UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 20172022
| ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________to________
Commission file number: 001-36865
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 47-1535633 |
(State or other jurisdiction of
| (I.R.S. Employer Identification No.) |
265 Turner Drive, Durango, CO 81303
(Address of principal executive offices, including zip code)
(970) 259-0554
(Registrant’sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | RMCF | Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | Smaller reporting company | ☒ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On December 31, 2017, the registrant had outstanding 5,903,436As of January 10, 2023, 6,250,297 shares of itsthe registrant’s common stock, $.001$0.001 par value per share.share, were outstanding.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. |
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Item 1.Financial Statements | 4 | |
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NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS |
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PART II. |
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Item 1.Legal Proceedings | 30 | |
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Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements involve various risks and uncertainties. The statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect," "anticipate," "should," "plan," "estimate," "potential," or similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future - including statements expressing general views about future operating results - are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date of this Quarterly Report. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause our Company’s actual results to differ materially from historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to: inflationary impacts, the impacts of the COVID-19 pandemic on our business, the outcome of legal proceedings, changes in the confectionery business environment, seasonality, consumer interest in our products, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding strategy, the success of international expansion efforts and the effect of government regulations. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see Part II, “Item 1A. Risk Factors” and the risks described elsewhere in this report and the section entitled “Risk Factors” contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 28, 2022 filed on May 27, 2022, as amended on June 28, 2022, as updated by this report.
Unless otherwise specified, the “Company,”“we,”“us” or “our” refers to Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its consolidated subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation).
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(unaudited)
Three Months Ended November 30, | Nine Months Ended November 30, | Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Sales | $ | 8,351,583 | $ | 8,250,611 | $ | 21,621,903 | $ | 21,591,420 | $ | 7,963,568 | $ | 7,012,429 | $ | 19,518,678 | $ | 18,786,654 | ||||||||||||||||
Franchise and royalty fees | 1,609,989 | 1,704,628 | 5,952,807 | 6,341,980 | 1,511,813 | 1,495,205 | 5,308,960 | 5,240,768 | ||||||||||||||||||||||||
Total revenues | 9,961,572 | 9,955,239 | 27,574,710 | 27,933,400 | ||||||||||||||||||||||||||||
Total Revenue | 9,475,381 | 8,507,634 | 24,827,638 | 24,027,422 | ||||||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||||||
Cost of sales | 6,040,004 | 5,544,155 | 14,907,440 | 14,373,548 | 5,869,566 | 5,200,749 | 14,672,015 | 13,819,428 | ||||||||||||||||||||||||
Franchise costs | 515,149 | 520,619 | 1,588,348 | 1,571,619 | 551,549 | 458,518 | 1,569,777 | 1,747,348 | ||||||||||||||||||||||||
Sales and marketing | 593,033 | 641,976 | 1,785,416 | 1,959,115 | 607,249 | 377,231 | 1,617,135 | 1,195,823 | ||||||||||||||||||||||||
General and administrative | 827,215 | 880,455 | 2,932,568 | 3,101,662 | 2,111,741 | 3,865,912 | 7,810,601 | 6,575,037 | ||||||||||||||||||||||||
Retail operating | 584,771 | 551,168 | 1,774,522 | 1,876,783 | 422,430 | 420,320 | 1,364,661 | 1,304,560 | ||||||||||||||||||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $134,350, $118,213, $387,849 and $324,412, respectively, included in cost of sales | 201,939 | 201,512 | 591,863 | 638,220 | ||||||||||||||||||||||||||||
Restructuring and acquisition-related charges | - | - | - | 60,000 | ||||||||||||||||||||||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $160,006, $155,170, $480,479 and $464,767, respectively, included in cost of sales | 127,887 | 143,612 | 382,843 | 440,205 | ||||||||||||||||||||||||||||
Total costs and expenses | 8,762,111 | 8,339,885 | 23,580,157 | 23,580,947 | 9,690,422 | 10,466,342 | 27,417,032 | 25,082,401 | ||||||||||||||||||||||||
Income from Operations | 1,199,461 | 1,615,354 | 3,994,553 | 4,352,453 | ||||||||||||||||||||||||||||
Loss from Operations | (215,041 | ) | (1,958,708 | ) | (2,589,394 | ) | (1,054,979 | ) | ||||||||||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||||||||||
Interest expense | (28,661 | ) | (40,842 | ) | (95,938 | ) | (132,884 | ) | ||||||||||||||||||||||||
Interest income | 6,396 | 9,543 | 19,827 | 32,540 | ||||||||||||||||||||||||||||
Other income (expense), net | (22,265 | ) | (31,299 | ) | (76,111 | ) | (100,344 | ) | ||||||||||||||||||||||||
Other Income | ||||||||||||||||||||||||||||||||
Interest Expense | (4,172 | ) | - | (4,172 | ) | - | ||||||||||||||||||||||||||
Interest Income | 7,234 | 2,195 | 13,732 | 9,348 | ||||||||||||||||||||||||||||
Gain on insurance recovery | - | - | - | 167,123 | ||||||||||||||||||||||||||||
Other income, net | 3,062 | 2,195 | 9,560 | 176,471 | ||||||||||||||||||||||||||||
Income Before Income Taxes | 1,177,196 | 1,584,055 | 3,918,442 | 4,252,109 | ||||||||||||||||||||||||||||
Loss Before Income Taxes | (211,979 | ) | (1,956,513 | ) | (2,579,834 | ) | (878,508 | ) | ||||||||||||||||||||||||
Income Tax Provision | 426,140 | 572,256 | 1,425,430 | 1,533,663 | - | (478,867 | ) | 1,388,272 | (177,600 | ) | ||||||||||||||||||||||
Consolidated Net Income | $ | 751,056 | $ | 1,011,799 | $ | 2,493,012 | $ | 2,718,446 | ||||||||||||||||||||||||
