filed with SWRL income tax returns. U-Swirl International, Inc.21% under the Tax Cuts and RMCF will file consolidated income tax returns beginning with FY 2017. SWRL will continue to file separate tax returns.
ForJobs Act recognized during the year ended February 29, 201628, 2018 and prior periods, the financial statements presented representlower enacted U.S. corporate tax rate of 21% under the consolidated statementsTax Cuts and Jobs Act effective for the year ended February 28, 2019. The revaluation of two separate consolidated groups fordeferred tax assets and liabilities resulted in income tax purposes. RMCF has filed income tax returns consolidatingexpense of approximately $421,000 recognized in consideration of the results of Rocky Mountain Chocolate Factory and its wholly owned subsidiary, Aspen Leaf Yogurt, LLC. U-Swirl Inc. has filed a separate consolidated income tax returnlower enacted rate for the results of U-Swirl, Inc. and its wholly owned subsidiary, U-Swirl International, Inc. RMCF and SWRL have filed separate income tax returns because RMCF owned only 39% of SWRL. Beginning on March 1, 2016 the results of U-Swirl International, Inc. will be included in RMCF’s consolidated income tax return, and on the same date, will be removed from U-Swirl, Inc.’s consolidated tax return. This is a result of the foreclosure of RMCF on the outstanding stock of U-Swirl in satisfaction of debt between RMCF and SWRL. The consolidated tax return for RMCF for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL.year ended February 28, 2018.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2012.2013. The Company’s federal income tax returns have been examined for the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years. The Company’s federal income tax returns are being examined for the years ended February 28 or 29, 2017 and 2016.
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. Management believes that, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2017.2019.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28, 2019 or 29, 2016 or 2015.2018. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28, or 29, 20172019 and 2016.2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 29,29, 2016, we hadthe Company foreclosed on the outstanding equity of U-Swirl International, Inc. and U-Swirl International, Inc. was consolidated for income tax purposes. SWRL, along with U-Swirl International, Inc., has historically filed its own consolidated federal income tax return and reported its own Federal net operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets. This full valuation allowance was eliminated asAs of February 29, 2016, in recognitiona portion of the likelihoodU-Swirl deferred tax assets were recognized as a result of it becoming more likely than not that the loss carry forwardssome of these assets would be realized in the future as a result of RMCF and U-Swirl International, Inc. filing a consolidated income tax return.
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl International, Inc.’sU-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. We haveThe Company has performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest in January 2013.2013 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl International Inc.’sU-Swirl’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
We estimateThe Company estimates that the potential future tax deductions of U-Swirl International, Inc.’sU-Swirl’s Federal net operating losses, limited by section 382, to be approximately $443,000$1,323,000 with a resulting deferred tax asset of approximately $164,000. U-Swirl International Inc.’s$325,000. U-Swirl’s Federal net operating loss carryovers will expire at various dates beginning in 2026.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash dividendsdividend of $0.12 per common share on March 11, 2016, June 17, 2016, September 16, 2016 and December 9, 20162018 to stockholders of record on February 26, 2016,March 6, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 15, 2018 to stockholders of record on June 5, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 14, 2018 to stockholders of record on September 4, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 7, 2016, September 6, 2016 and2018 to stockholders of record on November 25, 2016, respectively.23, 2018. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 9, 2017 payable14, 2019, which was paid on March 10, 201715, 2019 to stockholders of record on February 24, 2017.March 5, 2019.
Future declarationsdeclarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long termlong-term interest of the Company’s stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the nine months ended November 30, 2016,FY 2017, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the three monthsyears ended February 28, 2017.2019 or 2018. As of February 28, 2017,2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (the(as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock awards under the 2007 Plan as of February 28, 2017:2019:
Original share authorization: | 300,000 | |||
Prior plan shares authorized and incorporated in the 2007 | 85,340 | |||
Additional shares authorized through 2007 Plan amendment: | 300,000 | |||
Available for | 685,340 | |||
Cancelled/ | ||||
Shares awarded as unrestricted shares, stock options or restricted stock | ( | ) | ||
Shares available for award: |
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding stock options at beginning of year: | 12,936 | 12,936 | 155,880 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | (142,944 | ) | ||||||||
Cancelled/forfeited | (12,936 | ) | - | - | ||||||||
Outstanding stock options as of February 28 or 29: | - | 12,936 | 12,936 | |||||||||
Weighted average exercise price | n/a | $ | 12.94 | $ | 12.94 | |||||||
Weighted average remaining contractual term (in years) | n/a | 0.04 | 1.04 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding stock options at beginning of year: | - | - | 12,936 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Cancelled/forfeited | - | - | (12,936 | ) | ||||||||
Outstanding stock options as of February 28: | - | - | - | |||||||||
Weighted average exercise price | n/a | n/a | n/a | |||||||||
Weighted average remaining contractual term (in years) | n/a | n/a | n/a |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 181,742 | 237,641 | 295,040 | |||||||||
Granted | - | - | - | |||||||||
Vested | (48,084 | ) | (55,899 | ) | (56,199 | ) | ||||||
Cancelled/forfeited | (10,000 | ) | - | (1,200 | ) | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 123,658 | 181,742 | 237,641 | |||||||||
Weighted average grant date fair value | $ | 12.21 | $ | 12.22 | $ | 12.13 | ||||||
Weighted average remaining vesting period (in years) | 2.23 | 3.22 | 4.08 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 77,594 | 123,658 | 181,742 | |||||||||
Granted | - | - | - | |||||||||
Vested | (49,058 | ) | (44,064 | ) | (48,084 | ) | ||||||
Cancelled/forfeited | (3,534 | ) | (2,000 | ) | (10,000 | ) | ||||||
Outstanding non-vested restricted stock units as of February 28: | 25,002 | 77,594 | 123,658 | |||||||||
Weighted average grant date fair value | $ | 12.05 | $ | 12.16 | $ | 12.21 | ||||||
Weighted average remaining vesting period (in years) | 0.38 | 1.27 | 2.23 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
FY 2019 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,361,528 | $ | 25,324,024 | $ | 1,272,009 | $ | 3,737,606 | $ | - | $ | 35,695,167 | ||||||||||||
Intersegment revenues | (5,236 | ) | (1,144,484 | ) | - | - | - | (1,149,720 | ) | |||||||||||||||
Revenue from external customers | 5,356,292 | 24,179,540 | 1,272,009 | 3,737,606 | - | 34,545,447 | ||||||||||||||||||
Segment profit (loss) | 2,288,871 | 4,310,722 | (52,009 | ) | (32,391 | ) | (3,559,532 | ) | 2,955,661 | |||||||||||||||
Total assets | 1,182,355 | 12,267,458 | 1,001,419 | 5,264,989 | 6,505,920 | 26,222,141 | ||||||||||||||||||
Capital expenditures | 3,548 | 526,402 | 9,617 | 16,512 | 57,707 | 613,786 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,369 | $ | 573,846 | $ | 32,762 | $ | 952,178 | $ | 104,644 | $ | 1,709,799 |
FY 2016 |
Franchising |
Manufacturing |
Retail |
U-Swirl |
Other |
Total | ||||||||||||||||||
Total revenues | $ | 5,947,769 | $ | 27,726,443 | $ | 1,622,906 | $ | 6,535,646 | $ | - | $ | 41,832,764 | ||||||||||||
Intersegment revenues | (5,185 | ) | (1,370,684 | ) | - | - | - | (1,375,869 | ) | |||||||||||||||
Revenue from external customers | 5,942,584 | 26,355,759 | 1,622,906 | 6,535,646 | - | 40,456,895 | ||||||||||||||||||
Segment profit (loss) | 2,608,351 | 6,731,221 | (2,591 | ) | (2,128,649 | ) | (3,663,201 | ) | 3,545,131 | |||||||||||||||
Total assets | 1,205,616 | 11,980,933 | 1,008,783 | 10,126,209 | 5,994,184 | 30,315,725 | ||||||||||||||||||
Capital expenditures | 76,762 | 432,473 | 3,306 | 66,476 | 164,234 | 743,251 | ||||||||||||||||||
Total depreciation & amortization | $ | 36,908 | $ | 406,082 | $ | 18,236 | $ | 802,953 | $ | 156,122 | $ | 1,420,301 |
FY 2018 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 6,004,897 | $ | 27,491,089 | $ | 1,876,021 | $ | 4,142,085 | $ | - | $ | 39,514,092 | ||||||||||||
Intersegment revenues | (4,882 | ) | (1,434,515 | ) | - | - | - | (1,439,397 | ) | |||||||||||||||
Revenue from external customers | 6,000,015 | 26,056,574 | 1,876,021 | 4,142,085 | - | 38,074,695 | ||||||||||||||||||
Segment profit (loss) | 2,623,081 | 5,791,980 | (37,102 | ) | 542,073 | (3,795,829 | ) | 5,124,203 | ||||||||||||||||
Total assets | 1,157,158 | 12,729,659 | 1,134,876 | 8,125,171 | 5,793,771 | 28,940,635 | ||||||||||||||||||
Capital expenditures | 15,429 | 429,545 | 33,056 | 11,899 | 55,027 | 544,956 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,087 | $ | 540,033 | $ | 32,567 | $ | 576,162 | $ | 124,406 | $ | 1,319,255 |
FY 2015 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,976,964 | $ | 27,459,828 | $ | 2,134,976 | $ | 7,501,943 | $ | - | $ | 43,073,711 | ||||||||||||
Intersegment revenues | (342 | ) | (1,564,993 | ) | - | - | - | (1,565,335 | ) | |||||||||||||||
Revenue from external customers | 5,976,622 | 25,894,835 | 2,134,976 | 7,501,943 | - | 41,508,376 | ||||||||||||||||||
Segment profit (loss) | 2,783,734 | 6,993,693 | (51,803 | ) | (245,546 | ) | (3,699,637 | ) | 5,780,441 | |||||||||||||||
Total assets | 1,193,407 | 12,155,004 | 1,157,674 | 12,424,801 | 7,207,327 | 34,138,213 | ||||||||||||||||||
Capital expenditures | 28,806 | 378,060 | 41,361 | 61,053 | 117,464 | 626,744 | ||||||||||||||||||
Total depreciation & amortization | $ | 41,228 | $ | 395,864 | $ | 35,531 | $ | 813,172 | $ | 154,653 | $ | 1,440,448 |
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
Revenue from one customer of the Company’sCompany’s Manufacturing segment represented approximately $4.1$3.1 million, or 10.69.1 percent, of the Company’s revenues from external customers during the year ended February 28, 2017,2019, compared to $5.2$5.1 million, or 12.813.4 percent of the Company’s revenues from external customers during the year ended February 29, 2016.28, 2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For thethe three years ended February 28 or 29:
Cash paid (received) for: | 2017 | 2016 | 2015 | |||||||||
Income taxes paid | $ | 1,997,751 | $ | 1,383,805 | $ | 1,896,274 | ||||||
Interest | 129,927 | 170,709 | 193,022 | |||||||||
Accrued Inventory | 531,017 | 298,032 | 245,183 | |||||||||
Non-Cash Financing Activities: | ||||||||||||
Dividend payable | 702,525 | 700,728 | 721,536 | |||||||||
Non-Cash Investing Activities: | ||||||||||||
Sale or distribution of assets in exchange for notes receivable | ||||||||||||
Long-lived assets | 20,989 | 127,500 | 414,353 | |||||||||
Other assets | $ | - | $ | 75,000 | $ | - |
Cash paid for: | 2019 | 2018 | 2017 | |||||||||
Interest, net | $ | 52,102 | $ | 102,640 | $ | 129,927 | ||||||
Income taxes | 638,252 | 2,431,884 | 1,997,751 | |||||||||
Non-cash Operating Activities | ||||||||||||
Accrued Inventory | 52,918 | 258,247 | 531,017 | |||||||||
Non-cash Financing Activities | ||||||||||||
Dividend payable | $ | 714,939 | $ | 708,652 | 702,525 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’semployee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, the Company’s contribution was approximately $66,000, $62,000,$70,000, $68,000, and $60,000,$66,000, respectively, to the plan.
NOTE 1212 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscalfiscal years ended February 28, or 29, 20172019 and 2016:2018:
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2017 | ||||||||||||||||||||
Total revenue | $ | 9,376,199 | $ | 8,601,962 | $ | 9,955,239 | $ | 10,362,977 | $ | 38,296,377 | ||||||||||
Gross margin | 2,222,405 | 2,289,011 | 2,706,456 | 1,922,896 | 9,140,768 | |||||||||||||||
Net income | 731,834 | 974,813 | 1,011,799 | 731,670 | 3,450,116 | |||||||||||||||
Basic earnings per share | 0.13 | 0.17 | 0.17 | 0.13 | 0.59 | |||||||||||||||
Dilute earnings per share | $ | 0.12 | $ | 0.16 | $ | 0.17 | $ | 0.12 | $ | 0.58 |
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2016 | ||||||||||||||||||||
Total revenue | $ | 10,364,022 | $ | 9,274,554 | $ | 9,807,313 | $ | 11,011,006 | $ | 40,456,895 | ||||||||||
Gross margin | 2,470,383 | 2,536,811 | 2,723,841 | 2,763,228 | 10,494,263 | |||||||||||||||
Net income | 762,959 | 779,796 | 440,801 | 2,442,351 | 4,425,907 | |||||||||||||||
Basic earnings per share | 0.13 | 0.13 | 0.08 | 0.42 | 0.75 | |||||||||||||||
Diluted earnings per share | $ | 0.12 | $ | 0.13 | $ | 0.07 | $ | 0.41 | $ | 0.73 |
Fiscal Quarter | ||||||||||||||||||||
2019 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 8,366,085 | $ | 7,800,088 | $ | 8,949,747 | $ | 9,429,527 | $ | 34,545,447 | ||||||||||
Gross margin | 1,916,807 | 1,852,435 | 1,882,975 | 1,312,026 | 6,964,243 | |||||||||||||||
Net income | 576,944 | 750,815 | 525,361 | 385,679 | 2,238,799 | |||||||||||||||
Basic earnings per share | 0.10 | 0.13 | 0.09 | 0.06 | 0.38 | |||||||||||||||
Diluted earnings per share | $ | 0.10 | $ | 0.13 | $ | 0.09 | $ | 0.06 | $ | 0.37 |
Fiscal Quarter | ||||||||||||||||||||
2018 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 9,346,447 | $ | 8,266,691 | $ | 9,961,572 | $ | 10,499,985 | $ | 38,074,695 | ||||||||||
Gross margin | 2,191,974 | 2,210,910 | 2,311,579 | 2,276,586 | 8,991,049 | |||||||||||||||
Net income | 813,672 | 928,284 | 751,056 | 470,896 | 2,963,908 | |||||||||||||||
Basic earnings per share | 0.14 | 0.16 | 0.13 | 0.08 | 0.50 | |||||||||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.16 | $ | 0.13 | $ | 0.08 | $ | 0.50 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1313 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28 or 29:28:
| 2017 | 2016 | |||||||||||||||||||
Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 211,152 | $ | 220,778 | $ | 209,653 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 92,758 | 459,340 | 51,423 | ||||||||||||||
Franchise Rights | 20 | 5,971,129 | 1,144,957 | 5,914,181 | 760,818 | ||||||||||||||||
Total | 7,459,049 | 2,000,670 | 7,146,102 | 1,573,697 | |||||||||||||||||
Intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment | |||||||||||||||||||||
Company stores goodwill | 1,099,328 | 267,020 | 1,099,328 | 267,020 | |||||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Manufacturing segment-Goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Trademark-indefinite life | 20,000 | - | 20,000 | - | |||||||||||||||||
Total | 1,709,328 | 662,384 | 1,709,328 | 662,384 | |||||||||||||||||
Total intangible assets | $ | 9,168,377 | $ | 2,663,054 | $ | 8,855,430 | $ | 2,236,081 |
2019 | 2018 | |||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 214,152 | $ | 220,778 | $ | 212,653 | |||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | |||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | |||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 223,628 | 715,339 | 136,087 | |||||||||||||||
Franchise rights | 20 | 5,979,637 | 2,300,717 | 5,979,637 | 1,545,710 | |||||||||||||||||
Total | 7,467,557 | 3,290,300 | 7,467,557 | 2,446,253 | ||||||||||||||||||
Intangible assets not subject to amortization | ||||||||||||||||||||||
Franchising segment- | ||||||||||||||||||||||
Company stores goodwill | $ | 1,099,328 | $ | 267,020 | $ | 1,099,328 | $ | 267,020 | ||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Manufacturing segment-goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Trademark | 20,000 | - | 20,000 | - | ||||||||||||||||||
Total goodwill | 1,709,328 | 662,384 | 1,709,328 | 662,384 | ||||||||||||||||||
Total Intangible Assets | $ | 9,176,885 | $ | 3,952,684 | $ | 9,176,885 | $ | 3,108,637 |
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
On February 29, 2016, RMCF foreclosed on all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. As described in Note 1, this was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. We performed a test of impairment in conjunction with the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. We recognized an impairment loss of $1,930,529 to reduce the carrying value of Goodwill to the fair value. In making this determination we reviewed the fair value of U-Swirl compared to its carrying value. In performing this testing we focused on the actual performance of the acquired businesses that created the initial recognition of the goodwill, as well as U-Swirl’s past performance and future expected performance. Because of the significant underperformance of the acquired businesses as well as U-Swirl we determined that the carrying value of the reporting unit exceeded its fair value.