Consolidated Net Loss | $ | (211,979 | ) | $ | (1,477,646 | ) | $ | (3,968,106 | ) | $ | (700,908 | ) | ||||||||||||||||||||
Basic Earnings per Common Share | $ | .13 | $ | .17 | $ | .42 | $ | .47 | ||||||||||||||||||||||||
Diluted Earnings per Common Share | $ | .13 | $ | .17 | $ | .42 | $ | .45 | ||||||||||||||||||||||||
Basic Loss per Common Share | $ | (0.03 | ) | $ | (0.24 | ) | $ | (0.64 | ) | $ | (0.11 | ) | ||||||||||||||||||||
Diluted Loss per Common Share | $ | (0.03 | ) | $ | (0.24 | ) | $ | (0.64 | ) | $ | (0.11 | ) | ||||||||||||||||||||
Weighted Average Common Shares Outstanding - Basic | 5,903,436 | 5,874,366 | 5,878,086 | 5,839,603 | 6,227,002 | 6,141,507 | 6,219,362 | 6,127,884 | ||||||||||||||||||||||||
Dilutive Effect of Restricted Stock Units | 78,029 | 133,658 | 102,145 | 159,215 | ||||||||||||||||||||||||||||
Dilutive Effect of Employee Stock Awards | - | - | - | - | ||||||||||||||||||||||||||||
Weighted Average Common Shares Outstanding - Diluted | 5,981,465 | 6,008,024 | 5,980,231 | 5,998,818 | 6,227,002 | 6,141,507 | 6,219,362 | 6,127,884 |
The accompanying notes are an integral part of these consolidated financial statements.statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
November 30, | February 28, | November 30, | February 28, | |||||||||||||
2017 | 2017 | 2022 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 4,066,918 | $ | 5,779,195 | $ | 3,216,132 | $ | 7,587,374 | ||||||||
Accounts receivable, less allowance for doubtful accounts of $565,339 and $487,446, respectively | 4,991,026 | 3,855,823 | ||||||||||||||
Notes receivable, current portion, less current portion of the valuation allowance of $6,100 and $22,147, respectively | 133,642 | 235,612 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $837,568 and $870,735, respectively | 3,227,617 | 1,967,914 | ||||||||||||||
Notes receivable, current portion, less current portion of the valuation allowance of $34,704 and $47,228, respectively | 21,133 | 8,680 | ||||||||||||||
Refundable income taxes | 5,055 | 47,863 | 432,749 | 736,528 | ||||||||||||
Inventories, less reserve for slow moving inventory of $261,377 and $249,051, respectively | 5,687,275 | 4,975,779 | ||||||||||||||
Inventories | 6,195,929 | 4,354,202 | ||||||||||||||
Other | 282,840 | 256,548 | 451,929 | 343,268 | ||||||||||||
Total current assets | 15,166,756 | 15,150,820 | 13,545,489 | 14,997,966 | ||||||||||||
Property and Equipment, Net | 6,314,812 | 6,457,931 | 5,751,858 | 5,499,890 | ||||||||||||
Other Assets | ||||||||||||||||
Notes receivable, less current portion and valuation allowance of $42,647 and $26,500, respectively | 301,097 | 370,769 | ||||||||||||||
Notes receivable, less current portion and valuation allowance of $47,247 and $65,059, respectively | 95,686 | - | ||||||||||||||
Goodwill, net | 1,046,944 | 1,046,944 | 729,701 | 729,701 | ||||||||||||
Franchise rights, net | 4,536,370 | 4,826,172 | 1,800,769 | 2,078,066 | ||||||||||||
Intangible assets, net | 598,768 | 632,207 | 323,937 | 353,685 | ||||||||||||
Deferred income taxes | 1,303,621 | 858,874 | ||||||||||||||
Deferred income taxes, net | - | 1,388,271 | ||||||||||||||
Lease right of use asset | 2,547,035 | 1,771,034 | ||||||||||||||
Other | 64,849 | 74,639 | 48,115 | 62,148 | ||||||||||||
Total other assets | 7,851,649 | 7,809,605 | 5,545,243 | 6,382,905 | ||||||||||||
Total Assets | $ | 29,333,217 | $ | 29,418,356 | ||||||||||||
Total Assets | $ | 24,842,590 | $ | 26,880,761 | ||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Current maturities of long term debt | $ | 1,340,010 | $ | 1,302,501 | ||||||||||||
Accounts payable | 1,492,837 | 1,820,470 | $ | 3,501,983 | $ | 1,579,917 | ||||||||||
Accrued salaries and wages | 870,328 | 608,510 | 777,378 | 2,125,430 | ||||||||||||
Gift card liabilities | 2,938,588 | 2,921,585 | 546,475 | 574,883 | ||||||||||||
Other accrued expenses | 337,394 | 253,497 | 339,877 | 239,644 | ||||||||||||
Dividend payable | 708,412 | 702,525 | ||||||||||||||
Deferred income | 465,543 | 451,171 | ||||||||||||||
Contract liabilities | 198,357 | 195,961 | ||||||||||||||
Lease liability | 780,256 | 595,897 | ||||||||||||||
Total current liabilities | 8,153,112 | 8,060,259 | 6,144,326 | 5,311,732 | ||||||||||||
Long-Term Debt, Less Current Maturities | 1,519,310 | 2,529,240 | ||||||||||||||
Lease Liability, Less Current Portion | 1,801,795 | 1,218,256 | ||||||||||||||
Contract Liabilities, Less Current Portion | 993,119 | 950,847 | ||||||||||||||
Commitments and Contingencies | ||||||||||||||||
Stockholders’ Equity | ||||||||||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | ||||||||||||||||
Series A Junior Participating Preferred Stock, authorized 50,000 shares | - | - | ||||||||||||||
Undesignated series, authorized 200,000 shares | - | - | ||||||||||||||
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,903,436 and 5,854,372 shares issued and outstanding, respectively | 5,903 | 5,854 | ||||||||||||||
Stockholders' Equity | ||||||||||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | - | - | ||||||||||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 6,238,776 shares and 6,186,356 shares issued and outstanding, respectively | 6,239 | 6,186 | ||||||||||||||
Additional paid-in capital | 5,997,583 | 5,539,357 | 9,278,407 | 8,806,930 | ||||||||||||
Retained earnings | 13,657,309 | 13,283,646 | 6,618,704 | 10,586,810 | ||||||||||||
Total stockholders’ equity | 19,660,795 | 18,828,857 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 29,333,217 | $ | 29,418,356 | ||||||||||||
Total stockholders' equity | 15,903,350 | 19,399,926 | ||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 24,842,590 | $ | 26,880,761 |
The accompanying notes are an integral part of these consolidated financial statements.statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended | Nine Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2017 | 2016 | 2022 | 2021 | |||||||||||||
Cash Flows From Operating activities | ||||||||||||||||
Net income | $ | 2,493,012 | $ | 2,718,446 | ||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net loss | $ | (3,968,106 | ) | $ | (700,908 | ) | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Depreciation and amortization | 979,712 | 962,632 | 863,322 | 904,972 | ||||||||||||
Provision for slow moving inventory | 82,738 | 61,061 | ||||||||||||||
Provision for obsolete inventory | 166,255 | 103,422 | ||||||||||||||
Provision for loss on accounts and notes receivable | 88,200 | 109,200 | (119,000 | ) | - | |||||||||||
Loss on sale or disposal of property and equipment | 20,630 | 18,783 | ||||||||||||||
Gain on sale or disposal of property and equipment | (14,403 | ) | (153,129 | ) | ||||||||||||
Expense recorded for stock compensation | 458,275 | 447,581 | 471,530 | 709,210 | ||||||||||||
Deferred income | 23,769 | 14,710 | ||||||||||||||
Deferred income taxes | (444,747 | ) | 237,131 | 1,388,271 | (426,041 | ) | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (1,307,149 | ) | (650,708 | ) | (1,171,146 | ) | (985,887 | ) | ||||||||
Refundable income taxes | 42,808 | (284,927 | ) | 303,779 | 1,168 | |||||||||||
Inventories | (990,398 | ) | (771,281 | ) | (2,091,099 | ) | (936,483 | ) | ||||||||
Contract liabilities | 4,500 | 23,048 | ||||||||||||||
Other current assets | (26,641 | ) | (39,008 | ) | (109,860 | ) | (105,851 | ) | ||||||||
Accounts payable | (135,269 | ) | 156,150 | 1,976,869 | 1,079,671 | |||||||||||
Accrued liabilities | 362,718 | 17,281 | (1,284,330 | ) | 1,343,856 | |||||||||||
Net cash provided by operating activities | 1,647,658 | 2,997,051 | ||||||||||||||
Net cash (used in) provided by operating activities | (3,583,418 | ) | 857,048 | |||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Addition to notes receivable | (14,292 | ) | (131,243 | ) | (58,635 | ) | - | |||||||||
Proceeds received on notes receivable | 194,646 | 255,907 | 49,254 | 98,918 | ||||||||||||
Purchase of intangible assets | (8,508 | ) | (307,023 | ) | ||||||||||||
(Cost of) proceeds from sale or distribution of assets | (7,926 | ) | 33,845 | |||||||||||||
Proceeds from sale or disposal of assets | 22,289 | 1,751 | ||||||||||||||
Proceeds from insurance recovery | - | 206,336 | ||||||||||||||
Purchases of property and equipment | (446,935 | ) | (1,048,667 | ) | (810,732 | ) | (704,462 | ) | ||||||||
Decrease in other assets | 8,963 | 25,402 | ||||||||||||||
Decrease (Increase) in other assets | 10,000 | (10,000 | ) | |||||||||||||
Net cash used in investing activities | (274,052 | ) | (1,171,779 | ) | (787,824 | ) | (407,457 | ) | ||||||||
Cash Flows From Financing Activities | ||||||||||||||||
Payments on long-term debt | (972,421 | ) | (935,794 | ) | ||||||||||||
Repurchase of common stock | - | (351,584 | ) | |||||||||||||
Tax (expense) benefit of stock awards | - | (34,128 | ) | |||||||||||||
Dividends paid | (2,113,462 | ) | (2,102,261 | ) | ||||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Dividends paid and redemption of outstanding preferred stock purchase rights | - | (61,276 | ) | |||||||||||||
Net cash used in financing activities | (3,085,883 | ) | (3,423,767 | ) | - | (61,276 | ) | |||||||||
Net Decrease in Cash and Cash Equivalents | (1,712,277 | ) | (1,598,495 | ) | ||||||||||||
Net (Decrease) Increase in Cash and Cash Equivalents | (4,371,242 | ) | 388,315 | |||||||||||||
Cash and Cash Equivalents, Beginning of Period | 5,779,195 | 6,194,948 | 7,587,374 | 5,633,279 | ||||||||||||
Cash and Cash Equivalents, End of Period | $ | 4,066,918 | $ | 4,596,453 | $ | 3,216,132 | $ | 6,021,594 |
The accompanying notes are an integral part of these consolidated financial statements.statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIESSUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance as of August 31, 2021 | 6,124,288 | $ | 6,124 | $ | 8,241,286 | $ | 11,766,521 | $ | 20,013,931 | |||||||||||
Consolidated net (loss) income | (1,477,646 | ) | (1,477,646 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 52,409 | 53 | (53 | ) | - | |||||||||||||||
Equity compensation, restricted stock units | 439,586 | 439,586 | ||||||||||||||||||
Redemption of outstanding preferred stock purchase rights | (61,276 | ) | (61,276 | ) | ||||||||||||||||
Balance as of November 30, 2021 | 6,176,697 | $ | 6,177 | $ | 8,680,819 | $ | 10,227,599 | $ | 18,914,595 | |||||||||||
Balance as of February 28, 2021 | 6,074,293 | 6,074 | $ | 7,971,712 | $ | 10,989,783 | $ | 18,967,569 | ||||||||||||
Consolidated net (loss) income | (700,908 | ) | (700,908 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 102,404 | 103 | (103 | ) | - | |||||||||||||||
Equity compensation, restricted stock units | 709,210 | 709,210 | ||||||||||||||||||
Redemption of oustanding preferred stock purchase rights | (61,276 | ) | (61,276 | ) | ||||||||||||||||
Balance as of November 30, 2021 | 6,176,697 | $ | 6,177 | $ | 8,680,819 | $ | 10,227,599 | $ | 18,914,595 | |||||||||||
Balance as of August 31, 2022 | 6,223,234 | $ | 6,223 | $ | 9,087,530 | $ | 6,830,683 | $ | 15,924,436 | |||||||||||
Consolidated net (loss) income | (211,979 | ) | (211,979 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 15,542 | 16 | (16 | ) | - | |||||||||||||||
Equity compensation, restricted stock units | 190,893 | 190,893 | ||||||||||||||||||
Balance as of November 30, 2022 | 6,238,776 | $ | 6,239 | $ | 9,278,407 | $ | 6,618,704 | $ | 15,903,350 | |||||||||||
Balance as of February 28, 2022 | 6,186,356 | 6,186 | $ | 8,806,930 | $ | 10,586,810 | $ | 19,399,926 | ||||||||||||
Consolidated net (loss) income | (3,968,106 | ) | (3,968,106 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 52,420 | 53 | (53 | ) | - | |||||||||||||||
Equity compensation, restricted stock units | 471,530 | 471,530 | ||||||||||||||||||
Balance as of November 30, 2022 | 6,238,776 | $ | 6,239 | $ | 9,278,407 | $ | 6,618,704 | $ | 15,903,350 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1– NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc.Inc., a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc., a (a Colorado corporation (“RMCF”)corporation), Aspen Leaf Yogurt, LLC a Colorado limited liability company (“ALY”), U-Swirl International, Inc. (“U-Swirl”), a Nevada corporation, and its 46%-owned subsidiary, U-Swirl, Inc., a Nevada corporation (“SWRL”) of which, RMCF had financial control until February 29, 2016 (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
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.