The following are events that have indicated that it is more likely than not that the fair value of goodwill is less than the carrying amount:
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets totaled $427,840, $378,373,$844,320, $446,050, and $361,723$427,840 during the fiscal years ended February 28 or 29, 2019, 2018 and 2017, 2016 and 2015, respectively.
During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 28, 2017,28, 2019, annual amortization of intangible assets, based upon ourthe Company’s existing intangible assets and current useful lives, is estimated to be the following:
2018 | $ | 445,214 | ||
2019 | 451,644 | |||
2020 | 438,487 | |||
2021 | 426,778 | |||
2022 | 403,596 | |||
Thereafter | 3,292,660 | |||
Total | $ | 5,458,379 |
2020 | $ | 706,177 | ||
2021 | 594,229 | |||
2022 | 490,060 | |||
2023 | 411,607 | |||
2024 | 345,642 | |||
Thereafter | 1,629,542 | |||
Total | $ | 4,177,257 |
NOTE 14 – IMPAIRMENT OF LONG-LIVED RETAIL ASSETS, RESTRUCTURING AND ACQUISITION RELATED CHARGESCOSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
In 2014, SWRL entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, SWRL purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store. SWRL also entered into an Asset Purchase Agreement with Yogli Mogli, which was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, SWRL purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February 20, 2014, SWRL entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rightsCosts associated with 17 Fuzzy Peach Frozen Yogurt stores. Associated with these transactions, the Company recorded net restructuring charges of $124,551 during the year ended February 28, 2015. No restructuring charges were incurred during the year ended February 29, 2016.
On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of SWRL. In addition, Messrs. Conte, H. Cartwright and T. Cartwright resigned as officers of U-Swirl. Also on September 4, 2014, the SWRL Board of Directors appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.
In connection with these management changes, SWRL announced an operational restructuring designed to enhance SWRL’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements with the named officers, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement, property and equipment. The Company recorded restructuring charges of $503,526 during year ended February 28, 2015 associated with this operational restructuring.
As described in Note 1 above, effective March 1, 2015, the Company was reorganized to create a holding company structure pursuant to the Agreement and Plan of Merger, dated as of November 10, 2014, among Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and RKB Merger Corp. In connection with the holding company reorganization, the Company recorded restructuring fees of $179,399 during the year ended February 28, 2015.
During the year ended February 29, 2016, we closed an underperforming Company-owned café resulting in an impairment charge of $39,933. As described in Note 1, on February 29, 2016 the Company foreclosed on 100% of the outstanding equity of U-Swirl in full satisfaction of the obligations owed under the SWRL Loan Agreement. The Company reviewed all operating assets possessed as a part of this transaction and made the determination to offer for sale certain retail assets below their carrying value. This determination was made after a review of expected future cash flow. As a result of this review and determination an impairment charge of $356,280 was recorded to reflect these assets at their fair value.
Impairment of long-lived assets and goodwill, restructuring and acquisition charges incurredstore closures at February 28, or 29,2019, 2018 and 2017 2016 and 2015 were comprised of the following:
2017 | 2016 | 2015 | ||||||||||
Professional fees | $ | - | $ | - | $ | 284,275 | ||||||
Severance/transitional compensation | - | - | 212,027 | |||||||||
Leasehold improvements, property and equipment impairment of long-lived assets and goodwill | - | 2,326,742 | 243,000 | |||||||||
Provision for termination of contractual obligations | 60,000 | - | - | |||||||||
Acceleration of restricted stock unit vesting | - | - | 65,049 | |||||||||
Other | - | - | 3,125 | |||||||||
Total | $ | 60,000 | $ | 2,326,742 | $ | 807,476 |
2019 | 2018 | 2017 | ||||||||||
Loss on distribution of assets | $ | 81,981 | $ | - | $ | - | ||||||
Lease settlement costs | 145,000 | - | 60,000 | |||||||||
Total | $ | 226,981 | $ | - | $ | 60,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – RELATED PARTY TRANSACTIONS
Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have, on occasion, provided services to the Company and may provide services in the future. For the year ended February 28, 2017, the Company paid $47,822 and no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of operations.
NOTE 16 – SUBSEQUENT EVENTS
On May 22, 2017,28, 2019, the Company announced that its Board of Directors has declared a first quarter FY2018FY2020 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 16, 201714, 2019 to shareholders of record at the close of business June 6, 2017.4, 2019.
In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period.
NOTE 1716 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company’sCompany’s prior annual consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233 and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.
NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”)
As described in Note 1, effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be 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. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gift Cards
The Company’s franchisees sell gift cards which do not have either 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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
Impact to Prior Periods
The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:
Amount | ||||
Increase in deferred revenue | $ | (1,022,720 | ) | |
Reduction in gift card liabilities | 2,250,743 | |||
Adjustment to deferred income tax assets | (302,094 | ) | ||
Cumulative increase to retained earnings | $ | 925,929 |
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:
CONSOLIDATED BALANCE SHEET | ||||||||||||
AS OF FEBRUARY 28, 2018 | ||||||||||||
Previously Reported | Adjustments | Restated | ||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 6,072,984 | $ | - | $ | 6,072,984 | ||||||
Accounts receivable, net | 3,897,334 | - | 3,897,334 | |||||||||
Notes receivable, current portion, net | 105,540 | - | 105,540 | |||||||||
Refundable income taxes | 342,863 | - | 342,863 | |||||||||
Inventories, net | 4,842,474 | - | 4,842,474 | |||||||||
Other | 310,173 | - | 310,173 | |||||||||
Total current assets | 15,571,368 | - | 15,571,368 | |||||||||
Property and Equipment, Net | 6,166,240 | - | 6,166,240 | |||||||||
Other Assets | ||||||||||||
Notes receivable, less current portion, net | 235,983 | - | 235,983 | |||||||||
Goodwill, net | 1,046,944 | - | 1,046,944 | |||||||||
Franchise rights, net | 4,433,927 | - | 4,433,927 | |||||||||
Intangible assets, net | 587,377 | - | 587,377 | |||||||||
Deferred income taxes | 835,463 | (302,094 | ) | 533,369 | ||||||||
Other | 63,333 | - | 63,333 | |||||||||
Total other assets | 7,203,027 | (302,094 | ) | 6,900,933 | ||||||||
Total Assets | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 | |||||
Liabilities and Stockholders' Equity | ||||||||||||
Current Liabilities | ||||||||||||
Current maturities of long-term debt | $ | 1,352,893 | - | $ | 1,352,893 | |||||||
Accounts payable | 1,647,991 | - | 1,647,991 | |||||||||
Accrued salaries and wages | 644,005 | - | 644,005 | |||||||||
Gift card liabilities | 3,057,131 | (2,250,743 | ) | 806,388 | ||||||||
Other accrued expenses | 325,034 | - | 325,034 | |||||||||
Dividend payable | 708,652 | - | 708,652 | |||||||||
Deferred revenue | 471,910 | (143,445 | ) | 328,465 | ||||||||
Total current liabilities | 8,207,616 | (2,394,188 | ) | 5,813,428 | ||||||||
Long-Term Debt, Less Current Maturities | 1,176,416 | - | 1,176,416 | |||||||||
Deferred Revenue, Less Current Portion | - | 1,166,165 | 1,166,165 | |||||||||
Commitments and Contingencies | ||||||||||||
Stockholders' Equity | ||||||||||||
Preferred stock | ||||||||||||
Common stock | 5,903 | - | 5,903 | |||||||||
Additional paid-in capital | 6,131,147 | - | 6,131,147 | |||||||||
Retained earnings | 13,419,553 | 925,929 | 14,345,482 | |||||||||
Total stockholders' equity | 19,556,603 | 925,929 | 20,482,532 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
For the Years Ended February 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Franchise Fees contained within the Statement of Income: | $ | 335,028 | $ | 681,613 | $ | 324,718 | ||||||
Adjustment required to conform revenue to prior period method: | (53,528 | ) | - | - | ||||||||
Comparable franchise fees: | $ | 281,500 | $ | 681,613 | $ | 324,718 |
On February 28, 2019, 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:
2020 | $ | 256,093 | ||
2021 | 204,071 | |||
2022 | 190,524 | |||
2023 | 176,394 | |||
2024 | 137,477 | |||
Thereafter | 388,013 | |||
Total | $ | 1,352,572 |
NOTE 18 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2019 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchise fees | $ | 199,362 | $ | - | $ | - | $ | 135,666 | $ | 335,028 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 24,179,540 | - | - | 24,179,540 | |||||||||||||||
Retail sales | - | - | 1,272,009 | 2,112,245 | 3,384,254 | |||||||||||||||
Royalty and marketing fees | 5,156,930 | - | - | 1,489,695 | 6,646,625 | |||||||||||||||
Total | $ | 5,356,292 | $ | 24,179,540 | $ | 1,272,009 | $ | 3,737,606 | $ | 34,545,447 |
ITEMITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systems to future periods are subject to the risk that such controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all errors or all fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These reports by management, including the CEO and CFO, on the effectiveness of the Company’s Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act), that are designed to ensure that material information relating to the Company is made known to the officers who certify the Company’s 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 the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’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.
Management, under the supervision and with the participation of the CEO and CFO, has evaluated the effectiveness,effectiveness, as of February 28, 2017,2019, of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of February 28, 2017.2019.
Management’sManagement’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed under supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2017,2018, of the Company’s internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its publication Internal Control-Integrated Framework (2013). Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of February 28, 2017.2019.
Changes in Internal Control over Financial Reporting —There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended February 28, 20172019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to the Company’sCompany’s equity compensation plansplan, as of February 28, 2017,2019, which consists solely of the Company’s 2007 Equity Incentive Plan.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) | ||||||||
(a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 123,658 |
n/a | 332,589 | ||||||||
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- | ||||||||
Total | 123,658 | n/a | 332,589 |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | 25,002 |
n/a | 327,790 |
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- |
Total | 25,002 | n/a | 327,790 |
(1) Awards outstanding under the 2007 Equity Incentive Plan as of February 28, 20172019 consist of 123,65825,002 unvested restricted stock units. The weighted-average exercise price is calculated solely with respect to the outstanding stock options.
(2)(2) Represents shares remaining available under the Company’s 2007 Equity Incentive Plan. Shares available for future issuances under the 2007 Equity Incentive Plan may be issued in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and performance units, and other stock- and cash-based awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | The following documents are filed as part of this Annual Report: |
1. |
|
Page | |
| 33-34 |
Consolidated Statements of Income | 35 |
Consolidated Balance Sheets | 36 |
Consolidated Statements of Changes in | 37 |
Consolidated Statements of Cash Flows | 38 |
Notes to Consolidated Financial Statements | 39 |
2. | Financial Statement Schedule |
2. Financial Statement Schedule
SCHEDULE II - Valuation and Qualifying Accounts
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |||||||||||||
Year Ended February 28, 2017 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 137,316 | 271,694 | 536,093 | ||||||||||||
Year Ended February 29, 2016 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 729,060 | 171,000 | 229,589 | 670,471 | ||||||||||||
Year Ended February 28, 2015 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 600,930 | 214,600 | 86,470 | 729,060 |
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |
Year Ended February 28, 2019 | ||||
Valuation Allowance for Accounts and Notes Receivable | 505,972 | 143,214 | 159,684 | 489,502 |
Year Ended February 29, 2018 | ||||
Valuation Allowance for Accounts and Notes Receivable | 536,093 | 166,868 | 196,989 | 505,972 |
Year Ended February 28, 2017 | ||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 138,125 | 272,503 | 536,093 |
3. |
|
The following exhibits listed in the Exhibit Index are filed with, or incorporated by reference, in this Annual Report.
Exhibit Number | Description | Incorporated by Reference to | |||
3.1 | Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.2 | Certificate of Designations of Series A Junior Participating Preferred Stock, Par Value $0.001 Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.3 | Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.3 to the Current Report on Form 8-K filed on March 2, 2015 | |||
4.1 | Description of Capital Stock | Filed herewith | |||
10.1** | Form of Employment Agreement (Officers) | Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.2 | Form of Franchise Agreement for Rocky Mountain Chocolate Factory | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2010 (File No. 000-14749) | |||
10.3** | 2007 Equity Incentive Plan (As Amended and Restated) | Exhibit 10.1 to the Current Report on Form 8-K filed on August 9, 2013 (File No. 000-14749) | |||
10.4** | Form of Indemnification Agreement (Directors) | Exhibit 10.7 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.5** | Form of Indemnification Agreement (Officers) | Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.6* | Master License Agreement, dated August 17, 2009, between Kahala Franchise Corp. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2009 (File No. 000-14749) | |||
10.7 | Revolving Line of Credit Note, dated September 13, 2017, between Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank, National Association | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2017 | |||
10.8 | Business Loan Agreement, dated August 2, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2013 (File No. 000-14749) | |||
10.9 | Business Loan Agreement, dated December 27, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 99.3 to the Current Report on Form 8-K filed on January 22, 2014 (File No. 000-14749) | |||
10.10* | Master License Agreement, dated April 27, 2012, between RMCF Asia, Ltd. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2012 (File No. 000-14749) |
Exhibit Number | Description | Incorporated by Reference to | |||
10.11 | Exhibit 99.4 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.12 | Exhibit 99.5 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.13 | Investor Rights Agreement, dated January 14, 2013 between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC | Exhibit 99.6 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | |||
10.14** | Filed herewith | ||||
10.15** | Filed herewith | ||||
21.1 | Filed herewith | ||||
23.1 | Filed herewith | ||||
23.2 | Filed herewith | ||||
31.1 | Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | |||
32.1 | Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
101.INS | XBRL Instance Document | Filed herewith | |||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | |||
* | Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. | ||||
** | Management contract or compensatory plan. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. | ||||
|
|
|
| ||
|
|
|
| ||
Date: May | /s/ Bryan J. Merryman |
|
| ||
|
| BRYAN J. MERRYMAN | |||
Chief | |||||
Financial Officer, Treasurer and
| |||||
Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| |||
| ||||
| ||||
Date: May | /s/ Bryan J. Merryman | |||
BRYAN J. MERRYMAN | ||||
Chief Executive Officer, Chief | ||||
Financial Officer, Treasurer and | ||||
Director | ||||
(Principal Executive, Financial | ||||
and Accounting Officer) | ||||
Date: May 29, 2019 | /s/ Brett P. Seabert | |||
Brett P. Seabert, Director | ||||
Date: May | ||||
/s/ Clyde Wm. Engle | ||||
CLYDE Wm. ENGLE, Director | ||||
Date: May | /s/ Scott G. Capdevielle | |||
SCOTT G. CAPDEVIELLE, Director |
EXHIBIT INDEX
|
|
| ||||||||||
|
|
| ||||||||||
Date: May 29, 2019 | ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
| ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
/s/ Franklin E. Crail | ||||||||||||
6361
February 28,
%
February 29 or 28,
%
2019
2018
Change
Change
($’s in thousands)
2017
2016
Change
Change
Factory sales
Retail sales
Franchise fees
Royalty and marketing fees
Franchise fees
Total
Factory Sales
The decrease in factory sales for FY 20172019 compared to FY 20162018 was primarily due to an 5.6%a 23.1% decrease in shipments of product to customers outside our network of franchised retail stores, partially offset by a 1.0% increase in shipments to our network of franchised and a 4.7%licensed stores. The decrease in same-storeshipments of product to customers outside our network of franchised and licensed stores was primarily the result of a decrease in purchases by the Company’s largest customer during FY 2019, with revenue from such customer decreasing to approximately $3.1 million, or 9.1%, of the Company’s revenues during FY 2019, compared to $5.1 million, or 13.4% of the Company’s revenues during FY 2018 for this same customer. Same-store pounds purchased by franchise and co-branded license locations decreased 0.5% during FY 20172019 compared with FY 2016, and a 3.0% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation.2018.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of certain Company-owned locations and the closure of a certain underperforming Company-owned location.locations. Same store sales at all Company-owned stores and cafés increased 0.5%1.4% during FY 20172019 compared with FY 2016. Same-store sales at U-Swirl cafés decreased 2.2% during FY 2017 compared to FY 2016.2018.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 20172019 compared to FY 20162018 resulted primarily from a 12.3%9.1% decrease in franchise units in operation and lower same store sales.operation. The average number of total franchise stores in operation decreased from 423317 during FY 20162018 to 371288 during FY 2017.2019. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation decreased 0.2%increased 0.6% during FY 20172019 compared to FY 2016.2018. Franchise fee revenues decreased in FY 2019 compared to FY 2018 primarily as a result of $9,000$359,000 in international license fees being recognized during FY 2017 compared2018 with $263,000no comparable fees recognized during FY 2016.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2017, U-Swirl revenue decreased 20.2% to $5,216,100 compared with $6,535,600 of U-Swirl revenue consolidated within our results for FY 2016. The decrease resulted from a 20.4% decrease in average domestic U-Swirl franchise cafés in operation during FY 2017 compared to FY 2016, primarily as a result of store closings exceeding store openings, in-line with expected industry trends. 2019.
COSTS AND EXPENSES
Cost of Sales
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Cost of sales – factory | $ | 19,181.0 | $ | 19,151.7 | $ | 29.3 | 0.2 | % | ||||||||
Cost of sales – retail | 1,554.8 | 1,714.8 | (160.0 | ) | (9.3 | %) | ||||||||||
Franchise costs | 2,067.5 | 2,452.6 | (385.1 | ) | (15.7 | %) | ||||||||||
Sales and marketing | 2,658.4 | 2,466.5 | 191.9 | 7.8 | % | |||||||||||
General and administrative | 4,005.1 | 4,663.9 | (658.8 | ) | (14.1 | %) | ||||||||||
Retail operating | 2,404.0 | 2,951.8 | (547.8 | ) | (18.6 | %) | ||||||||||
Total | $ | 31,870.8 | $ | 33,401.3 | $ | (1,530.5 | ) | (4.6 | %) |
For the Year Ended | ||||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 19,360.5 | $ | 19,703.6 | $ | (343.1 | ) | (1.7 | )% | |||||||
Cost of sales - retail | 1,239.0 | 1,473.1 | (234.1 | ) | (15.9 | )% | ||||||||||
Franchise costs | 1,980.8 | 2,097.6 | (116.8 | ) | (5.6 | )% | ||||||||||
Sales and marketing | 2,210.8 | 2,489.5 | (278.7 | ) | (11.2 | )% | ||||||||||
General and administrative | 3,432.6 | 3,904.6 | (472.0 | ) | (12.1 | )% | ||||||||||
Retail operating | 1,934.9 | 2,389.3 | (454.4 | ) | (19.0 | )% | ||||||||||
Total | $ | 30,158.6 | $ | 32,057.7 | $ | (1,899.1 | ) | (5.9 | )% |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 6,242.8 | $ | 7,204.1 | $ | ( 961.3 | ) | (13.3 | %) | |||||||
Retail | 2,897.9 | 3,290.2 | (392.3 | ) | (11.9 | %) | ||||||||||
Total | $ | 9,140.7 | $ | 10,494.3 | $ | (1,353.6 | ) | (12.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,819.0 | $ | 6,353.0 | $ | (1,534.0 | ) | (24.1 | )% | |||||||
Retail gross margin | 2,145.3 | 2,638.1 | (492.8 | ) | (18.7 | )% | ||||||||||
Total | $ | 6,964.3 | $ | 8,991.1 | $ | (2,026.8 | ) | (22.5 | )% |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 24.6 | % | 27.3 | % | (2.7% | ) | (9.9 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6% | ) | (0.9 | %) | ||||||||
Total | 30.6 | % | 33.5 | % | (2.9% | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28, | % | % | ||||||||||||||
(Percent) | 2019 | 2018 | Change | Change | ||||||||||||
| ||||||||||||||||
Factory gross margin | 19.9 | % | 24.4 | % | (4.5 | )% | (18.4 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total | 25.3 | % | 29.8 | % | (4.5 | )% | (15.1 | )% |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 6,242.8 | $ | 7,204.1 | $ | ( 961.3 | ) | (13.3 | %) | |||||||
Plus: depreciation and amortization | 447.7 | 404.4 | 43.3 | 10.7 | % | |||||||||||
Factory adjusted gross margin | 6,609.5 | 7,608.5 | (999.0 | ) | (13.1 | %) | ||||||||||
Retail | 2,897.9 | 3,290.2 | (392.3 | ) | (11.9 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 9,507.4 | $ | 10,898.7 | $ | (1,391.3 | ) | (12.8 | %) | |||||||
Factory adjusted gross margin | 26.0 | % | 28.9 | % | (2.9 | %) | (10.0 | %) | ||||||||
Retail | 65.1 | % | 65.7 | % | (0.6 | %) | (0.9 | %) | ||||||||
Total Adjusted Gross Margin | 31.8 | % | 34.8 | % | (3.0 | %) | (8.6 | %) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28, | $ | % | ||||||||||||||
($'s in thousands) | 2019 | 2018 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,819.0 | $ | 6,353.0 | $ | (1,534.0 | ) | (24.1 | )% | |||||||
Plus: depreciation and amortization | 555.9 | 523.0 | 32.9 | 6.3 | % | |||||||||||
Factory adjusted gross margin | 5,374.9 | 6,876.0 | (1,501.1 | ) | (21.8 | )% | ||||||||||
Retail gross margin | 2,145.3 | 2,638.1 | (492.8 | ) | (18.7 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 7,520.2 | $ | 9,514.1 | $ | (1,993.9 | ) | (21.0 | )% | |||||||
Factory adjusted gross margin | 22.2 | % | 26.4 | % | (4.2 | )% | (15.9 | )% | ||||||||
Retail gross margin | 63.4 | % | 64.2 | % | (0.8 | )% | (1.2 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 31.5 | % | (4.2 | )% | (13.3 | )% |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 270450 basis points during FY 20172019 compared to FY 20162018 due primarily to increasedlower efficiencies associated with a 13.9% decrease in production volume and higher costs associated with inventory obsolescence. Costs associated with inventory obsolescence were generally the result of laborthe initiation of product rationalization resulting from lower volume and overhead related to maintenance, equipment issues and product mix shift, partially offset by lower costs of certain materials.underperforming products. The decrease in Company-owned store margin is due primarily to product mix shift primarily resultinga decrease in Company-owned café revenue from the sale or closure of certain underperforming Company-owned storesyogurt and Cafés.the associated higher margins.
Franchise Costs
The decrease in franchise costs for FY 20172019 compared to FY 20162018 is due primarily to a decrease in professional fees and lower franchise costs associated with supporting U-Swirl franchise unitslower international development in FY 20172019 compared to FY 2016 as a result of fewer store openings in FY 2017.2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreasedincreased to 24.6%28.4% during FY 20172019 from 27.0%26.5% during FY 2016.2018. This decreaseincrease as a percentage of royalty, marketing and franchise fees is primarily a result of a 15.7%an 11.7% decrease in total royalty and marketing fees and franchise costsfee revenue during FY 20172019 compared to FY 2016.2018.
Sales and Marketing
The increasedecrease in sales and marketing costs during FY 20172019 compared to FY 20162018 is primarily due to higher marketing relatedlower marketing-related compensation and professional fees partially offset by lower marketing-related costs associated with U-Swirl franchise locations. Marketing costs for U-Swirl franchise locations declined because of lower marketing fee revenues resulting from fewer franchise stores in operation.
General and Administrative
The decrease in general and administrative costs during FY 20172019 compared to FY 20162018 is due primarily to lower professional fees, the foreclosureresult of U-Swirl in the prior yearresolving legal proceedings, and the associated focus on reduction of duplicative general and administrativelower compensation costs. During FY 2017,2019, approximately $460,000$103,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,291,000$307,000 during FY 2016.2018. As a percentage of total revenues, general and administrative expenses decreased to 10.5%9.9% in FY 20172019 compared to 11.5%10.3% in FY 2016.2018.
Retail Operating Expenses
The decrease in retailRetail operating expenses decreased during FY 20172019 compared to FY 2016 was2018 due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of a certain underperforming Company-owned units.location, offset by the acquisition of a franchised location. Retail operating expenses, as a percentage of retail sales, decreased to 54.0%57.2% during FY 20172019 from 59.0%58.1% during FY 2016.2018. This is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $841,000$1,154,000 during FY 2017, a decrease2019, an increase of 17.2%45.0% from $1,016,000$796,000 incurred during FY 2016.2018. This decreaseincrease was the result of fewer Company-owned store assetsa change in service duemanagement’s estimates related to the sale or closurefuture value of U-Swirl intangibles and the associated acceleration of amortization expense. During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain Company-owned stores and cafés.intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Depreciation and amortization included in cost of sales increased 10.7%6.3% from $404,000$523,000 during FY 20162018 to $448,000$556,000 during FY 2017.2019. This increase was the result of an increase in production assets in service.
Other Income (Expense)
Net interest expense was $128,800$50,300 in FY 20172019 compared to net interest expense of $167,900$96,700 in FY 2016.2018. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions by U-Swirl.
Income Tax Expense
We realized an income tax expense of $1,946,000$717,000 in FY 20172019 compared to an income tax benefitexpense of $261,400$2,160,000 during FY 2016. As described further in Note 6 to the consolidated financial statements, the increase in the effective tax rate is primarily due to the tax consequences of acquiring a 100% controlling interest in U-Swirl during FY 2016.
Fiscal 2016 Compared To Fiscal 2015
Results Summary
Basic earnings per share increased 17.2% from $0.64 in FY 2015 to $0.75 in FY 2016. Revenues decreased 2.5% from $41.5 million for FY 2015 to $40.5 million for FY 2016. Operating income decreased 5.4% from $6.0 million in FY 2015 to $5.6 million in FY 2016. Net income increased 12.4% from $3.9 million in FY 2015 to $4.4 million in FY 2016. The decrease in operating income for FY 2016 compared to FY 2015 is due primarily to a decrease in revenues. The increase in net income is primarily the result of an impairment charge associated with U-Swirl goodwill and certain long lived assets more than offset by income tax benefit recognized.
Revenues
For the Year Ended | ||||||||||||||||
February 29 or 28, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory sales | $ | 26,355.8 | $ | 25,894.6 | $ | 461.2 | 1.8 | % | ||||||||
Retail sales | 5,005.0 | 6,206.0 | (1,201.0 | ) | (19.4% | ) | ||||||||||
Royalty and marketing fees | 8,547.6 | 8,821.0 | (273.4 | ) | (3.1% | ) | ||||||||||
Franchise fees | 548.5 | 586.8 | (38.3 | ) | (6.5% | ) | ||||||||||
Total | $ | 40,456.9 | $ | 41,508.4 | $ | (1,051.5 | ) | (2.5% | ) |
Factory Sales
The increase in factory sales for FY 2016 compared to FY 2015 was primarily due to an 8.1% increase in shipments of product to customers outside our network of franchised retail stores. This increase was partially offset by a 5.3% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation and a 1.5% decrease in same-store pounds purchased by franchise and co-branded license locations during FY 2016 compared with FY 2015.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of five Company-owned locations and the closure of two underperforming Company-owned cafés. Same store sales at all Company-owned stores and cafés decreased 0.8% during FY 2016 compared with FY 2015. Same-store sales at U-Swirl cafés decreased 1.0% during FY 2016 compared to FY 2015.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 2016 compared to FY 2015 resulted from an 11.1% decrease in franchise units in operation and lower same store sales. The average number of total franchise stores in operation decreased from 476 during FY 2015 to 423 during FY 2016. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation increased 0.7% during FY 2016 compared to FY 2015. Franchise fee revenues decreased as a result of fewer international license fees during FY 2016 compared to FY 2015.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2016, U-Swirl revenue decreased 15.7% to $6,535,600 compared with $7,753,000 of U-Swirl revenue consolidated within our results for FY 2015. The decrease resulted from a 15.1% decrease in average domestic U-Swirl franchise cafés in operation during FY 2016 compared to FY 2015, primarily as a result of store closings exceeding store openings and acquired franchisees.
COSTS AND EXPENSES
For the Year Ended | ||||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Cost of sales – factory adjusted | $ | 19,151.7 | $ | 18,432.3 | $ | 719.4 | 3.9 | % | ||||||||
Cost of sales – retail | 1,714.8 | 2,177.3 | (462.5 | ) | (21.2 | %) | ||||||||||
Franchise costs | 2,452.6 | 2,264.1 | 188.5 | 8.3 | % | |||||||||||
Sales and marketing | 2,466.5 | 2,474.0 | (7.5 | ) | (0.3 | %) | ||||||||||
General and administrative | 4,663.9 | 4,831.9 | (168.0 | ) | (3.5 | %) | ||||||||||
Retail operating | 2,951.8 | 3,509.6 | (557.8 | ) | (15.9 | %) | ||||||||||
Total | $ | 33,401.3 | $ | 33,689.2 | $ | ( 287.9 | ) | (0.9 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total | $ | 10,494.3 | $ | 11,491.0 | $ | ( 996.7 | ) | (8.7 | %) |
Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | % | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 27.3 | % | 28.8 | % | (1.5% | ) | (5.2% | ) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total | 33.5 | % | 35.8 | % | (2.3% | ) | (6.4% | ) |
Adjusted Gross Margin | For the Year Ended | |||||||||||||||
February 28 or 29, | $ | % | ||||||||||||||
($’s in thousands) | 2016 | 2015 | Change | Change | ||||||||||||
Factory gross margin | $ | 7,204.1 | $ | 7,462.3 | $ | ( 258.2 | ) | (3.5 | %) | |||||||
Plus: depreciation and amortization | 404.4 | 393.8 | 10.6 | 2.7 | % | |||||||||||
Factory adjusted gross margin | 7,608.5 | 7,856.1 | (247.6 | ) | (3.2 | %) | ||||||||||
Retail | 3,290.2 | 4,028.7 | (738.5 | ) | (18.3 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 10,898.7 | $ | 11,884.8 | $ | ( 986.1 | ) | (8.3 | %) | |||||||
Factory adjusted gross margin | 28.9 | % | 30.3 | % | (1.4 | %) | (4.6 | %) | ||||||||
Retail | 65.7 | % | 64.9 | % | 0.8 | % | 1.2 | % | ||||||||
Total Adjusted Gross Margin | 34.8 | % | 37.0 | % | (2.2 | %) | (5.9 | %) |
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 it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margin decreased 150 basis points during FY 2016 compared to FY 2015 due primarily to increased costs of certain materials and a shift in product and customer mix. The increase in Company-owned store margin is due primarily to the sale or closure of certain underperforming Company-owned stores and cafés.
Franchise Costs
The increase in franchise costs for FY 2016 compared to FY 2015 is due primarily to franchise costs associated with supporting U-Swirl franchise units. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.0% during FY 2016 from 24.1% during FY 2015. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of a 3.3% decrease in royalty, marketing and franchise fee revenue as a result of a decrease in the number of domestic franchise stores during FY 2016 compared to FY 2015.
Sales and Marketing
Sales and marketing costs were approximately unchanged during FY 2016 compared to FY 2015.
General and Administrative
The decrease in general and administrative costs during FY 2016 compared to FY 2015 is due primarily to the reorganization of U-Swirl in the prior year and the associated focus on reduction of duplicative general and administrative costs, partially offset by an increase in professional fees. During FY 2016, approximately $1,291,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,651,000 during FY 2015. As a percentage of total revenues, general and administrative expenses decreased to 11.5% in FY 2016 compared to 11.6% in FY 2015.
Retail Operating Expenses
The decrease in retail operating expense was due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of certain underperforming Company-owned units. The average number of Company-owned stores in operation decreased from 16 during FY 2015 to 12 units during FY 2016. Retail operating expenses, as a percentage of retail sales, increased from 56.6% during FY 2015 to 59.0% in FY 2016. This increase is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $1,016,000 during FY 2016, a decrease of 3.0% from $1,047,000 incurred during FY 2015. This decrease is due to a decrease in amortization related to franchise rights, trademark and intangible assets. Depreciation and amortization included in cost of sales increased 2.5% from $394,000 during FY 2015 to $404,000 during FY 2016. This increase was the result of an increase in production assets in service.
Other Income
Net interest expense was $167,900 in FY 2016 compared to net interest expense of $184,500 in FY 2015. This change was the result of lower average outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions of U-Swirl.
Income Tax Expense
We realized an income tax benefit of $261,400 in FY 2016 compared to expense of $2,037,695, an effective rate of 35.3%, during FY 2015.2018. As described further in Note 6 to the consolidated financial statements, the decrease in the effective tax rate is primarily due to the revaluation of deferred tax consequencesassets and liabilities to the lower enacted U.S. corporate tax rate of 21% under the recent Tax Cuts and Jobs Act recognized during FY 2018, with no comparable revaluation recognized during FY 2019. Additionally, the decrease in the effective tax rate during FY 2019 compared to 2018 was due to the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act being effective for all of FY 2019 and only two months of FY 2018.
Fiscal 2018 Compared To Fiscal 2017
A discussion of our controlling interestresults of operations for FY 2018 in U-Swirl.comparison to FY 2017 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Fiscal Year Ended February 28, 2018.
Liquidity and Capital Resources
As of February 28, 2017,28, 2019, working capital was $7.1$9.5 million compared with $7.2$7.4 million as of February 29, 2016.28, 2018. The decreaseincrease in working capital was due primarily to the impact of the adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 and our operating results less the payment of $2.8 million in cash dividends, $1.4 million in debt repayments and the purchase of $1.2 million$614,000 of property and equipment and $1.3 million in debt repayments.equipment. We have historically generated excess operating cash flow. We review our working capital needs and projections and when we believe that we have greater working capital than necessary we have historically utilized that excess working capital to repurchase common stock and pay dividends to our stockholders. This trend continued during FY 2017, resulting in the decrease in working capital at February 28, 2017 compared with February 29, 2016.
Cash and cashcash equivalent balances decreased from $6.2 million as of February 29, 2016 to $5.8$6.1 million as of February 28, 20172018 to $5.4 million as of February 28, 2019 as a result of cash flows generated by operating activities being less than cash flows used in financing and investing activities. The Company’sOur current ratio was 3.0 to 1.0 at February 28, 2019 compared to 1.9 to 1.0 at February 28, 2017, which was the same at February 29, 2016. The Company monitors2018. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2017,2019, we had net income of $3.45$2.2 million. Operating activities provided cash of $5.3$4.0 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.7 million and stock compensation expense of $520,000. During FY 2018, we had net income of $3.0 million. Operating activities provided cash of $4.8 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock compensation expense of $0.6 million. During FY 2016, we had net income of $3.8 million, and operating activities provided cash of $6.8 million. The principal adjustment to reconcile the net income to net cash provided by operating activities was asset impairments of $2.3 million, depreciation and amortization of $1.4 million and stock compensation expense of $0.8 million.