In January 2013, through our wholly-owned subsidiaries, including 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 (46% interest as of November 30, 2017). At that time, U-Swirl was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which were being supported by SWRL. The SWRL Board of Directors is composed solely of Board members also serving on the Company’s Board of Directors.
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 by 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. As a result of certain defaults under the SWRL Loan Agreement, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U-Swirl on February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of SWRL as of February 29, 2016. As of February 29, 2016 and November 30, 2017, SWRL had no operating assets.ecommerce channels.
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“Let’s Yo!” and “Aspen Leaf Yogurt”.Yogurt.”
The Company’sCompany’s revenues are currently derived from three principal sources: (i) sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; (ii) the collection of initial franchise fees and royalties from franchisees’ sales of both confectionery productssales; and frozen yogurt; and(iii) sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the number of stores operatedoperating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés as of November 30, 2017:2022:
Sold, Not Yet Open |
Open |
Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 5 | 5 | |||||||||
Franchise stores – Domestic stores and kiosks | 9 | 188 | 197 | |||||||||
International license stores | - | 84 | 84 | |||||||||
Cold Stone Creamery – co-branded | 5 | 86 | 91 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores | - | 2 | 2 | |||||||||
Company-owned stores – co-branded | - | 3 | 3 | |||||||||
Franchise stores – Domestic stores | * | 104 | 104 | |||||||||
Franchise stores – Domestic – co-branded | * | 15 | 15 | |||||||||
International License Stores | 1 | 1 | 2 | |||||||||
Total | 15 | 488 | 503 |
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development, and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Sold, Not Yet Open | Open | Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 1 | 1 | |||||||||
Franchise stores - Domestic stores and kiosks | 7 | 158 | 165 | |||||||||
International license stores | 1 | 4 | 5 | |||||||||
Cold Stone Creamery - co-branded | 4 | 101 | 105 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores - co-branded | - | 3 | 3 | |||||||||
Franchise stores - Domestic stores | 1 | 50 | 51 | |||||||||
Franchise stores - Domestic - co-branded | - | 7 | 7 | |||||||||
International license stores | - | 1 | 1 | |||||||||
Total | 13 | 325 | 338 |
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“(“GAAP”) for interim financial reporting and Securities and Exchange Commission (the “SEC”) regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods presented. The results of operations for the nine months ended November 30, 2017 2022, are not necessarily indicative of the results to be expected for the entire fiscal year.
Theseunaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K10-K for the fiscal year ended February 28, 2017.2022, as amended by Amendment No.1 on Form 10-K/A filed on June 28, 2022. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Subsequent Events
On December 22, 2017, H.R.1 - An Act14, 2022 (the "Effective Date"), the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”), by and among the Company, Bradley L. Radoff, an individual (“Radoff”), Andrew T. Berger, an individual (“Berger”), AB Value Partners, LP (“AB Value Partners”), AB Value Management LLC (“AB Value Management” and, together with AB Value Partners, “AB Value” and, together with Radoff, “ABV-Radoff”), and Mary Bradley, an individual (each, a “Party” and together, the “Parties”), pertaining to, provideamong other things, the dismissal of all pending lawsuits between the Parties and the appointment of one director to the Company’s Board of Directors (the “Board”).
Pursuant to the Settlement Agreement, the Company and ABV-Radoff agreed to a “Standstill Period” commencing on the Effective Date and ending on the date that is forty-five (45) days prior to the beginning of the Company’s advance notice period for reconciliationthe nomination of directors at the Company’s 2025 annual meeting of stockholders. During the Standstill Period, ABV-Radoff agreed to comply with certain customary standstill provisions, including an agreement by each member of ABV-Radoff, subject to certain exceptions, to vote their shares of common stock as recommended by the Board on any matter to be voted on at any meetings of stockholders during the Standstill Period, including with respect to the election of directors, and an agreement that at no time will AB Value beneficially own 10.0% or more of the Company’s common stock outstanding at such time and at no time will Radoff own 12.5% or more of the Company’s common stock outstanding at such time.
The Company also agreed that the Board shall take such action to appoint a female director candidate with at least five years of fast-moving consumer goods franchise operational experience and three years of prior public company board experience who qualifies as an independent director under Rule 5605 of the Nasdaq Listing Rules (the “Applicable Criteria”) designated by ABV-Radoff and subject to the Board’s reasonable approval (such approval not to be unreasonably withheld) (the “New Director”), to serve as a member of the Board with a term expiring at the 2023 annual meeting of stockholders (the “2023 Annual Meeting”). The Company agreed to nominate such New Director for election to the Board at the 2023 Annual Meeting and the Company’s 2024 annual meeting of stockholders and to appoint the New Director to the Nominating and Corporate Governance Committee and Audit Committee of the Board, subject to the Board’s reasonable approval (such approval not to be unreasonably withheld) and the New Director’s qualifications to serve on such committees under the Nasdaq Listing Rules and the applicable U.S. Securities and Exchange Commission rules and regulations. In addition, subject to certain conditions and requirements described in the Agreement, ABV-Radoff will have certain customary replacement rights during the Standstill Period. Any replacement New Director identified by ABV-Radoff must satisfy the Applicable Criteria and be reasonably acceptable to the Nominating and Corporate Governance Committee of the Board and the Board (such acceptance not to be unreasonably withheld).