During FY 2017,2019, investing activities used cash of $1.3 million,$506,000, primarily due to the purchases of property and equipment of $1.2 million$614,000 the result of investment in factory infrastructure improvements.improvements, partially offset by proceeds received on notes receivable of $102,000. In comparison, investing activities used cash of $0.7 million$340,000 during FY 20162018 primarily due to the purchases of property and equipment of $0.7 million.$545,000 the result of investment in factory infrastructure improvements, partially offset by proceeds received on notes receivable of $231,000.
Financing activities used cash of $4.4$4.2 million during FY 20172019 and used cash of $7.1$4.1 million during the prior year. ThisThe increase in cash used in financing activities was primarily due to a decreasean increase in the amount of common stock repurchased during FY 2017.debt service being applied to principal, the result of lower interest expense.
The Company has a $5$5.0 million credit line for general corporate and working capital purposes, of which $5$5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2017,2019. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (4.7% at February 28, 2019). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2017.2019 and the Company believes it is likely to be renewed on terms similar to the current terms.
The Company’sCompany’s long-term debt is comprised of a promissory note used to finance prior business acquisitions of U-Swirlby SWRL (unpaid balance as of February 28, 2017, $3.82019, $1.2 million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. This promissory note matures in January 2020. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of February 28, 2017,2019, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets
TheThe table below presents significant contractual obligations of the Company at February 28, 2017.2019.
(Amounts in thousands)
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | 3,832 | 1,303 | 2,529 | - | - | |||||||||||||||
Operating leases | 2,166 | 817 | 980 | 176 | 193 | |||||||||||||||
Other long-term obligations | 472 | 189 | 171 | 112 | - | |||||||||||||||
Total | 6,470 | 2,309 | 3,680 | 288 | 193 |
Contractual Obligations | Total | Less than 1 year | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Notes payable | $ | 1,176 | $ | 1,176 | $ | - | $ | - | $ | - | ||||||||||
Operating leases | 2,949 | 758 | 1,333 | 683 | 175 | |||||||||||||||
Purchase contracts | 880 | 880 | - | - | - | |||||||||||||||
Other long-term obligations | 231 | 135 | 96 | - | - | |||||||||||||||
Total | $ | 5,236 | $ | 2,949 | $ | 1,429 | $ | 683 | $ | 175 |
For FY 2018,2020, the Company anticipates making capital expenditures of approximately $1.0 million,$900,000, which will be used to maintain and improve existing factory and administrative infrastructure. The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2018.2020. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
Operating leases: Our Company-owned stores are occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, some of which contain optional renewal rights. We also lease warehouse facilities to support our manufacturing operations and we lease most of our transportation equipment. We do not deem any individual lease to be significant in relation to our overall operations.
Purchase obligations: As of February 28, 2017,28, 2019, we had no off-balance sheet arrangements or obligations.purchase obligations of approximately $880,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’sCompany’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s 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 the Company’s 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria. We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we ordinarily extend credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
We recorded an average expense of approximately $174,300$149,000 per year for potential uncollectible accounts over the three-year period ended February 28, 2017.2019. Write-offs of uncollectible accounts net of recoveries averaged approximately $195,900$209,500 over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over the past three years, the allowances for doubtful notes and accounts have ranged from 10.7%10.0% to 12.6%10.7% of gross receivables.
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. FranchiseBeginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of the associated agreement, which is generally a period of 10-15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon the opening of the store. International license fees are recognizedfranchise store, or upon the execution of thean international license agreement and payment of the license fee.agreement. We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with franchise store openings in the third quarter of FY 2004, we modified our royalty structure. Under the current structure, we recognizeThe Company recognizes no royalty on Rocky Mountain Chocolate Factory franchised stores’ retail sales of products purchased from usthe Company and recognizerecognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. ForRoyalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise stores opened priorrights and range from 2.5% to the third quarter6% of FY 2004 we recognize a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28, 2017,2019, the Company recorded expense averaging $110,600$228,900 per year for potential inventory losses, or approximately 0.5%1.1% of total cost of sales for that period.
Consolidation – The consolidated financial statements in this Annual Report include the accounts of the Company and its subsidiaries. On January 14, 2013 we acquired a controlling interest in U-Swirl. Prior to January 14, 2013, our consolidated financial statements exclude the financial information of U-Swirl. Beginning on January 14, 2013 and continuing through February 28, 2017,2019, the results of operations, assets and liabilities of U-Swirl have been included in our consolidated financial statements. All material inter-Company balances have been eliminated upon consolidation.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. We previously entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with acquisitions of SWRL (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. On February 29, 2016, RMCF repossessed all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement with SWRL. As described in Note 1 below, this was the result of SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants.Agreement. As of February 29, 2016 U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. RMCFWe performed a test of impairment as a result of the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the financial statements.
Franchise Rights – Franchise rights consists of the purchase price paid in consideration of certain rights associated with franchise agreements. These franchise agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.
Other accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with its evaluation of the recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrumentsinstruments for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 2017,2019, based on future contractual obligations for chocolate products, we estimate that a 10% increase or decrease in the prices of contracted ingredients would result in a $259,000an $88,000 favorable or unfavorable price benefit or cost resulting from our commodity purchase contracts.
The Company has a $5$5 million bank line of credit that bears interest at a variable rate. As of February 28, 2017,2019, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of February 28, 2017, $3.82019, $1.2 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.
ITEMITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page | |
|
|
35 | |
36 | |
37 | |
38 | |
39 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders of
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Durango, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Rocky Mountain Chocolate Factory, Inc. and Subsidiaries (the “Company”) as of February 28, 2017 and February 29, 2016, and28, 2019, the related consolidated statementsstatement of income, changes in stockholders’stockholders' equity, and cash flows for each of the years in the three-year periodyear ended February 28, 2017. Our audits also included2019, and the consolidatedrelated notes (collectively referred to as the “financial statements”). In our opinion, the financial statement schedule listedstatements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and the results of its operations and its cash flows for the year ended February 28, 2019, in conformity with accounting principles generally accepted in the Index at Item 15. These consolidatedUnited States of America.
As discussed in Note 1 to the financial statements, and schedule are the responsibility ofCompany adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the Company’s management.modified retrospective adoption method on March 1, 2018.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements and schedule based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting (“Internal Control”). Ourreporting. As part of our audit included considerationwe are required to obtain an understanding of Internal Control as a basis for designing audit procedures that are appropriate in the circumstances,internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s Internal Control.Company's internal control over financial reporting. Accordingly, we express no such opinion. An
Our audit also includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidatedpresentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 and 17 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on March 1, 2018.
We have audited the impact to the 2018 financial statements as disclosed under the modified retrospective method as a result of the adoption of ASC Topic 606, “Revenue from Contracts with Customers”, as described in Note 1 and 17 to the financial statements. In our opinion, the consolidatedimpacts are appropriate and have been properly disclosed. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the impacts disclosed and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements taken as a whole.
/s/ Plante & Moran, PLLC
Denver, Colorado
May 8, 2019
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2018, the related statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. and Subsidiariesthe Company as of February 28,28, 2018 and 2017, and February 29, 2016, and the results of theirits operations and theirits cash flows for each of the years in the three-yeartwo-year period ended February 28, 20172018, in conformity with accounting principles generally accepted in the United States of America. Also, in
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our opinion,audits. We are a public accounting firm registered with the related financial statement schedule, when considered in relationPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the basic consolidatedCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements taken as a whole, presents fairly in allare free of material respects,misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the information set forth therein.purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EKS&H LLLP
May 23, 2017
Denver, Colorado
May 15, 2018
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 29,876,507 | $ | 31,360,745 | $ | 32,100,824 | ||||||
Franchise and royalty fees | 8,419,870 | 9,096,150 | 9,407,552 | |||||||||
Total revenues | 38,296,377 | 40,456,895 | 41,508,376 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,735,739 | 20,866,482 | 20,609,609 | |||||||||
Franchise costs | 2,067,530 | 2,452,609 | 2,264,138 | |||||||||
Sales & marketing | 2,658,421 | 2,466,469 | 2,474,027 | |||||||||
General and administrative | 4,005,142 | 4,663,914 | 4,831,903 | |||||||||
Retail operating | 2,404,003 | 2,951,783 | 3,509,584 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $447,651, $404,391 and $393,776, respectively, included in cost of sales | 841,058 | 1,015,910 | 1,046,672 | |||||||||
Impairment of long-lived assets and goodwill | - | 2,326,742 | - | |||||||||
Restructuring and acquisition related charges | 60,000 | - | 807,476 | |||||||||
Total costs and expenses | 32,771,893 | 36,743,909 | 35,543,409 | |||||||||
Operating Income | 5,524,484 | 3,712,986 | 5,964,967 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (170,351 | ) | (216,600 | ) | (243,188 | ) | ||||||
Interest income | 41,572 | 48,745 | 58,662 | |||||||||
Other, net | (128,779 | ) | (167,855 | ) | (184,526 | ) | ||||||
Income Before Income Taxes | 5,395,705 | 3,545,131 | 5,780,441 | |||||||||
Income Tax Expense (Benefit) | 1,945,589 | (261,400 | ) | 2,037,695 | ||||||||
Net Income | 3,450,116 | 3,806,531 | 3,742,746 | |||||||||
Less: Net loss attributable to non-controlling interest | - | (619,376 | ) | (195,094 | ) | |||||||
Net Income attributable to RMCF stockholders | $ | 3,450,116 | $ | 4,425,907 | $ | 3,937,840 | ||||||
Basic Earnings per Common Share | $ | 0.59 | $ | 0.75 | $ | 0.64 | ||||||
Diluted Earnings per Common Share | $ | 0.58 | $ | 0.73 | $ | 0.61 | ||||||
Weighted Average Common Shares Outstanding | 5,843,245 | 5,893,618 | 6,144,426 | |||||||||
Dilutive Effect of Employee Stock Awards | 150,447 | 201,856 | 268,913 | |||||||||
Weighted Average Common Shares Outstanding, Assuming Dilution | 5,993,692 | 6,095,474 | 6,413,339 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | ||||||||||||
Sales | $ | 27,563,794 | $ | 30,167,760 | $ | 29,876,507 | ||||||
Franchise and royalty fees | 6,981,653 | 7,906,935 | 8,419,870 | |||||||||
Total Revenue | 34,545,447 | 38,074,695 | 38,296,377 | |||||||||
Costs and Expenses | ||||||||||||
Cost of sales | 20,599,551 | 21,176,711 | 20,735,739 | |||||||||
Franchise costs | 1,980,781 | 2,097,555 | 2,067,530 | |||||||||
Sales and marketing | 2,210,800 | 2,489,483 | 2,658,421 | |||||||||
General and administrative | 3,432,618 | 3,904,560 | 4,005,142 | |||||||||
Retail operating | 1,934,891 | 2,389,296 | 2,404,003 | |||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $555,926, $523,034, and $447,651, respectively, included in cost of sales | 1,153,873 | 796,221 | 841,058 | |||||||||
Costs associated with Company-owned store closures | 226,981 | - | 60,000 | |||||||||
Total costs and expenses | 31,539,495 | 32,853,826 | 32,771,893 | |||||||||
Income from Operations | 3,005,952 | 5,220,869 | 5,524,484 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense | (70,787 | ) | (121,244 | ) | (170,351 | ) | ||||||
Interest income | 20,496 | 24,578 | 41,572 | |||||||||
Other expense, net | (50,291 | ) | (96,666 | ) | (128,779 | ) | ||||||
Income Before Income Taxes | 2,955,661 | 5,124,203 | 5,395,705 | |||||||||
Income Tax Provision | 716,862 | 2,160,295 | 1,945,589 | |||||||||
Consolidated Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Basic Earnings per Common Share | $ | 0.38 | $ | 0.50 | $ | 0.59 | ||||||
Diluted Earnings per Common Share | $ | 0.37 | $ | 0.50 | $ | 0.58 | ||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Basic | 5,931,431 | 5,884,337 | 5,843,245 | |||||||||
Dilutive Effect of Employee | ||||||||||||
Stock Awards | 51,207 | 96,099 | 150,447 | |||||||||
Weighted Average Common Shares | ||||||||||||
Outstanding - Diluted | 5,982,638 | 5,980,436 | 5,993,692 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28 or 29, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,779,195 | $ | 6,194,948 | ||||
Accounts receivable, less allowance for doubtful accounts of $487,446 and $595,471, respectively | 3,855,823 | 3,799,691 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $22,147 and $0, respectively | 235,612 | 317,248 | ||||||
Refundable income taxes | 47,863 | - | ||||||
Inventories, less reserve for slow moving inventory of $249,051 and $261,346, respectively | 4,975,779 | 4,840,108 | ||||||
Other | 256,548 | 286,859 | ||||||
Total current assets | 15,150,820 | 15,438,854 | ||||||
Property and Equipment, Net | 6,457,931 | 6,010,303 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and allowance for doubtful accounts of $26,500 and $75,000, respectively | 370,769 | 530,446 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights | 4,826,172 | 5,153,363 | ||||||
Intangible assets, net | 632,207 | 419,042 | ||||||
Deferred income taxes | 858,874 | 1,421,655 | ||||||
Other | 74,639 | 295,118 | ||||||
Total other assets | 7,809,605 | 8,866,568 | ||||||
Total Assets | $ | 29,418,356 | $ | 30,315,725 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,302,501 | $ | 1,254,007 | ||||
Accounts payable | 1,820,470 | 1,663,245 | ||||||
Accrued salaries and wages | 608,510 | 683,863 | ||||||
Gift card liabilities | 2,921,585 | 2,835,943 | ||||||
Other accrued expenses | 253,497 | 364,955 | ||||||
Dividend payable | 702,525 | 700,728 | ||||||
Deferred income | 451,171 | 502,950 | ||||||
Total current liabilities | 8,060,259 | 8,005,691 | ||||||
Long-Term Debt, Less Current Maturities | 2,529,240 | 3,831,126 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock, authorized 50,000 shares | - | - | ||||||
Undesignated series, authorized 200,000 shares | - | - | ||||||
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,854,372 and 5,839,396 issued, and 5,854,372 and 5,839,396 outstanding, respectively | 5,854 | 5,839 | ||||||
Additional paid-in capital | 5,539,357 | 5,340,190 | ||||||
Retained earnings | 13,283,646 | 13,132,879 | ||||||
Total stockholders’ equity | 18,828,857 | 18,478,908 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 29,418,356 | $ | 30,315,725 |
AS OF FEBRUARY 28, | ||||||||
2019 | 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,384,027 | $ | 6,072,984 | ||||
Accounts receivable, less allowance for doubtful accounts of $489,502 and $479,472, respectively | 3,993,262 | 3,897,334 | ||||||
Notes receivable, current portion, less current portion of the valuation allowance of $0 and $9,000, respectively | 110,162 | 105,540 | ||||||
Refundable income taxes | 190,201 | 342,863 | ||||||
Inventories, less reserve for slow moving inventory of $371,147 and $357,706, respectively | 4,270,357 | 4,842,474 | ||||||
Other | 318,126 | 310,173 | ||||||
Total current assets | 14,266,135 | 15,571,368 | ||||||
Property and Equipment, Net | 5,786,139 | 6,166,240 | ||||||
Other Assets | ||||||||
Notes receivable, less current portion and valuation allowance of $0 and $17,500, respectively | 281,669 | 235,983 | ||||||
Goodwill, net | 1,046,944 | 1,046,944 | ||||||
Franchise rights, net | 3,678,920 | 4,433,927 | ||||||
Intangible assets, net | 498,337 | 587,377 | ||||||
Deferred income taxes | 607,421 | 835,463 | ||||||
Other | 56,576 | 63,333 | ||||||
Total other assets | 6,169,867 | 7,203,027 | ||||||
Total Assets | $ | 26,222,141 | $ | 28,940,635 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long term debt | $ | 1,176,488 | $ | 1,352,893 | ||||
Accounts payable | 897,074 | 1,647,991 | ||||||
Accrued salaries and wages | 655,853 | 644,005 | ||||||
Gift card liabilities | 742,289 | 3,057,131 | ||||||
Other accrued expenses | 293,094 | 325,034 | ||||||
Dividend payable | 714,939 | 708,652 | ||||||
Contract liabilities | 256,094 | 471,910 | ||||||
Total current liabilities | 4,735,831 | 8,207,616 | ||||||
Long-Term Debt, Less Current Maturities | - | 1,176,416 | ||||||
Contract Liabilities, Less Current Portion | 1,096,478 | - | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | ||||||||
Series A Junior Participating Preferred Stock; 50,000 authorized; -0- shares issued and outstanding | - | - | ||||||
Undesignated series; 200,000 shares authorized; -0- shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 5,957,827 shares and 5,903,436 shares issued and outstanding, respectively | 5,958 | 5,903 | ||||||
Additional paid-in capital | 6,650,864 | 6,131,147 | ||||||
Retained earnings | 13,733,010 | 13,419,553 | ||||||
Total stockholders' equity | 20,389,832 | 19,556,603 | ||||||
Total Liabilities and Stockholders' Equity | $ | 26,222,141 | $ | 28,940,635 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,839 | $ | 180,384 | $ | 184,206 | ||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | (174,371 | ) | - | ||||||||
Repurchase and retirement of common stock | (35 | ) | (233 | ) | (7,383 | ) | ||||||
Issuance of common stock | 2 | 4 | 120 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48 | 55 | 3,441 | |||||||||
Balance at end of year | 5,854 | 5,839 | 180,384 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 5,340,190 | 7,163,092 | 8,921,723 | |||||||||
Exchange of $.03 par value per share for $.001 par value per share common stock | - | 174,371 | - | |||||||||
Repurchase and retirement of common stock | (351,548 | ) | (3,030,475 | ) | (3,120,241 | ) | ||||||
Issuance of common stock | 20,418 | 61,036 | 47,360 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 564,425 | 602,498 | 731,400 | |||||||||
Transfers from non-controlling interest | - | 349,800 | 382,306 | |||||||||
Tax (expense) benefit from employee stock transactions | (34,128 | ) | 19,868 | 200,544 | ||||||||
Balance at end of year | 5,539,357 | 5,340,190 | 7,163,092 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,132,879 | 11,524,708 | 10,344,794 | |||||||||
Net income attributable to RMCF stockholders | 3,450,116 | 4,425,907 | 3,937,840 | |||||||||
Cash dividends declared | (2,806,583 | ) | (2,817,736 | ) | (2,757,926 | ) | ||||||
Correction of immaterial error1 | (492,766 | ) | - | - | ||||||||
Balance at end of year | 13,283,646 | 13,132,879 | 11,524,708 | |||||||||
Non-controlling Interest in Equity of Subsidiary | ||||||||||||
Balance at beginning of year | - | 869,671 | 401,655 | |||||||||
Net loss | - | (619,376 | ) | (195,094 | ) | |||||||
Deductions | - | (310,995 | ) | - | ||||||||
Contributions | - | 60,700 | 663,110 | |||||||||
Balance at end of year | - | - | 869,671 | |||||||||
Total Stockholders’ Equity | $ | 18,828,857 | $ | 18,478,908 | $ | 19,737,855 | ||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,839,396 | 6,012,799 | 6,140,200 | |||||||||
Repurchase and retirement of common stock | (35,108 | ) | (233,302 | ) | (246,106 | ) | ||||||
Issuance of common stock | 2,000 | 4,000 | 4,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 48,084 | 55,899 | 114,705 | |||||||||
Balance at end of year | 5,854,372 | 5,839,396 | 6,012,799 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Common Stock | ||||||||||||
Balance at beginning of year | $ | 5,903 | $ | 5,854 | $ | 5,839 | ||||||
Repurchase and retirement of common stock | - | - | (35 | ) | ||||||||
Issuance of common stock | 6 | 5 | 2 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49 | 44 | 48 | |||||||||
Balance at end of year | 5,958 | 5,903 | 5,854 | |||||||||
Additional Paid-In Capital | ||||||||||||
Balance at beginning of year | 6,131,147 | 5,539,357 | 5,340,190 | |||||||||
Repurchase and retirement of common stock | - | - | (351,548 | ) | ||||||||
Issuance of common stock | 55,971 | 59,095 | 20,418 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 463,746 | 532,695 | 564,425 | |||||||||
Tax (expense) benefit from employee stock transactions | - | - | (34,128 | ) | ||||||||
Balance at end of year | 6,650,864 | 6,131,147 | 5,539,357 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 13,419,553 | 13,283,646 | 13,132,879 | |||||||||
Net income attributable to RMCF stockholders | 2,238,799 | 2,963,908 | 3,450,116 | |||||||||
Cash dividends declared | (2,851,271 | ) | (2,828,001 | ) | (2,806,583 | ) | ||||||
Correction of immaterial error1 | - | - | (492,766 | ) | ||||||||
Adoption of ASC 6062 | 925,929 | - | - | |||||||||
Balance at end of year | 13,733,010 | 13,419,553 | 13,283,646 | |||||||||
Total Stockholders' Equity | 20,389,832 | 19,556,603 | 18,828,857 | |||||||||
Common Shares | ||||||||||||
Balance at beginning of year | 5,903,436 | 5,854,372 | 5,839,396 | |||||||||
Repurchase and retirement of common stock | - | - | (35,108 | ) | ||||||||
Issuance of common stock | 5,333 | 5,000 | 2,000 | |||||||||
Exercise of stock options, vesting of restricted stock units and other | 49,058 | 44,064 | 48,084 | |||||||||
Balance at end of year | 5,957,827 | 5,903,436 | 5,854,372 |
1 As revised. Refer to Note 1716 for information on immaterial correction of errors in prior period.
2 Refer to Note 17 for information on the adoption of ASC 606.
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 3,450,116 | $ | 3,806,531 | $ | 3,742,746 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,288,709 | 1,420,301 | 1,440,448 | |||||||||
Provision for loss on accounts and notes receivable | 138,125 | 171,000 | 214,600 | |||||||||
Provision for inventory loss | 100,049 | 76,695 | 58,836 | |||||||||
Asset impairment and store closure losses | - | 2,319,003 | 225,640 | |||||||||
(Gain) loss on sale of assets | 37,112 | 90,149 | (46,857 | ) | ||||||||
Expense recorded for stock compensation | 584,893 | 763,094 | 865,240 | |||||||||
Deferred income taxes | 262,248 | (1,878,205 | ) | (55,068 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (128,404 | ) | 364,767 | 662,625 | ||||||||
Refundable income taxes | (47,863 | ) | 172,945 | (12,055 | ) | |||||||
Inventories | (2,735 | ) | 144,454 | (202,333 | ) | |||||||
Other assets | 29,442 | 24,415 | (16,087 | ) | ||||||||
Accounts payable | (87,657 | ) | (310,533 | ) | (451,080 | ) | ||||||
Accrued liabilities | (293,402 | ) | 154,800 | 325,544 | ||||||||
Deferred income | (9,619 | ) | (531,331 | ) | (880,684 | ) | ||||||
Net cash provided by operating activities | 5,321,014 | 6,788,085 | 5,871,515 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Additions to notes receivable | (133,202 | ) | (46,489 | ) | (179,569 | ) | ||||||
Proceeds received on notes receivable | 318,219 | 368,122 | 488,691 | |||||||||
Proceeds from sale or distribution of assets | 39,045 | 23,692 | 530,175 | |||||||||
Intangible assets | (312,947 | ) | (83,103 | ) | - | |||||||
Decrease (increase) in other assets | 34,479 | (212,860 | ) | (2,395 | ) | |||||||
Purchase of property and equipment | (1,238,472 | ) | (743,251 | ) | (626,744 | ) | ||||||
Net cash (used in) provided by investing activities | (1,292,878 | ) | (693,889 | ) | 210,158 | |||||||
Cash Flows From Financing Activities: | ||||||||||||
Payments on long-term debt | (1,253,392 | ) | (1,207,234 | ) | (107,633 | ) | ||||||
Repurchase of common stock | (351,583 | ) | (3,030,708 | ) | (3,127,624 | ) | ||||||
Issuance of common stock | - | - | 69,599 | |||||||||
Proceeds from issuance of common stock in subsidiary | - | - | 892,895 | |||||||||
Tax (expense) benefit of stock option exercise | (34,128 | ) | 19,868 | 200,544 | ||||||||
Dividends paid | (2,804,786 | ) | (2,838,545 | ) | (2,711,812 | ) | ||||||
Net cash used in financing activities | (4,443,889 | ) | (7,056,619 | ) | (4,784,031 | ) | ||||||
Net (Decrease) Increase In Cash And Cash Equivalents | (415,753 | ) | (962,423 | ) | 1,297,642 | |||||||
Cash And Cash Equivalents At Beginning Of Year | 6,194,948 | 7,157,371 | 5,859,729 | |||||||||
Cash And Cash Equivalents At End Of Year | $ | 5,779,195 | $ | 6,194,948 | $ | 7,157,371 |
FOR THE YEARS ENDED FEBRUARY 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net Income | $ | 2,238,799 | $ | 2,963,908 | $ | 3,450,116 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,709,799 | 1,319,255 | 1,288,709 | |||||||||
Provision for obsolete inventory | 325,478 | 166,868 | 138,125 | |||||||||
Provision for loss on accounts and notes receivable | 155,600 | 225,858 | 100,049 | |||||||||
Asset impairment and store closure losses | 67,822 | - | - | |||||||||
Loss on sale or disposal of property and equipment | 36,024 | 38,496 | 37,112 | |||||||||
Expense recorded for stock compensation | 519,772 | 591,839 | 584,893 | |||||||||
Deferred income taxes | (78,934 | ) | 23,411 | 262,248 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (390,663 | ) | (229,948 | ) | (128,404 | ) | ||||||
Refundable income taxes | 157,544 | (295,000 | ) | (47,863 | ) | |||||||
Inventories | 41,310 | (365,323 | ) | (2,735 | ) | |||||||
Other current assets | (8,225 | ) | (54,091 | ) | 29,442 | |||||||
Accounts payable | (545,588 | ) | 96,491 | (87,657 | ) | |||||||
Accrued liabilities | (84,191 | ) | 242,578 | (293,402 | ) | |||||||
Contract Liabilities | (129,527 | ) | 33,270 | (9,619 | ) | |||||||
Net cash provided by operating activities | 4,015,020 | 4,757,612 | 5,321,014 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Addition to notes receivable | - | (14,293 | ) | (133,202 | ) | |||||||
Proceeds received on notes receivable | 102,256 | 230,637 | 318,219 | |||||||||
Purchase of intangible assets | - | (8,508 | ) | (312,947 | ) | |||||||
Proceeds from (cost of) sale or distribution of assets | 13,498 | (7,926 | ) | 39,045 | ||||||||
Purchases of property and equipment | (613,786 | ) | (544,956 | ) | (1,238,472 | ) | ||||||
(Increase) decrease in other assets | (8,140 | ) | 5,529 | 34,479 | ||||||||
Net cash used in investing activities | (506,172 | ) | (339,517 | ) | (1,292,878 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Payments on long-term debt | (1,352,821 | ) | (1,302,432 | ) | (1,253,392 | ) | ||||||
Repurchase of common stock | - | - | (351,583 | ) | ||||||||
Tax expense of stock option exercise | - | - | (34,128 | ) | ||||||||
Dividends paid | (2,844,984 | ) | (2,821,874 | ) | (2,804,786 | ) | ||||||
Net cash used in financing activities | (4,197,805 | ) | (4,124,306 | ) | (4,443,889 | ) | ||||||
Net Decrease in Cash and Cash Equivalents | (688,957 | ) | 293,789 | (415,753 | ) | |||||||
Cash and Cash Equivalents, Beginning of Period | 6,072,984 | 5,779,195 | 6,194,948 | |||||||||
Cash and Cash Equivalents, End of Period | $ | 5,384,027 | $ | 6,072,984 | $ | 5,779,195 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS 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) and, Aspen Leaf Yogurt, LLC (“ALY”), its 39%-owned subsidiary, U-Swirl, Inc. (“SWRL”), and U-Swirl International, Inc. (“U-Swirl”), a wholly-ownedand its 46%-owned subsidiary, as of February 29, 2016U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.
Effective March 1, 2015, the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03 per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001, of Newco. The new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), the Company entered into two agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to SWRL, in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of February 29, 2016 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. As of February 28, 2017, the Company held a 39% interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving as the Company’s Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. becoming a wholly-owned subsidiary of the Company as of February 29, 2016. As of February 29, 2016 U-Swirl, Inc. had no assets.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’sCompany’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2017:2019:
Sold, Not Yet Open |
Open |
Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 4 | 4 | |||||||||
Franchise stores – Domestic stores and kiosks | 6 | 189 | 195 | |||||||||
International License Stores | - | 94 | 94 | |||||||||
Cold Stone Creamery – co-branded | 5 | 83 | 88 | |||||||||
U-Swirl cafés (Including all associated brands) | ||||||||||||
Company-owned cafés | - | 2 | 2 | |||||||||
Company-owned cafés – co-branded | - | 3 | 3 | |||||||||
Franchise stores – North American cafés | * | 129 | 129 | |||||||||
Franchise stores – North American – co-branded | * | 16 | 16 | |||||||||
International License cafés | - | 2 | 2 | |||||||||
Total | 11 | 522 | 533 |
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Sold, Not Yet Open | Open | Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 2 | 2 | |||||||||
Franchise stores - Domestic stores and kiosks | 4 | 183 | 187 | |||||||||
International license stores | 1 | 64 | 65 | |||||||||
Cold Stone Creamery - co-branded | 11 | 91 | 102 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores | - | 1 | 1 | |||||||||
Company-owned stores - co-branded | - | 3 | 3 | |||||||||
Franchise stores - Domestic stores | - | 87 | 87 | |||||||||
Franchise stores - Domestic - co-branded | - | 9 | 9 | |||||||||
International license stores | - | 2 | 2 | |||||||||
Total | 16 | 442 | 458 |
Consolidation
ManagementManagement accounts for the activities of the Company and its subsidiaries, and the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As described above, on January 14, 2013, the Company acquired a controlling interest in SWRL. Prior to January 14, 2013, the Company’s consolidated financial statements excludeexcluded the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets and liabilities of SWRL have been included in these consolidated financial statements. The Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under a loan and security agreement with SWRL to cover the SWRLpurchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement.Agreement”). This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February 29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $5.3$4.9 million at February 28, 2017.2019.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business, we extendthe Company extends credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At February 28, 2017,2019, the Company has $655,028had $391,831 of notes receivable outstanding and an allowance for doubtful accounts of $48,647$0 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through September, 2022November 2023 and approximately $579,000$375,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’sCompany’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.
Income Taxes
We provideThe 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 bases 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. Due to historical U-Swirl losses, prior to FY 2016 wethe Company established a full valuation allowance on ourthe Company’s deferred tax assets. During FY 2016 wethe Company took possession of the outstanding equity in U-Swirl International, Inc.U-Swirl. As a result of ourthe Company’s ownership increasing to 100%, wethe Company began filing consolidated income tax returns in FY 2017. Because of this change, we havethe Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 wethe Company further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The correction of this immaterial error to ourthe Company’s balance sheet is further described in Note 17.16. The Company's temporary differences are listed in Note 6.
Gift Card Breakage
The Company and ourits franchisees sell gift cards that are redeemable for product in our stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on ourthe Company’s gift cards, and we dothe Company does not charge any service fees. While ourthe Company’s franchisees continue to honor all gift cards presented for payment, wethe Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is inredeemed by the processcustomer or the Company determines the likelihood of accumulating sufficient historical redemption patterns to calculate breakage estimates related to unredeemedthe gift cards. Thiscard being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based on a percentage of sales when the likelihood of the redemption of the gift card becomes remote. When the Company has sufficientupon Company-specific historical redemption patterns to calculate breakage estimates, the gift card breakage will be recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. As the Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage estimates, the Company did not recognize gift card breakage during the year ended February 28 or 29, 2017 or 2016.patterns. Accrued gift card liability was $2,921,585$742,289 and $2,835,943$3,057,131 at February 28, or 29, 20172019 and 2016,2018, respectively. The Company recognized breakage of $139,188 and $0 during FY 2019 and FY 2018, respectively. See Note 17 to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC 606.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of ourthe Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the SWRL Loan Agreement with SWRL.Agreement. This was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of goodwill recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership and the result of ourthe Company’s test indicated a full impairment of the U-Swirl goodwill. OurThe Company’s testing and impairment is described in Note 13 to the financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under the acquisition method, the purchase price of the acquisition is allocated to the underlying tangible and intangible assets acquired based on their respective fair values. Fair values are derived from various observable and unobservable inputs and assumptions. The Company utilizes third-party valuation specialists to assist in the allocation. Initial purchase price allocations are preliminary and are subject to revision within the measurement period, not to exceed one year from the date of acquisition. The costs of the business acquisitions are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Moreover, unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to ourthe Company’s franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-ownedCompany-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’sCompany’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
FranchiseBeginning in FY 2019, upon adoption of adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue iswas recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with Rocky Mountain Chocolate Factory franchise store openings in the third quarter of FY 2004, the Company modified its royalty structure. Under the current structure, theThe Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 the Company recognizes a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain instances, we arethe Company is required to pay a portion of franchise fee revenue, or royalty fees to parties we’vethe Company has contracted with to assist in developing and growing a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the ongoing royalty fees, or both. When such agreements exist, we reportthe Company reports franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of the Company’s Manufacturingour manufacturing segment represented approximately $4.1$3.1 million or 11%9% of the Company’sour total revenues during the year ended February 28, 2017. The Company’s2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by a changefurther decreases in the purchases of this customer.customer or the loss of this customer entirely.
Stock-Based Compensation
At February 28, 2017,28, 2019, the Company had one stock-based compensation plans, which currently consists solely ofplan, the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $584,893, $763,094,$519,772, $591,839, and $865,240$584,893 related to equity-based compensation expense during the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
TaxBeginning March 1, 2017, the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement. Prior to March 1, 2017 tax benefits or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the accompanying Statements of Cash Flows. The excess tax benefit or (expense)expense included in net cash provided by financing activities for the years ended February 28, or 29, 2017 2016 and 2015 was $(34,128), $19,868 and $200,544, respectively.$34,128.
During FY 20172019 and 2016,2018, the Company granted no restricted stock units. There were no stock options granted to employees during FY 20172019 or FY 2016.2018. The restricted stock unit grants generally vest 17-20%17 to 20% annually over a period of five to six years. The Company recognized $564,473$463,795 of consolidated stock-based compensation expense related to these grants made in prior years during FY 20172019 compared with $602,554$532,739 in FY 2016.2018 and $564,473 in FY 2017. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 20172019 was $1,179,492,$114,183, which is expected to be recognized over the weighted average period of 2.20.4 years.