Furthermore, pursuant to titles IIthe Settlement Agreement, the Parties agreed to mutual releases and Vdischarges of all claims by AB Value, Radoff, Bradley and Berger against the Company and by the Company against AB Value, Radoff, Bradley and Berger, in each case up to the date of the concurrent resolutionAgreement, except in connection with the claims, counterclaims, causes of action, defenses, or other rights or obligations relating to the demand for books and records pursuant to Section 220 of the Delaware General Corporation Law previously delivered by Radoff to the Company dated November 9, 2022. The Parties agreed to dismiss (i) the lawsuit filed by AB Value on September 23, 2021, in the budget for fiscal year 2018, known asCourt of Chancery of the Tax CutsState of Delaware, against the Company and Jobs Act, (“TCJA”certain of its former and current directors captioned AB VALUE PARTNERS, LP, et al. v. Rocky Mountain Chocolate Factory, Inc., et al., C.A. No.2021-0819-LWW (Del. Ch.), and (ii) the lawsuit filed by the Company on September 28, 2022, in the Court of Chancery of the State of Delaware against ABV-Radoff, Berger and Mary Bradley captioned Rocky Mountain Chocolate Factory, Inc. v. Radoff, et al. C.A. No.2021-0819-LWW (Del. Ch.) was enacted into law.(collectively, the “Lawsuits”). The Settlement Agreement includes customary mutual non-disparagement provisions during the Standstill Period. The Company is currently reviewingagreed to reimburse ABV-Radoff for their fees and expenses in the componentspreparation and execution of the TCJASettlement Agreement and evaluating its impact, which could be material onthe related matters in the amount of one million and seventy-five thousand dollars ($1,075,000.00).
On December 16, 2022, the Parties filed a Stipulation of Dismissal with Prejudice for each of the Lawsuits with the Court of Chancery of the State of Delaware.
Management evaluated all activity of the Company’s fiscal year 2018 consolidated through the issue date of the financial statements and related disclosures, including a one-time, non-cash expense related to a decreaseconcluded that no subsequent events, except for those described above, have occurred that would require recognition or disclosure in the value of the Company’s net deferred tax assets.financial statements.
Recent Accounting Pronouncements
Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on our condensed consolidated financial statements.
In January 2017, June 2016, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In June Accounting Standards Update (“ASU”) 2016 the FASB issued ASU 2016-13,-13, Financial Instruments - Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments. ASU 2016-132016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-132016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments.instruments and affect the carrying value of accounts receivable. ASU 2016-132016-13 is effective for the Company's fiscal year beginning March 1, 2020 2023, and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-132016-13 will have on the Company's consolidated financial statements.
SUBSIDIARIES
NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended | ||||||||
November 30, | ||||||||
Cash paid (received) for: | 2022 | 2021 | ||||||
Interest | $ | 25,000 | $ | 5,202 | ||||
Income taxes | $ | (303,777 | ) | $ | 247,273 |
NOTE 3 –REVENUE FROM CONTRACTS WITH CUSTOMERS
In February 2016,The Company recognizes revenue from contracts with its customers in accordance with Accounting Standards Codification® (“ASC”) 606, which provides that revenues are recognized when control of promised goods or services is transferred to a customer in an amount that reflects the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lesseesconsideration expected to be received for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures alonggoods or services. The Company generally receives a fee associated with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendmentsFranchise Agreement or License Agreement (collectively “Customer Contracts”) at the beginning oftime that the earliest period presented using a modified retrospective approach. The Company expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption. The Company anticipates ASU 2016-02 willCustomer Contract is entered. These Customer Contracts have a material impact onterm of up to 20 years, however the consolidated balance sheet. The impactmajority of ASU 2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The Company is currently evaluating the impactCustomer Contracts have a term of ASU 2016-02 on the consolidated statements of income.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in Topic 605, Revenue Recognition. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early application of the guidance is permitted for annual reporting periods beginning after December 31, 2016. This guidance is applicable to the Company's fiscal year beginning March 1, 2018. The Company expects the adoption of the new guidance to change the timing of recognition of initial franchise fees, including master license and territory fees for our international business, and renewal fees. Currently, these fees are generally recognized upfront upon either opening of the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognized over10 years. During the term of the related agreement, which we expect will result in a material impact to revenue recognized for franchise fees, license fees and renewal fees; we are still inCustomer Contract, the process of quantifying the material impact. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuingobligated to evaluatemany performance obligations that the impactCompany has determined are not distinct. The resulting treatment of revenue from Customer Contracts is that the adoptionrevenue is recognized proportionately over the life of this new guidance will have on thesethe Customer Contract.
Initial Franchise Fees, License Fees, Transfer Fees, and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.Renewal Fees
The Company anticipates that contract fulfillment costs under ASC Topic 606 will have no material impact to the Company's consolidated statements of income and statements of cash flows. The Company's current policy is to recognize initial franchise fees when a franchise location opens or at the start of a new agreement term. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and will beare treated as a single performance obligation. As a result, initialInitial franchise fees received will most likely beare being recognized as the Company satisfies the performance obligation over the franchise term. The cumulative adjustment to be recorded as contract liabilities, upon adoption, is expected to be approximately 15% of the Company's consolidated total liabilities. No impact to the Company's consolidated statements of cash flows is expected as the initial fees will continue to be collected upon the signingterm of the franchise agreement, which is generally 10 years.
The following table summarizes contract liabilities as of November 30, 2022, and November 30, 2021:
Nine Months Ended | ||||||||
November 30: | ||||||||
2022 | 2021 | |||||||
Contract liabilities at the beginning of the year: | $ | 1,146,808 | $ | 1,119,646 | ||||
Revenue recognized | (180,000 | ) | (164,952 | ) | ||||
Contract fees received | 184,500 | 188,000 | ||||||
Deferred (amortized) gain on the financed sale of equipment | 40,168 | (21,928 | ) | |||||
Contract liabilities at the end of the period: | $ | 1,191,476 | $ | 1,120,766 |
At November 30, 2022, annual revenue expected to be recognized in the future, related to performance obligations that are not yet fully satisfied, are estimated to be the following:
FYE 23 | $ | 51,242 | ||
FYE 24 | 194,622 | |||
FYE 25 | 179,637 | |||
FYE 26 | 167,515 | |||
FYE 27 | 150,824 | |||
Thereafter | 447,636 | |||
Total | $ | 1,191,476 |
Gift Cards
The Company’s franchisees sell gift cards, which do not have expiration dates or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. ASC 606 requires the use of the “proportionate” method for recognizing breakage. Under the guidance of ASC 606, the Company recognizes breakage from gift cards when the gift card is redeemed by the customer or the beginningCompany determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based on Company-specific historical redemption patterns.
Factory Sales of Confectionary Items, Retail Sales, and Royalty and Marketing Fees
Confectionary items sold to the Company’s franchisees, others, and its Company-owned stores sales are recognized at the time of the underlying sale, based on the terms of the sale and when ownership of the inventory is transferred, and are presented net of sales taxes and discounts. Royalties and marketing fees from franchised or licensed locations, which are based on a new franchise term.percent of sales, are recognized at the time the sales occur.
NOTE 2 - EARNINGS PER SHARE4 – DISAGGREGATION OF REVENUE
Basic earnings per share is calculated usingThe following table presents disaggregated revenue by the weighted-average numbermethod of sharesrecognition and segment:
Three Months Ended November 30, 2022 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Franchise fees | $ | 48,965 | $ | - | $ | - | $ | 9,488 | $ | 58,453 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 7,284,940 | - | - | 7,284,940 | |||||||||||||||
Retail sales | - | - | 301,594 | 377,034 | 678,628 | |||||||||||||||
Royalty and marketing fees | 1,189,594 | - | - | 263,766 | 1,453,360 | |||||||||||||||
Total | $ | 1,238,559 | $ | 7,284,940 | $ | 301,594 | $ | 650,288 | $ | 9,475,381 |
Three Months Ended November 30, 2021 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Franchise fees | $ | 53,944 | $ | - | $ | - | $ | 7,755 | $ | 61,699 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 6,376,367 | - | - | 6,376,367 | |||||||||||||||
Retail sales | - | - | 275,530 | 360,532 | 636,062 | |||||||||||||||
Royalty and marketing fees | 1,196,192 | - | - | 237,314 | 1,433,506 | |||||||||||||||
Total | $ | 1,250,136 | $ | 6,376,367 | $ | 275,530 | $ | 605,601 | $ | 8,507,634 |
Nine Months Ended November 30, 2022 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Franchise fees | $ | 147,720 | $ | - | $ | - | $ | 32,280 | $ | 180,000 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 17,250,750 | - | - | 17,250,750 | |||||||||||||||
Retail sales | - | - | 815,197 | 1,452,731 | 2,267,928 | |||||||||||||||
Royalty and marketing fees | 4,070,980 | - | - | 1,057,980 | 5,128,960 | |||||||||||||||
Total | $ | 4,218,700 | $ | 17,250,750 | $ | 815,197 | $ | 2,542,991 | $ | 24,827,638 |
Nine Months Ended November 30, 2021 | ||||||||||||||||||||
Revenues recognized over time under ASC 606: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Franchise fees | $ | 136,907 | $ | - | $ | - | $ | 28,045 | $ | 164,952 |
Revenues recognized at a point in time: | ||||||||||||||||||||
Franchising | Manufacturing | Retail | U-Swirl | Total | ||||||||||||||||
Factory sales | - | 16,578,535 | - | - | 16,578,535 | |||||||||||||||
Retail sales | - | - | 829,542 | 1,378,577 | 2,208,119 | |||||||||||||||
Royalty and marketing fees | 4,147,951 | - | - | 927,865 | 5,075,816 | |||||||||||||||
Total | $ | 4,284,858 | $ | 16,578,535 | $ | 829,542 | $ | 2,334,487 | $ | 24,027,422 |
NOTE 3 5– INVENTORIES
Inventories consist of the following:
November 30, 2017 | February 28, 2017 | |||||||
Ingredients and supplies | $ | 2,998,169 | $ | 3,021,220 | ||||
Finished candy | 2,880,531 | 2,137,609 | ||||||
U-Swirl food and packaging | 69,952 | 66,001 | ||||||
Reserve for slow moving inventory | (261,377 | ) | (249,051 | ) | ||||
Total inventories | $ | 5,687,275 | $ | 4,975,779 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2022 | February 28, 2022 | |||||||
Ingredients and supplies | $ | 3,600,464 | $ | 2,753,068 | ||||
Finished candy | 3,302,200 | 2,168,084 | ||||||
U-Swirl food and packaging | 44,950 | 56,319 | ||||||
Reserve for slow moving inventory | (751,685 | ) | (623,269 | ) | ||||
Total inventories | $ | 6,195,929 | $ | 4,354,202 |
NOTE 4 -6 – PROPERTY AND EQUIPMENT, NET
Property and equipment consistsconsist of the following:
November 30, 2017 | February 28, 2017 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 4,905,103 | 4,787,855 | ||||||
Machinery and equipment | 10,594,111 | 10,598,355 | ||||||
Furniture and fixtures | 1,067,788 | 1,047,319 | ||||||
Leasehold improvements | 1,568,759 | 1,531,112 | ||||||
Transportation equipment | 434,091 | 418,402 | ||||||
Asset Impairment | (47,891 | ) | (47,891 | ) | ||||
19,035,579 | 18,848,770 | |||||||
Less accumulated depreciation | (12,720,767 | ) | (12,390,839 | ) | ||||
Property and equipment, net | $ | 6,314,812 | $ | 6,457,931 |
November 30, 2022 | February 28, 2022 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 5,150,355 | 5,148,854 | ||||||
Machinery and equipment | 10,647,391 | 10,207,182 | ||||||
Furniture and fixtures | 766,354 | 787,921 | ||||||
Leasehold improvements | 950,242 | 985,914 | ||||||
Transportation equipment | 445,489 | 479,701 | ||||||
18,473,449 | 18,123,190 | |||||||
Less accumulated depreciation | (12,721,591 | ) | (12,623,300 | ) | ||||
Property and equipment, net | $ | 5,751,858 | $ | 5,499,890 |
Depreciation expense related to property and equipment totaled $185,545 and $556,277 during the three and nine months ended November 30, 2022, compared to $177,909 and $541,887 during the three and nine months ended November 30, 2021, respectively.