During FY 2017, theThe Company issued 2,000 fully-vested, unrestricted shares to non-employee directors compared with 4,000 fully-vested,fully vested, unrestricted shares of stock to non-employee directors in FY 2016.during the year ended February 28, 2019 compared to no shares issued during the year ended February 28, 2018 and 2,000 issued during the year ended February 28, 2017. In connection with these non-employee director stock issuances, the Company recognized $20,420$24,480, $0 and $61,040$20,420 of stock-based compensation expense during FYyear ended February 28, 2019, 2018 and 2017, respectively.
During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and FY 2016, respectively.based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized $31,497 in stock-based compensation expense during the year ended February 28, 2019.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. DuringFollowing the expiration of all outstanding options, during FY 2017, FY 2016 and FY 2015, 0, 12,936, and 12,936, respectively, ofno stock options were excluded from diluted shares as their effect was anti-dilutive.shares.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $279,698, $215,314,$275,441, $355,678, and $244,946$279,698 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively. Total advertising expense for U-Swirl and its brands amounted to $335,771, $460,034,$168,000, $222,093, and $399,414$335,771 for the fiscal years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The Company’sCompany’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable and notes receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, FASB issued ASU 2016-15, Statement2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 clarifies and provides specific guidancechanges in stockholders’ equity in the interim financial statements included in Quarterly Reports on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduceForm 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current diversity in practice. ASU No. 2016-15 isand comparative quarter and year-to-date interim periods. The amendments are effective for public business entities for annual periods, including interim periods within those annual periods, beginningall filings made on or after December 15, 2017, with early application permitted. This guidance is applicableNovember 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the Company's fiscal year beginning March 1, 2018.filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Quarterly Report on Form 10-Q. The Company does not anticipate that this guidancethe adoption of these SEC amendments will have a material impacteffect on its consolidatedthe Company’s financial statements.position, results of operations, cash flows or stockholders’ equity.
In June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting 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- 132016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU No. 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2017. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the process of assessing the impact of the adoption of ASU No. 2016-09 on its consolidated financial statements. During the fiscal years ended February 28, 2017 and February 29, 2016 the Company would have realized additional expense of $34,000 and additional income of $20,000, respectively, if this guidance had been applied.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are requiredThe Company will adopt this guidance effective with the three month period ending May 31, 2019 (the first quarter of Fiscal Year 2020). The Company can elect to apply the amendments atrecord a cumulative-effect adjustment as of the beginning of the earliest period presented usingyear of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments (see note 5) will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, The Company anticipates ASU 2016-02 will have a material impact on the FASB issuedconsolidated balance sheet. The impact of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The cumulative adjustment to be recorded as right-of-use assets and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 willoperating lease liabilities, upon adoption, is expected to be effective for us in the first quarterrange of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.$3,500,000 to $3,900,000.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASC 606”). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in TopicASC 605 Revenue“Revenue Recognition.” ASC 606 provides that revenues are to be 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. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early applicationnew standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in Company-owned stores as those sales are recognized at the time of the guidance is permittedunderlying sale and are presented net of sales taxes and discounts. The standard also did not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard changed the timing in which the Company recognizes initial fees from franchisees and licensees for annual reporting periods beginning after December 31, 2016. This guidance is applicablenew franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store opening and renewals that impact the Company's fiscal year beginning March 1, 2018. The Company expectsterm of the adoption offranchise agreement upon renewal. In accordance with the new guidance, to change the timinginitial franchise services are not distinct from the continuing rights or services offered during the term of recognition ofthe franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees including master license and territory fees for our international business, and renewal fees. Currently, these fees are generallybeing recognized upfront upon either opening ofas the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognizedCompany satisfies the performance obligation over the term of the relatedfranchise agreement, which we expect will result in a material impactis generally 10 to revenue recognized for franchise fees, license fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. 15 years.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Ingredients and supplies | $ | 3,021,220 | $ | 2,868,157 | ||||
Finished candy | 2,137,609 | 2,138,952 | ||||||
U-Swirl food and packaging | 66,001 | 94,345 | ||||||
Reserve for slow moving inventory | (249,051 | ) | (261,346 | ) | ||||
Total inventories | $ | 4,975,779 | $ | 4,840,108 |
2019 | 2018 | |||||||
Ingredients and supplies | $ | 2,612,954 | $ | 2,764,727 | ||||
Finished candy | 1,983,854 | 2,371,610 | ||||||
U-Swirl food and packaging | 44,696 | 63,843 | ||||||
Reserve for slow moving inventory | (371,147 | ) | (357,706 | ) | ||||
Total inventories | $ | 4,270,357 | $ | 4,842,474 |
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 4,787,855 | 4,784,272 | ||||||
Machinery and equipment | 10,598,355 | 9,987,906 | ||||||
Furniture and fixtures | 1,047,319 | 1,169,475 | ||||||
Leasehold improvements | 1,531,112 | 1,862,603 | ||||||
Transportation equipment | 418,402 | 438,601 | ||||||
Asset impairment | (47,891 | ) | (568,803 | ) | ||||
18,848,770 | 18,187,672 | |||||||
Less accumulated depreciation | 12,390,839 | 12,177,369 | ||||||
Property and equipment, net | $ | 6,457,931 | $ | 6,010,303 |
2019 | 2018 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 5,031,395 | 4,905,103 | ||||||
Machinery and equipment | 10,263,119 | 10,686,631 | ||||||
Furniture and fixtures | 864,944 | 1,067,788 | ||||||
Leasehold improvements | 1,131,659 | 1,568,260 | ||||||
Transportation equipment | 422,458 | 434,091 | ||||||
Asset impairment | (30,000 | ) | (62,891 | ) | ||||
18,197,193 | 19,112,600 | |||||||
Less accumulated depreciation | (12,411,054 | ) | (12,946,360 | ) | ||||
Property and equipment, net | $ | 5,786,139 | $ | 6,166,240 |
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2017,28, 2019, the Company had a $5$5.0 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (3.0%(4.7% at February 28, 2017)2019). At February 28, 2017, $52019, $5.0 million was available for borrowings under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017,2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 20172019 and we believethe Company believes it is likely to be renewed on terms similar to current terms. At February 28, 2019 and 2018 there was no amount outstanding under this line of credit.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets, including the SWRL Loan Agreement.assets. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. As of February 28, 2019, the Company was in compliance with all such covenants. The Wells Fargo Loan Agreement also contains customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following at February 28 or 29:28:
2017 | 2016 | |||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by substantially all business assets. | $ | 3,831,741 | $ | 5,085,133 | ||||
Less current maturities | 1,302,501 | 1,254,007 | ||||||
Long-term obligations | $ | 2,529,240 | $ | 3,831,126 |
The following is a schedule by year of maturities of long-term debt for the years ending February 28 or 29:
2018 | $ | 1,302,501 | ||
2019 | 1,352,900 | |||
2020 | 1,176,340 | |||
Total | $ | 3,831,741 |
2019 | 2018 | ||||||||
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by sustantially all business assets | $ | 1,176,488 | $ | 2,529,309 | |||||
Less current maturities | 1,176,488 | 1,352,893 | |||||||
Long-term obligations | $ | - | $ | 1,176,416 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under fivenon-cancelable operating leases of up to ten-year non-cancelable operating leases.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 following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 603,000 | ||
2019 | 561,000 | |||
2020 | 272,000 | |||
2021 | 49,000 | |||
2022 | 49,000 | |||
Thereafter | 194,000 | |||
Total | $ | 1,728,000 |
2020 | $ | 318,000 | ||
2021 | 259,000 | |||
2022 | 249,000 | |||
2023 | 243,000 | |||
2024 | 249,000 | |||
Thereafter | 175,000 | |||
Total | $ | 1,493,000 |
We actThe Company acts as primary lessee of some franchised store premises, which wethe Company then subleasesubleases to franchisees, but the majority of existing locations are leased by the franchisee directly. OurThe Company’s current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we wereFebruary 28, 2019, the Company was the primary lessee at fivefour of our 332the Company’s 313 domestic franchised stores and 1 former office space.stores.
InIn 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's liability as primary lessee on sublet franchise outlets, all of which is fully offset by sublease rentals, is as follows for the years ending February 28 or 29:
2018 | $ | 189,000 | ||
2019 | 90,000 | |||
2020 | 81,000 | |||
2021 | 83,000 | |||
2022 | 29,000 | |||
Total | $ | 472,000 |
2020 | $ | 92,000 | ||
2021 | 75,000 | |||
2022 | 21,000 | |||
Total | $ | 188,000 |
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Minimum rentals | $ | 944,938 | $ | 1,187,003 | $ | 1,282,363 | ||||||
Less sublease rentals | (318,000 | ) | (479,000 | ) | (468,000 | ) | ||||||
Contingent rentals | 25,200 | 22,200 | 22,200 | |||||||||
$ | 652,138 | $ | 730,203 | $ | 836,563 |
2019 | 2018 | 2017 | ||||||||||
Minimum rentals | $ | 1,030,536 | $ | 1,270,240 | $ | 944,938 | ||||||
Less sublease rentals | (572,000 | ) | (603,000 | ) | (318,000 | ) | ||||||
Contingent rentals | 22,800 | 26,100 | 25,200 | |||||||||
$ | 481,336 | $ | 693,340 | $ | 652,138 |
In FY 2013,2019, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule, by year, of future minimum rental payments required under such lease for the years ending February 28:28 or 29:
2018 | $ | 28,000 | ||
Total | $ | 28,000 |
2020 | $ | 116,000 | ||
2021 | 121,000 | |||
2022 | 125,000 | |||
2023 | 129,000 | |||
2024 | 33,000 | |||
Total | $ | 524,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018 | $ | 185,700 | ||
2019 | 84,300 | |||
2020 | 62,100 | |||
2021 | 62,100 | |||
2022 | 15,500 | |||
Total | $ | 409,700 |
2020 | $ | 323,000 | ||
2021 | 323,000 | |||
2022 | 257,000 | |||
2023 | 29,000 | |||
Total | $ | 932,000 |
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29:28:
2017 | 2016 | 2015 | |||||||
220,791 | 182,006 | 185,703 |
2019 | 2018 | 2017 | |||||||
325,229 | 225,992 | 220,791 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 20172019, the Company was contracted for approximately $2,595,000$880,000 of raw materials under such agreements.
Contingencies
The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (collectively, the “CherryBerry Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB Shares, they must first offer such shares to SWRL and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint in the Colorado District Court, and thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion). On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May 9, 2016, the Oklahoma Court granted that application and we filed an answer to this action on June 6, 2016. All parties are currently involved in discovery proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this lawsuit.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28 or 29:28:
2017 | 2016 | 2015 | ||||||||||
Current | ||||||||||||
Federal | $ | 1,411,126 | $ | 1,420,811 | $ | 1,846,365 | ||||||
State | 272,214 | 195,993 | 246,398 | |||||||||
Total Current | 1,683,340 | 1,616,804 | 2,092,763 | |||||||||
Deferred | ||||||||||||
Federal | 240,234 | (1,725,918 | ) | (50,603 | ) | |||||||
State | 22,015 | (152,286 | ) | (4,465 | ) | |||||||
Total Deferred | 262,249 | (1,878,204 | ) | (55,068 | ) | |||||||
Total | $ | 1,945,589 | $ | (261,400 | ) | $ | 2,037,695 |
2019 | 2018 | 2017 | ||||||||||
Current | ||||||||||||
Federal | $ | 653,226 | $ | 1,916,720 | $ | 1,411,127 | ||||||
State | 142,570 | 220,164 | 272,214 | |||||||||
Total Current | 795,796 | 2,136,884 | 1,683,341 | |||||||||
Deferred | ||||||||||||
Federal | (67,410 | ) | 55,658 | 240,233 | ||||||||
State | (11,524 | ) | (32,247 | ) | 22,015 | |||||||
Total Deferred | (78,934 | ) | 23,411 | 262,248 | ||||||||
Total | $ | 716,862 | $ | 2,160,295 | $ | 1,945,589 |
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years endedended February 28 or 29:
2017 | 2016 | 2015 | ||||||||||
Statutory rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.6 | % | 0.8 | % | 2.8 | % | ||||||
Domestic production deduction | (1.1 | %) | (3.0 | %) | (1.6 | %) | ||||||
Work opportunity tax credits | (0.4 | %) | - | - | ||||||||
Statutory rate change | - | (1.6 | %) | - | % | |||||||
Other | 0.0 | % | 0.5 | % | 0.1 | % | ||||||
U-Swirl loss carryforward recognized | - | (1.8 | %) | (3.0 | %) | |||||||
Valuation allowance, U-Swirl Consolidated loss | - | (36.3 | %) | 3.0 | % | |||||||
Effective rate – provision (benefit) | 36.1 | % | (7.4 | %) | 35.3 | % |
2019 | 2018 | 2017 | ||||||||||
Statutory rate | 21.0 | % | 31.9 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit | 3.4 | % | 2.4 | % | 3.6 | % | ||||||
Domestic production deduction | 0.0 | % | (0.9 | )% | (1.1 | )% | ||||||
Work opportunity tax credits | (0.7 | )% | (0.2 | )% | (0.4 | )% | ||||||
Other | 0.5 | % | 0.8 | % | 0.0 | % | ||||||
Impact of tax reform | 0.0 | % | 8.2 | % | 0.0 | % | ||||||
Effective rate - provision (benefit) | 24.2 | % | 42.2 | % | 36.1 | % |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes at February 28 or 29 are as follows:
Deferred Tax Assets | 2017 | 2016 | ||||||
Allowance for doubtful accounts and notes | $ | 198,354 | $ | 248,537 | ||||
Inventories | 90,027 | 96,698 | ||||||
Accrued compensation | 188,002 | 183,898 | ||||||
Loss provisions and deferred income | 1,175,351 | 1,299,191 | ||||||
Self-insurance accrual | 37,000 | 28,923 | ||||||
Amortization | 782,683 | 861,594 | ||||||
Restructuring charges | 148,494 | 148,494 | ||||||
U-Swirl accumulated net loss | 164,035 | 346,605 | ||||||
Valuation allowance | (148,494 | ) | (148,494 | ) | ||||
Net deferred tax assets | 2,635,452 | 3,065,446 | ||||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (1,683,778 | ) | (1,537,653 | ) | ||||
Prepaid expenses | (92,800 | ) | (106,138 | ) | ||||
Deferred tax liabilities | $ | (1,776,578 | ) | $ | (1,643,791 | ) | ||
Net deferred tax assets | $ | 858,874 | $ | 1,421,655 |
2019 | 2018 | |||||||
Deferred Tax Assets | ||||||||
Allowance for doubtful accounts and notes | $ | 120,368 | $ | 124,469 | ||||
Inventories | 91,265 | 86,938 | ||||||
Accrued compensation | 87,930 | 130,049 | ||||||
Loss provisions and deferred income | 492,468 | 817,945 | ||||||
Self-insurance accrual | 34,426 | 38,868 | ||||||
Amortization | 217,481 | 520,379 | ||||||
Restructuring charges | 98,693 | 98,728 | ||||||
U-Swirl accumulated net loss | 325,253 | 258,173 | ||||||
Valuation allowance | (98,693 | ) | (98,728 | ) | ||||
Net deferred tax assets | $ | 1,369,191 | $ | 1,976,821 | ||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | (682,542 | ) | (1,066,113 | ) | ||||
Prepaid expenses | (79,228 | ) | (75,245 | ) | ||||
Deferred Tax Liabilities | (761,770 | ) | (1,141,358 | ) | ||||
Net deferred tax assets | $ | 607,421 | $ | 835,463 |
The following table summarizes deferred income tax valuation allowances as of February 28 or 29:28:
2017 | 2016 | |||||||
Valuation allowance at beginning of period | $ | 148,494 | $ | 349,010 | ||||
Tax expense (benefits) realized by valuation allowance | - | 81,340 | ||||||
Tax benefits released from valuation allowance | - | (281,856 | ) | |||||
Valuation allowance at end of period | $ | 148,494 | $ | 148,494 |
2019 | 2018 | |||||||
Valuation allowance at beginning of period | $ | 98,728 | $ | 148,494 | ||||
Tax expense (benefits) realized by valuation allowance | (35 | ) | - | |||||
Tax benefits released from valuation allowance | - | - | ||||||
Impact of tax reform | - | (49,766 | ) | |||||
Valuation allowance at end of period | $ | 98,693 | $ | 98,728 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Income tax benefit realizedexpense and the effective income tax rate for the year ended February 29, 2016, compared to the tax expense in the prior years, is primarily due to the tax consequences of a change in the controlling interest in U-Swirl and foreclosure upon the stock of U-Swirl International, Inc. In FY 2014 we did not realize a tax benefit28, 2019 decreased from the SWRL taxable loss causing our effective rate to increase for the year. During FY 2015 the taxable loss at SWRL was lower, resulting in a decrease to our effective rate. During FY 2016 an income tax benefit of approximately $2,149,000 was recognizedyear ended February 28, 2018, primarily as a result of the company foreclosing upon the interest in U-Swirl and recognizingrevaluation of deferred tax assets and loss carry forwards that previously had full valuation allowances when RMCF had less than an 80% ownership interest. Resulting from this foreclosure, RMCF will consolidate U-Swirl International, Inc. resulting in realizationliabilities to the lower enacted U.S. corporate tax rate of U-Swirl International, Inc. deferred tax assets that previously had a full valuation allowance when filed with SWRL income tax returns. U-Swirl International, Inc.21% under the Tax Cuts and RMCF will file consolidated income tax returns beginning with FY 2017. SWRL will continue to file separate tax returns.
ForJobs Act recognized during the year ended February 29, 201628, 2018 and prior periods, the financial statements presented representlower enacted U.S. corporate tax rate of 21% under the consolidated statementsTax Cuts and Jobs Act effective for the year ended February 28, 2019. The revaluation of two separate consolidated groups fordeferred tax assets and liabilities resulted in income tax purposes. RMCF has filed income tax returns consolidatingexpense of approximately $421,000 recognized in consideration of the results of Rocky Mountain Chocolate Factory and its wholly owned subsidiary, Aspen Leaf Yogurt, LLC. U-Swirl Inc. has filed a separate consolidated income tax returnlower enacted rate for the results of U-Swirl, Inc. and its wholly owned subsidiary, U-Swirl International, Inc. RMCF and SWRL have filed separate income tax returns because RMCF owned only 39% of SWRL. Beginning on March 1, 2016 the results of U-Swirl International, Inc. will be included in RMCF’s consolidated income tax return, and on the same date, will be removed from U-Swirl, Inc.’s consolidated tax return. This is a result of the foreclosure of RMCF on the outstanding stock of U-Swirl in satisfaction of debt between RMCF and SWRL. The consolidated tax return for RMCF for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL.year ended February 28, 2018.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2012.2013. The Company’s federal income tax returns have been examined for the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years. The Company’s federal income tax returns are being examined for the years ended February 28 or 29, 2017 and 2016.
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. Management believes that, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2017.2019.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28, 2019 or 29, 2016 or 2015.2018. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28, or 29, 20172019 and 2016.2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 29,29, 2016, we hadthe Company foreclosed on the outstanding equity of U-Swirl International, Inc. and U-Swirl International, Inc. was consolidated for income tax purposes. SWRL, along with U-Swirl International, Inc., has historically filed its own consolidated federal income tax return and reported its own Federal net operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets. This full valuation allowance was eliminated asAs of February 29, 2016, in recognitiona portion of the likelihoodU-Swirl deferred tax assets were recognized as a result of it becoming more likely than not that the loss carry forwardssome of these assets would be realized in the future as a result of RMCF and U-Swirl International, Inc. filing a consolidated income tax return.
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl International, Inc.’sU-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. We haveThe Company has performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest in January 2013.2013 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl International Inc.’sU-Swirl’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
We estimateThe Company estimates that the potential future tax deductions of U-Swirl International, Inc.’sU-Swirl’s Federal net operating losses, limited by section 382, to be approximately $443,000$1,323,000 with a resulting deferred tax asset of approximately $164,000. U-Swirl International Inc.’s$325,000. U-Swirl’s Federal net operating loss carryovers will expire at various dates beginning in 2026.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash dividendsdividend of $0.12 per common share on March 11, 2016, June 17, 2016, September 16, 2016 and December 9, 20162018 to stockholders of record on February 26, 2016,March 6, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 15, 2018 to stockholders of record on June 5, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 14, 2018 to stockholders of record on September 4, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 7, 2016, September 6, 2016 and2018 to stockholders of record on November 25, 2016, respectively.23, 2018. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 9, 2017 payable14, 2019, which was paid on March 10, 201715, 2019 to stockholders of record on February 24, 2017.March 5, 2019.
Future declarationsdeclarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long termlong-term interest of the Company’s stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the nine months ended November 30, 2016,FY 2017, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the three monthsyears ended February 28, 2017.2019 or 2018. As of February 28, 2017,2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (the(as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock awards under the 2007 Plan as of February 28, 2017:2019:
Original share authorization: | 300,000 | |||
Prior plan shares authorized and incorporated in the 2007 | 85,340 | |||
Additional shares authorized through 2007 Plan amendment: | 300,000 | |||
Available for | 685,340 | |||
Cancelled/ | ||||
Shares awarded as unrestricted shares, stock options or restricted stock | ( | ) | ||
Shares available for award: |
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding stock options at beginning of year: | 12,936 | 12,936 | 155,880 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | (142,944 | ) | ||||||||
Cancelled/forfeited | (12,936 | ) | - | - | ||||||||
Outstanding stock options as of February 28 or 29: | - | 12,936 | 12,936 | |||||||||
Weighted average exercise price | n/a | $ | 12.94 | $ | 12.94 | |||||||
Weighted average remaining contractual term (in years) | n/a | 0.04 | 1.04 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding stock options at beginning of year: | - | - | 12,936 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Cancelled/forfeited | - | - | (12,936 | ) | ||||||||
Outstanding stock options as of February 28: | - | - | - | |||||||||
Weighted average exercise price | n/a | n/a | n/a | |||||||||
Weighted average remaining contractual term (in years) | n/a | n/a | n/a |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2017,2019, and changes for the three years then ended was as follows:
Twelve Months Ended | ||||||||||||
February 28 or 29: | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 181,742 | 237,641 | 295,040 | |||||||||
Granted | - | - | - | |||||||||
Vested | (48,084 | ) | (55,899 | ) | (56,199 | ) | ||||||
Cancelled/forfeited | (10,000 | ) | - | (1,200 | ) | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 123,658 | 181,742 | 237,641 | |||||||||
Weighted average grant date fair value | $ | 12.21 | $ | 12.22 | $ | 12.13 | ||||||
Weighted average remaining vesting period (in years) | 2.23 | 3.22 | 4.08 |
Twelve Months Ended | ||||||||||||
February 28: | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Outstanding non-vested restricted stock units at beginning of year: | 77,594 | 123,658 | 181,742 | |||||||||
Granted | - | - | - | |||||||||
Vested | (49,058 | ) | (44,064 | ) | (48,084 | ) | ||||||
Cancelled/forfeited | (3,534 | ) | (2,000 | ) | (10,000 | ) | ||||||
Outstanding non-vested restricted stock units as of February 28: | 25,002 | 77,594 | 123,658 | |||||||||
Weighted average grant date fair value | $ | 12.05 | $ | 12.16 | $ | 12.21 | ||||||
Weighted average remaining vesting period (in years) | 0.38 | 1.27 | 2.23 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
FY 2019 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,361,528 | $ | 25,324,024 | $ | 1,272,009 | $ | 3,737,606 | $ | - | $ | 35,695,167 | ||||||||||||
Intersegment revenues | (5,236 | ) | (1,144,484 | ) | - | - | - | (1,149,720 | ) | |||||||||||||||
Revenue from external customers | 5,356,292 | 24,179,540 | 1,272,009 | 3,737,606 | - | 34,545,447 | ||||||||||||||||||
Segment profit (loss) | 2,288,871 | 4,310,722 | (52,009 | ) | (32,391 | ) | (3,559,532 | ) | 2,955,661 | |||||||||||||||
Total assets | 1,182,355 | 12,267,458 | 1,001,419 | 5,264,989 | 6,505,920 | 26,222,141 | ||||||||||||||||||
Capital expenditures | 3,548 | 526,402 | 9,617 | 16,512 | 57,707 | 613,786 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,369 | $ | 573,846 | $ | 32,762 | $ | 952,178 | $ | 104,644 | $ | 1,709,799 |
FY 2016 |
Franchising |
Manufacturing |
Retail |
U-Swirl |
Other |
Total | ||||||||||||||||||
Total revenues | $ | 5,947,769 | $ | 27,726,443 | $ | 1,622,906 | $ | 6,535,646 | $ | - | $ | 41,832,764 | ||||||||||||
Intersegment revenues | (5,185 | ) | (1,370,684 | ) | - | - | - | (1,375,869 | ) | |||||||||||||||
Revenue from external customers | 5,942,584 | 26,355,759 | 1,622,906 | 6,535,646 | - | 40,456,895 | ||||||||||||||||||
Segment profit (loss) | 2,608,351 | 6,731,221 | (2,591 | ) | (2,128,649 | ) | (3,663,201 | ) | 3,545,131 | |||||||||||||||
Total assets | 1,205,616 | 11,980,933 | 1,008,783 | 10,126,209 | 5,994,184 | 30,315,725 | ||||||||||||||||||
Capital expenditures | 76,762 | 432,473 | 3,306 | 66,476 | 164,234 | 743,251 | ||||||||||||||||||
Total depreciation & amortization | $ | 36,908 | $ | 406,082 | $ | 18,236 | $ | 802,953 | $ | 156,122 | $ | 1,420,301 |
FY 2018 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 6,004,897 | $ | 27,491,089 | $ | 1,876,021 | $ | 4,142,085 | $ | - | $ | 39,514,092 | ||||||||||||
Intersegment revenues | (4,882 | ) | (1,434,515 | ) | - | - | - | (1,439,397 | ) | |||||||||||||||
Revenue from external customers | 6,000,015 | 26,056,574 | 1,876,021 | 4,142,085 | - | 38,074,695 | ||||||||||||||||||
Segment profit (loss) | 2,623,081 | 5,791,980 | (37,102 | ) | 542,073 | (3,795,829 | ) | 5,124,203 | ||||||||||||||||
Total assets | 1,157,158 | 12,729,659 | 1,134,876 | 8,125,171 | 5,793,771 | 28,940,635 | ||||||||||||||||||
Capital expenditures | 15,429 | 429,545 | 33,056 | 11,899 | 55,027 | 544,956 | ||||||||||||||||||
Total depreciation & amortization | $ | 46,087 | $ | 540,033 | $ | 32,567 | $ | 576,162 | $ | 124,406 | $ | 1,319,255 |
FY 2015 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,976,964 | $ | 27,459,828 | $ | 2,134,976 | $ | 7,501,943 | $ | - | $ | 43,073,711 | ||||||||||||
Intersegment revenues | (342 | ) | (1,564,993 | ) | - | - | - | (1,565,335 | ) | |||||||||||||||
Revenue from external customers | 5,976,622 | 25,894,835 | 2,134,976 | 7,501,943 | - | 41,508,376 | ||||||||||||||||||
Segment profit (loss) | 2,783,734 | 6,993,693 | (51,803 | ) | (245,546 | ) | (3,699,637 | ) | 5,780,441 | |||||||||||||||
Total assets | 1,193,407 | 12,155,004 | 1,157,674 | 12,424,801 | 7,207,327 | 34,138,213 | ||||||||||||||||||
Capital expenditures | 28,806 | 378,060 | 41,361 | 61,053 | 117,464 | 626,744 | ||||||||||||||||||
Total depreciation & amortization | $ | 41,228 | $ | 395,864 | $ | 35,531 | $ | 813,172 | $ | 154,653 | $ | 1,440,448 |
FY 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 5,951,055 | $ | 26,678,514 | $ | 1,710,734 | $ | 5,216,076 | $ | - | $ | 39,556,379 | ||||||||||||
Intersegment revenues | (5,332 | ) | (1,254,670 | ) | - | - | - | (1,260,002 | ) | |||||||||||||||
Revenue from external customers | 5,945,723 | 25,423,844 | 1,710,734 | 5,216,076 | - | 38,296,377 | ||||||||||||||||||
Segment profit (loss) | 2,495,709 | 5,609,957 | 128,024 | 1,017,395 | (3,855,380 | ) | 5,395,705 | |||||||||||||||||
Total assets | 1,216,241 | 12,900,070 | 1,101,461 | 9,124,822 | 5,075,762 | 29,418,356 | ||||||||||||||||||
Capital expenditures | 15,480 | 966,619 | 17,047 | 40,924 | 198,402 | 1,238,472 | ||||||||||||||||||
Total depreciation & amortization | $ | 54,053 | $ | 463,996 | $ | 14,755 | $ | 622,654 | $ | 133,251 | $ | 1,288,709 |
Revenue from one customer of the Company’sCompany’s Manufacturing segment represented approximately $4.1$3.1 million, or 10.69.1 percent, of the Company’s revenues from external customers during the year ended February 28, 2017,2019, compared to $5.2$5.1 million, or 12.813.4 percent of the Company’s revenues from external customers during the year ended February 29, 2016.28, 2018.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For thethe three years ended February 28 or 29:
Cash paid (received) for: | 2017 | 2016 | 2015 | |||||||||
Income taxes paid | $ | 1,997,751 | $ | 1,383,805 | $ | 1,896,274 | ||||||
Interest | 129,927 | 170,709 | 193,022 | |||||||||
Accrued Inventory | 531,017 | 298,032 | 245,183 | |||||||||
Non-Cash Financing Activities: | ||||||||||||
Dividend payable | 702,525 | 700,728 | 721,536 | |||||||||
Non-Cash Investing Activities: | ||||||||||||
Sale or distribution of assets in exchange for notes receivable | ||||||||||||
Long-lived assets | 20,989 | 127,500 | 414,353 | |||||||||
Other assets | $ | - | $ | 75,000 | $ | - |
Cash paid for: | 2019 | 2018 | 2017 | |||||||||
Interest, net | $ | 52,102 | $ | 102,640 | $ | 129,927 | ||||||
Income taxes | 638,252 | 2,431,884 | 1,997,751 | |||||||||
Non-cash Operating Activities | ||||||||||||
Accrued Inventory | 52,918 | 258,247 | 531,017 | |||||||||
Non-cash Financing Activities | ||||||||||||
Dividend payable | $ | 714,939 | $ | 708,652 | 702,525 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’semployee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28, or 29,2019, 2018 and 2017, 2016 and 2015, the Company’s contribution was approximately $66,000, $62,000,$70,000, $68,000, and $60,000,$66,000, respectively, to the plan.
NOTE 1212 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscalfiscal years ended February 28, or 29, 20172019 and 2016:2018:
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2017 | ||||||||||||||||||||
Total revenue | $ | 9,376,199 | $ | 8,601,962 | $ | 9,955,239 | $ | 10,362,977 | $ | 38,296,377 | ||||||||||
Gross margin | 2,222,405 | 2,289,011 | 2,706,456 | 1,922,896 | 9,140,768 | |||||||||||||||
Net income | 731,834 | 974,813 | 1,011,799 | 731,670 | 3,450,116 | |||||||||||||||
Basic earnings per share | 0.13 | 0.17 | 0.17 | 0.13 | 0.59 | |||||||||||||||
Dilute earnings per share | $ | 0.12 | $ | 0.16 | $ | 0.17 | $ | 0.12 | $ | 0.58 |
Fiscal Quarter
First | Second | Third | Fourth | Total | ||||||||||||||||
2016 | ||||||||||||||||||||
Total revenue | $ | 10,364,022 | $ | 9,274,554 | $ | 9,807,313 | $ | 11,011,006 | $ | 40,456,895 | ||||||||||
Gross margin | 2,470,383 | 2,536,811 | 2,723,841 | 2,763,228 | 10,494,263 | |||||||||||||||
Net income | 762,959 | 779,796 | 440,801 | 2,442,351 | 4,425,907 | |||||||||||||||
Basic earnings per share | 0.13 | 0.13 | 0.08 | 0.42 | 0.75 | |||||||||||||||
Diluted earnings per share | $ | 0.12 | $ | 0.13 | $ | 0.07 | $ | 0.41 | $ | 0.73 |
Fiscal Quarter | ||||||||||||||||||||
2019 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 8,366,085 | $ | 7,800,088 | $ | 8,949,747 | $ | 9,429,527 | $ | 34,545,447 | ||||||||||
Gross margin | 1,916,807 | 1,852,435 | 1,882,975 | 1,312,026 | 6,964,243 | |||||||||||||||
Net income | 576,944 | 750,815 | 525,361 | 385,679 | 2,238,799 | |||||||||||||||
Basic earnings per share | 0.10 | 0.13 | 0.09 | 0.06 | 0.38 | |||||||||||||||
Diluted earnings per share | $ | 0.10 | $ | 0.13 | $ | 0.09 | $ | 0.06 | $ | 0.37 |
Fiscal Quarter | ||||||||||||||||||||
2018 | First | Second | Third | Fourth | Total | |||||||||||||||
Total revenue | $ | 9,346,447 | $ | 8,266,691 | $ | 9,961,572 | $ | 10,499,985 | $ | 38,074,695 | ||||||||||
Gross margin | 2,191,974 | 2,210,910 | 2,311,579 | 2,276,586 | 8,991,049 | |||||||||||||||
Net income | 813,672 | 928,284 | 751,056 | 470,896 | 2,963,908 | |||||||||||||||
Basic earnings per share | 0.14 | 0.16 | 0.13 | 0.08 | 0.50 | |||||||||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.16 | $ | 0.13 | $ | 0.08 | $ | 0.50 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1313 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28 or 29:28:
| 2017 | 2016 | |||||||||||||||||||
Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 211,152 | $ | 220,778 | $ | 209,653 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 92,758 | 459,340 | 51,423 | ||||||||||||||
Franchise Rights | 20 | 5,971,129 | 1,144,957 | 5,914,181 | 760,818 | ||||||||||||||||
Total | 7,459,049 | 2,000,670 | 7,146,102 | 1,573,697 | |||||||||||||||||
Intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment | |||||||||||||||||||||
Company stores goodwill | 1,099,328 | 267,020 | 1,099,328 | 267,020 | |||||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Manufacturing segment-Goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Trademark-indefinite life | 20,000 | - | 20,000 | - | |||||||||||||||||
Total | 1,709,328 | 662,384 | 1,709,328 | 662,384 | |||||||||||||||||
Total intangible assets | $ | 9,168,377 | $ | 2,663,054 | $ | 8,855,430 | $ | 2,236,081 |
2019 | 2018 | |||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 214,152 | $ | 220,778 | $ | 212,653 | |||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | |||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | |||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 223,628 | 715,339 | 136,087 | |||||||||||||||
Franchise rights | 20 | 5,979,637 | 2,300,717 | 5,979,637 | 1,545,710 | |||||||||||||||||
Total | 7,467,557 | 3,290,300 | 7,467,557 | 2,446,253 | ||||||||||||||||||
Intangible assets not subject to amortization | ||||||||||||||||||||||
Franchising segment- | ||||||||||||||||||||||
Company stores goodwill | $ | 1,099,328 | $ | 267,020 | $ | 1,099,328 | $ | 267,020 | ||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Manufacturing segment-goodwill | 295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||||
Trademark | 20,000 | - | 20,000 | - | ||||||||||||||||||
Total goodwill | 1,709,328 | 662,384 | 1,709,328 | 662,384 | ||||||||||||||||||
Total Intangible Assets | $ | 9,176,885 | $ | 3,952,684 | $ | 9,176,885 | $ | 3,108,637 |
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
On February 29, 2016, RMCF foreclosed on all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. As described in Note 1, this was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. We performed a test of impairment in conjunction with the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. We recognized an impairment loss of $1,930,529 to reduce the carrying value of Goodwill to the fair value. In making this determination we reviewed the fair value of U-Swirl compared to its carrying value. In performing this testing we focused on the actual performance of the acquired businesses that created the initial recognition of the goodwill, as well as U-Swirl’s past performance and future expected performance. Because of the significant underperformance of the acquired businesses as well as U-Swirl we determined that the carrying value of the reporting unit exceeded its fair value.