NOTE 5 - STOCKHOLDERS’ EQUITY7 – GOODWILL AND INTANGIBLE ASSETS
Cash DividendGoodwill and intangible assets consist of the following:
November 30, 2022 | February 28, 2022 | |||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||
Store design | 10 | $ | 394,826 | $ | 254,588 | $ | 394,826 | $ | 240,409 | |||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | |||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | |||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 556,339 | 372,640 | 556,339 | 357,071 | |||||||||||||||
Franchise rights | 20 | 5,979,637 | 4,178,868 | 5,979,637 | 3,901,571 | |||||||||||||||||
Total | 7,482,605 | 5,357,899 | 7,482,605 | 5,050,854 | ||||||||||||||||||
Goodwill and intangible assets not subject to amortization | ||||||||||||||||||||||
Franchising segment- | ||||||||||||||||||||||
Company stores goodwill | $ | 515,065 | $ | 515,065 | ||||||||||||||||||
Franchising goodwill | 97,318 | 97,318 | ||||||||||||||||||||
Manufacturing segment-goodwill | 97,318 | 97,318 | ||||||||||||||||||||
Trademark | 20,000 | 20,000 | ||||||||||||||||||||
Total | 729,701 | 729,701 | ||||||||||||||||||||
Total Goodwill and Intangible Assets | $ | 8,212,306 | $ | 5,357,899 | $ | 8,212,306 | $ | 5,050,854 |
Amortization expense related to intangible assets totaled $102,348 and $307,045 during the three and nine months ended November 30, 2022, compared to $120,873 and $363,085 during the three and nine months ended November 30, 2021, respectively.
At November 30, 2022, the annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:
FYE 23 | $ | 102,348 | ||
FYE 24 | 346,672 | |||
FYE 25 | 294,427 | |||
FYE 26 | 251,342 | |||
FYE 27 | 215,382 | |||
Thereafter | 914,535 | |||
Total | $ | 2,124,706 |
NOTE 8 – LINE OF CREDIT
Revolving Credit Line
The Company paidhas a quarterly cash dividend$5.0 million credit line (subject to certain borrowing base limitations) for general corporate and working capital purposes, of $0.12 per sharewhich $5.0 million was available for borrowing and no amount was outstanding as of per shareNovember 30, 2022. The credit line is secured by substantially all of common stockthe Company’s assets, except retail store assets. Interest on March 10, 2017borrowings is at the Secured Overnight Financing Rate plus 2.37% (6.19% at November 30, 2022). Additionally, the line of credit is subject to stockholdersvarious financial ratios and leverage covenants. At November 30, 2022, the Company was compliant with all covenants.
NOTE 9 – STOCKHOLDERS’ EQUITY
Future declaration of dividends will depend on, among other things, the Company's results of operations, capital requirements, financial condition and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long term interest of the Company’s stockholders.Warrants
Stock Repurchases
On July 15, 2014,In consideration of an Exclusive Supplier Operating Agreement, dated December 20, 2019 (“Exclusive Supplier Agreement”), by and between the Company publicly announced a plan to repurchase up to $3.0 millionand Edible Arrangements, and the performance of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, specific obligations therein, on December 20, 2019, the Company announcedissued a planCommon Stock Purchase Warrant, dated December 20, 2019 (the “Warrant”), to purchase up to an additional $2,058,000960,677 shares of itsthe Company’s common stock (the “Warrant Shares”) at an exercise price of $8.76 per share. The Warrant Shares vest in annual tranches in varying amounts following each contract year under the repurchase plan,exclusive supplier agreement, subject to, and only upon, the achievement of certain revenue thresholds on May 21, 2015,an annual or cumulative five-year basis in connection with performance under the exclusive supplier agreement. The Warrant expires six months after the final and conclusive determination of revenue thresholds for the fifth contract year and the cumulative revenue determination in accordance with the terms of the Warrant. As of November 30, 2022, no warrants have vested and subsequent to the termination by the Company announced a further increase toof the repurchase plan by authorizing Exclusive Supplier Agreement on November 1, 2022, the purchase of up to an additional $2,090,000 of its common stockCompany has no remaining material obligations under the repurchase plan. The Company did not repurchase any shares of common stock under the repurchase plan during the three and nine months ended November 30, 2017. As of November 30, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
Stock-Based Compensation
At November 30, 2017, the Company had stock-based compensation plans for employees and non-employee directors that authorized the granting of stock awards, including stock options and restricted stock units.Warrant.
The Company determined that the grant date fair value of the warrants was de minimis and did not record any amount in consideration of the warrants. The Company utilized a Monte Carlo model to determine the grant date fair value.
Stock-Based Compensation
Under the Company’s 2007 Equity Incentive Plan (as amended and restated) (the “2007 Plan”), the Company may authorize and grant stock awards to employees, non-employee directors, and certain other eligible participants, including stock options, restricted stock, and restricted stock units.