The following are events that have indicated that it is more likely than not that the fair value of goodwill is less than the carrying amount:
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets totaled $427,840, $378,373,$844,320, $446,050, and $361,723$427,840 during the fiscal years ended February 28 or 29, 2019, 2018 and 2017, 2016 and 2015, respectively.
During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.
ROCKY MOUNTAINMOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 28, 2017,28, 2019, annual amortization of intangible assets, based upon ourthe Company’s existing intangible assets and current useful lives, is estimated to be the following:
2018 | $ | 445,214 | ||
2019 | 451,644 | |||
2020 | 438,487 | |||
2021 | 426,778 | |||
2022 | 403,596 | |||
Thereafter | 3,292,660 | |||
Total | $ | 5,458,379 |
2020 | $ | 706,177 | ||
2021 | 594,229 | |||
2022 | 490,060 | |||
2023 | 411,607 | |||
2024 | 345,642 | |||
Thereafter | 1,629,542 | |||
Total | $ | 4,177,257 |
NOTE 14 – IMPAIRMENT OF LONG-LIVED RETAIL ASSETS, RESTRUCTURING AND ACQUISITION RELATED CHARGESCOSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
In 2014, SWRL entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, SWRL purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store. SWRL also entered into an Asset Purchase Agreement with Yogli Mogli, which was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, SWRL purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February 20, 2014, SWRL entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rightsCosts associated with 17 Fuzzy Peach Frozen Yogurt stores. Associated with these transactions, the Company recorded net restructuring charges of $124,551 during the year ended February 28, 2015. No restructuring charges were incurred during the year ended February 29, 2016.
On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of SWRL. In addition, Messrs. Conte, H. Cartwright and T. Cartwright resigned as officers of U-Swirl. Also on September 4, 2014, the SWRL Board of Directors appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.
In connection with these management changes, SWRL announced an operational restructuring designed to enhance SWRL’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements with the named officers, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement, property and equipment. The Company recorded restructuring charges of $503,526 during year ended February 28, 2015 associated with this operational restructuring.
As described in Note 1 above, effective March 1, 2015, the Company was reorganized to create a holding company structure pursuant to the Agreement and Plan of Merger, dated as of November 10, 2014, among Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and RKB Merger Corp. In connection with the holding company reorganization, the Company recorded restructuring fees of $179,399 during the year ended February 28, 2015.
During the year ended February 29, 2016, we closed an underperforming Company-owned café resulting in an impairment charge of $39,933. As described in Note 1, on February 29, 2016 the Company foreclosed on 100% of the outstanding equity of U-Swirl in full satisfaction of the obligations owed under the SWRL Loan Agreement. The Company reviewed all operating assets possessed as a part of this transaction and made the determination to offer for sale certain retail assets below their carrying value. This determination was made after a review of expected future cash flow. As a result of this review and determination an impairment charge of $356,280 was recorded to reflect these assets at their fair value.
Impairment of long-lived assets and goodwill, restructuring and acquisition charges incurredstore closures at February 28, or 29,2019, 2018 and 2017 2016 and 2015 were comprised of the following:
2017 | 2016 | 2015 | ||||||||||
Professional fees | $ | - | $ | - | $ | 284,275 | ||||||
Severance/transitional compensation | - | - | 212,027 | |||||||||
Leasehold improvements, property and equipment impairment of long-lived assets and goodwill | - | 2,326,742 | 243,000 | |||||||||
Provision for termination of contractual obligations | 60,000 | - | - | |||||||||
Acceleration of restricted stock unit vesting | - | - | 65,049 | |||||||||
Other | - | - | 3,125 | |||||||||
Total | $ | 60,000 | $ | 2,326,742 | $ | 807,476 |
2019 | 2018 | 2017 | ||||||||||
Loss on distribution of assets | $ | 81,981 | $ | - | $ | - | ||||||
Lease settlement costs | 145,000 | - | 60,000 | |||||||||
Total | $ | 226,981 | $ | - | $ | 60,000 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – RELATED PARTY TRANSACTIONS
Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have, on occasion, provided services to the Company and may provide services in the future. For the year ended February 28, 2017, the Company paid $47,822 and no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of operations.
NOTE 16 – SUBSEQUENT EVENTS
On May 22, 2017,28, 2019, the Company announced that its Board of Directors has declared a first quarter FY2018FY2020 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 16, 201714, 2019 to shareholders of record at the close of business June 6, 2017.4, 2019.
In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period.
NOTE 1716 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company’sCompany’s prior annual consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233 and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.
NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”)
As described in Note 1, effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be 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. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gift Cards
The Company’s franchisees sell gift cards which do not have either 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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
Impact to Prior Periods
The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:
Amount | ||||
Increase in deferred revenue | $ | (1,022,720 | ) | |
Reduction in gift card liabilities | 2,250,743 | |||
Adjustment to deferred income tax assets | (302,094 | ) | ||
Cumulative increase to retained earnings | $ | 925,929 |
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:
CONSOLIDATED BALANCE SHEET | ||||||||||||
AS OF FEBRUARY 28, 2018 | ||||||||||||
Previously Reported | Adjustments | Restated | ||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 6,072,984 | $ | - | $ | 6,072,984 | ||||||
Accounts receivable, net | 3,897,334 | - | 3,897,334 | |||||||||
Notes receivable, current portion, net | 105,540 | - | 105,540 | |||||||||
Refundable income taxes | 342,863 | - | 342,863 | |||||||||
Inventories, net | 4,842,474 | - | 4,842,474 | |||||||||
Other | 310,173 | - | 310,173 | |||||||||
Total current assets | 15,571,368 | - | 15,571,368 | |||||||||
Property and Equipment, Net | 6,166,240 | - | 6,166,240 | |||||||||
Other Assets | ||||||||||||
Notes receivable, less current portion, net | 235,983 | - | 235,983 | |||||||||
Goodwill, net | 1,046,944 | - | 1,046,944 | |||||||||
Franchise rights, net | 4,433,927 | - | 4,433,927 | |||||||||
Intangible assets, net | 587,377 | - | 587,377 | |||||||||
Deferred income taxes | 835,463 | (302,094 | ) | 533,369 | ||||||||
Other | 63,333 | - | 63,333 | |||||||||
Total other assets | 7,203,027 | (302,094 | ) | 6,900,933 | ||||||||
Total Assets | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 | |||||
Liabilities and Stockholders' Equity | ||||||||||||
Current Liabilities | ||||||||||||
Current maturities of long-term debt | $ | 1,352,893 | - | $ | 1,352,893 | |||||||
Accounts payable | 1,647,991 | - | 1,647,991 | |||||||||
Accrued salaries and wages | 644,005 | - | 644,005 | |||||||||
Gift card liabilities | 3,057,131 | (2,250,743 | ) | 806,388 | ||||||||
Other accrued expenses | 325,034 | - | 325,034 | |||||||||
Dividend payable | 708,652 | - | 708,652 | |||||||||
Deferred revenue | 471,910 | (143,445 | ) | 328,465 | ||||||||
Total current liabilities | 8,207,616 | (2,394,188 | ) | 5,813,428 | ||||||||
Long-Term Debt, Less Current Maturities | 1,176,416 | - | 1,176,416 | |||||||||
Deferred Revenue, Less Current Portion | - | 1,166,165 | 1,166,165 | |||||||||
Commitments and Contingencies | ||||||||||||
Stockholders' Equity | ||||||||||||
Preferred stock | ||||||||||||
Common stock | 5,903 | - | 5,903 | |||||||||
Additional paid-in capital | 6,131,147 | - | 6,131,147 | |||||||||
Retained earnings | 13,419,553 | 925,929 | 14,345,482 | |||||||||
Total stockholders' equity | 19,556,603 | 925,929 | 20,482,532 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 28,940,635 | $ | (302,094 | ) | $ | 28,638,541 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
For the Years Ended February 28, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Franchise Fees contained within the Statement of Income: | $ | 335,028 | $ | 681,613 | $ | 324,718 | ||||||
Adjustment required to conform revenue to prior period method: | (53,528 | ) | - | - | ||||||||
Comparable franchise fees: | $ | 281,500 | $ | 681,613 | $ | 324,718 |
On February 28, 2019, 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:
2020 | $ | 256,093 | ||
2021 | 204,071 | |||
2022 | 190,524 | |||
2023 | 176,394 | |||
2024 | 137,477 | |||
Thereafter | 388,013 | |||
Total | $ | 1,352,572 |
NOTE 18 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2019 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchise fees | $ | 199,362 | $ | - | $ | - | $ | 135,666 | $ | 335,028 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 24,179,540 | - | - | 24,179,540 | |||||||||||||||
Retail sales | - | - | 1,272,009 | 2,112,245 | 3,384,254 | |||||||||||||||
Royalty and marketing fees | 5,156,930 | - | - | 1,489,695 | 6,646,625 | |||||||||||||||
Total | $ | 5,356,292 | $ | 24,179,540 | $ | 1,272,009 | $ | 3,737,606 | $ | 34,545,447 |
ITEMITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systems to future periods are subject to the risk that such controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all errors or all fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These reports by management, including the CEO and CFO, on the effectiveness of the Company’s Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act), that are designed to ensure that material information relating to the Company is made known to the officers who certify the Company’s 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 the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’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.
Management, under the supervision and with the participation of the CEO and CFO, has evaluated the effectiveness,effectiveness, as of February 28, 2017,2019, of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of February 28, 2017.2019.
Management’sManagement’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed under supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2017,2018, of the Company’s internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its publication Internal Control-Integrated Framework (2013). Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of February 28, 2017.2019.
Changes in Internal Control over Financial Reporting —There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended February 28, 20172019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to the Company’sCompany’s equity compensation plansplan, as of February 28, 2017,2019, which consists solely of the Company’s 2007 Equity Incentive Plan.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) | ||||||||
(a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 123,658 |
n/a | 332,589 | ||||||||
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- | ||||||||
Total | 123,658 | n/a | 332,589 |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (2) |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | 25,002 |
n/a | 327,790 |
Equity compensation plans not approved by security holders |
-0- |
-0- |
-0- |
Total | 25,002 | n/a | 327,790 |
(1) Awards outstanding under the 2007 Equity Incentive Plan as of February 28, 20172019 consist of 123,65825,002 unvested restricted stock units. The weighted-average exercise price is calculated solely with respect to the outstanding stock options.
(2)(2) Represents shares remaining available under the Company’s 2007 Equity Incentive Plan. Shares available for future issuances under the 2007 Equity Incentive Plan may be issued in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and performance units, and other stock- and cash-based awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 20172019 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.2019.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | The following documents are filed as part of this Annual Report: |
1. |
|
Page | |
| 33-34 |
Consolidated Statements of Income | 35 |
Consolidated Balance Sheets | 36 |
Consolidated Statements of Changes in | 37 |
Consolidated Statements of Cash Flows | 38 |
Notes to Consolidated Financial Statements | 39 |
2. | Financial Statement Schedule |
2. Financial Statement Schedule
SCHEDULE II - Valuation and Qualifying Accounts
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |||||||||||||
Year Ended February 28, 2017 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 137,316 | 271,694 | 536,093 | ||||||||||||
Year Ended February 29, 2016 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 729,060 | 171,000 | 229,589 | 670,471 | ||||||||||||
Year Ended February 28, 2015 | ||||||||||||||||
Valuation Allowance for Accounts and Notes Receivable | 600,930 | 214,600 | 86,470 | 729,060 |
Balance at Beginning of Period | Additions Charged to Costs & Exp. |
Deductions |
Balance at End of Period | |
Year Ended February 28, 2019 | ||||
Valuation Allowance for Accounts and Notes Receivable | 505,972 | 143,214 | 159,684 | 489,502 |
Year Ended February 29, 2018 | ||||
Valuation Allowance for Accounts and Notes Receivable | 536,093 | 166,868 | 196,989 | 505,972 |
Year Ended February 28, 2017 | ||||
Valuation Allowance for Accounts and Notes Receivable | 670,471 | 138,125 | 272,503 | 536,093 |
3. |
|
The following exhibits listed in the Exhibit Index are filed with, or incorporated by reference, in this Annual Report.
Exhibit Number | Description | Incorporated by Reference to | |||
3.1 | Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.2 | Certificate of Designations of Series A Junior Participating Preferred Stock, Par Value $0.001 Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015 | |||
3.3 | Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation | Exhibit 3.3 to the Current Report on Form 8-K filed on March 2, 2015 | |||
4.1 | Description of Capital Stock | Filed herewith | |||
10.1** | Form of Employment Agreement (Officers) | Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.2 | Form of Franchise Agreement for Rocky Mountain Chocolate Factory | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2010 (File No. 000-14749) | |||
10.3** | 2007 Equity Incentive Plan (As Amended and Restated) | Exhibit 10.1 to the Current Report on Form 8-K filed on August 9, 2013 (File No. 000-14749) | |||
10.4** | Form of Indemnification Agreement (Directors) | Exhibit 10.7 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.5** | Form of Indemnification Agreement (Officers) | Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) | |||
10.6* | Master License Agreement, dated August 17, 2009, between Kahala Franchise Corp. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2009 (File No. 000-14749) | |||
10.7 | Revolving Line of Credit Note, dated September 13, 2017, between Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank, National Association | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2017 | |||
10.8 | Business Loan Agreement, dated August 2, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended August 31, 2013 (File No. 000-14749) | |||
10.9 | Business Loan Agreement, dated December 27, 2013, between Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 99.3 to the Current Report on Form 8-K filed on January 22, 2014 (File No. 000-14749) | |||
10.10* | Master License Agreement, dated April 27, 2012, between RMCF Asia, Ltd. and Rocky Mountain Chocolate Factory, Inc., a Colorado corporation | Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2012 (File No. 000-14749) |
Exhibit Number | Description | Incorporated by Reference to | |||
10.11 | Exhibit 99.4 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.12 | Exhibit 99.5 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | ||||
10.13 | Investor Rights Agreement, dated January 14, 2013 between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC | Exhibit 99.6 to the Current Report on Form 8-K filed January 14, 2013 (File No. 000-14749) | |||
10.14** | Filed herewith | ||||
10.15** | Filed herewith | ||||
21.1 | Filed herewith | ||||
23.1 | Filed herewith | ||||
23.2 | Filed herewith | ||||
31.1 | Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | |||
32.1 | Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
101.INS | XBRL Instance Document | Filed herewith | |||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | |||
* | Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. | ||||
** | Management contract or compensatory plan. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. | ||||
|
|
|
| ||
|
|
|
| ||
Date: May | /s/ Bryan J. Merryman |
|
| ||
|
| BRYAN J. MERRYMAN | |||
Chief | |||||
Financial Officer, Treasurer and
| |||||
Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| |||
| ||||
| ||||
Date: May | /s/ Bryan J. Merryman | |||
BRYAN J. MERRYMAN | ||||
Chief Executive Officer, Chief | ||||
Financial Officer, Treasurer and | ||||
Director | ||||
(Principal Executive, Financial | ||||
and Accounting Officer) | ||||
Date: May 29, 2019 | /s/ Brett P. Seabert | |||
Brett P. Seabert, Director | ||||
Date: May | ||||
/s/ Clyde Wm. Engle | ||||
CLYDE Wm. ENGLE, Director | ||||
Date: May | /s/ Scott G. Capdevielle | |||
SCOTT G. CAPDEVIELLE, Director |
EXHIBIT INDEX
|
|
| ||||||||||
|
|
| ||||||||||
Date: May 29, 2019 | ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
| ||||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
/s/ Franklin E. Crail | ||||||||||||
6361