The following table summarizes restricted stock unit activity during the nine months ended November 30, 2022, and 2021:
Nine Months Ended | ||||||||
November 30, | ||||||||
2022 | 2021 | |||||||
Outstanding non-vested restricted stock units as of February 28: | 105,978 | 209,450 | ||||||
Granted | 94,892 | 26,058 | ||||||
Vested | (52,421 | ) | (117,470 | ) | ||||
Cancelled/forfeited | (1,232 | ) | (2,400 | ) | ||||
Outstanding non-vested restricted stock units as of November 30: | 147,217 | 115,638 | ||||||
Weighted average grant date fair value | $ | 5.28 | $ | 9.23 | ||||
Weighted average remaining vesting period (in years) | 2.05 | 2.40 |
The following table summarizes stock option activity during the nine months ended November 30, 2022, and 2021:
Nine Months Ended | ||||||||
November 30, | ||||||||
2022 | 2021 | |||||||
Outstanding stock options as of February 28: | - | - | ||||||
Granted | 36,144 | - | ||||||
Exercised | - | - | ||||||
Cancelled/forfeited | - | - | ||||||
Outstanding stock options as of November 30: | 36,144 | - | ||||||
Weighted average exercise price | 6.49 | n/a | ||||||
Weighted average remaining contractual term (in years) | 9.51 | n/a |
The Company did not issue any unrestricted shares of stock to non-employee directors during the three and nine months ended November 30, 2022, compared to 26,058 restricted shares issued during the three months ended November 30, 2021, and 9,000 unrestricted shares during the nine months ended November 30, 2021. In connection with these non-employee director stock issuances, the Company recognized $133,795$0 and $458,275$110,747 during the three and nine months ended November 30, 2022, respectively, compared to $55,373 of stock-based compensation expense during the three months ended November 30, 2021, and $101,983 during the nine months ended November 30, 2021.
During the nine months ended November 30, 2022, the Company issued 36,144 stock options and issued up to 94,892 performance-based restricted stock units subject to vesting based on the achievement of performance goals. These issuances were made to the Company’s new Chief Executive Officer and Chief Financial Officer as a part of the incentive compensation structure for Mr. Sarlls and Mr. Arroyo. The stock options were issued with an aggregate grant date fair value of $77,267 or $2.14 per share. The performance-based restricted stock units were issued with an aggregate grant date fair value of $298,582 or $6.29 per share, based upon a target issuance of 47,446 shares. The stock options granted vest with respect to one-third of the shares on the last day of the Company’s current fiscal year ending February 28, 2023, and vest as to remaining shares in equal quarterly increments on the last day of each quarter until the final vesting on February 28, 2025. The performance-based restricted stock units will vest following the end of the Company’s fiscal year ending February 2025 with respect to the target number of performance-based restricted stock units if the Company achieves an annualized total shareholder return of 12.5% during the performance period, subject to continued service through the end of the performance period. The Compensation Committee has the discretion to determine the number of performance-based restricted stock units between 0-200% of the target number that will vest based on the achievement of performance below or above the target performance goal.
The Company recognized $190,893 and $471,530 of stock-based compensation expense during the three- and nine-month periods ended November 30, 2022, respectively, compared to $621,997 and $845,011 during the three and nine month periods ended November 30, 2017, respectively, compared to $132,453 and $447,581 during the three and nine month periods ended November 30, 2016, 2021, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.
As of November 30, 2017, the Company does not have any stock options outstanding. The following table summarizes stock option activity during the nine months ended November 30, 2017 and 2016:
Nine Months Ended | ||||||||
November 30, | ||||||||
2017 | 2016 | |||||||
Outstanding stock options as of February 28 or 29: | - | 12,936 | ||||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Cancelled/forfeited | - | (12,936 | ) | |||||
Outstanding stock options as of November 30: | - | - | ||||||
Weighted average exercise price | n/a | n/a | ||||||
Weighted average remaining contractual term (in years) | n/a | n/a |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizesExcept as noted above, restricted stock unit activity during the nine months ended November 30, 2017 and 2016:
Nine Months Ended | ||||||||
November 30, | ||||||||
2017 | 2016 | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 123,658 | 181,742 | ||||||
Granted | - | - | ||||||
Vested | (44,064 | ) | (48,084 | ) | ||||
Cancelled/forfeited | (1,700 | ) | (10,000 | ) | ||||
Outstanding non-vested restricted stock units as of November 30: | 77,894 | 123,658 | ||||||
Weighted average grant date fair value | $ | 12.17 | $ | 12.22 | ||||
Weighted average remaining vesting period (in years) | 1.52 | 2.47 |
The Company did not issue any fully vested, unrestricted shares of stock to non-employee directors during the nine months ended November 30, 2017 compared to 2,000 shares issued during the nine months ended November 30, 2016. In connection with these non-employee director stock issuances, the Company recognized $0 and $20,420 of stock-based compensation expense during the nine months ended November 30, 2017 and 2016, respectively.
During the nine months ended November 30, 2017, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the nine months ended November 30, 2017.
During the three and nine month periods ended November 30, 2017, the Company recognized $133,795 and $399,175, respectively, of stock-based compensation expense related to non-vested, non-forfeited restricted stock unit grants. The restricted stock unit grantsunits generally vest between 17% and 20% annuallyin equal annual installments over a period of five to six years. During the nine-monthnine-month periods ended November 30, 2017 2022, and 2016, 44,0642021, 52,421 and 48,084117,470 restricted stock units vested and were issued as common stock, respectively. TotalThe total unrecognized stock-based compensation expense of non-vested, non-forfeited restricted stock units and stock options granted as of November 30, 2017 2022, was $758,217,$665,709, which is expected to be recognized over the weighted-average period of 1.52.05 years.
NOTE 6 10– SUPPLEMENTAL CASH FLOW INFORMATIONEARNINGS PER SHARE
Basic earnings per share is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through the settlement of restricted stock units. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.
The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include outstanding common shares issuable if their effect would be anti-dilutive. During the nine months ended November 30, 2022, 130,367 shares of issuable common stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. During the nine months ended November 30, 2021, 960,677 shares of common stock warrants and 160,951 shares of issuable common stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
Nine Months Ended | ||||||||
November 30, | ||||||||
| 2017 | 2016 | ||||||
Cash paid for: | ||||||||
Interest, net | $ | 76,291 | $ | 100,275 | ||||
Income taxes | 1,827,369 | 1,655,774 | ||||||
Non-Cash Operating Activities | ||||||||
Accrued Inventory | 334,853 | 202,669 | ||||||
Non-Cash Financing Activities | ||||||||
Dividend Payable | 708,412 | 702,525 | ||||||
Sale of assets and inventory to buyers for notes receivable: | ||||||||
Long-lived assets | $ | - | $ | 20,989 |
NOTE 11 – LEASING ARRANGEMENTS
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.
The Company acts as the primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing franchised locations are leased by the franchisee directly.
In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.
The Company also leases trucking equipment and warehouse space in support of its manufacturing operations. The expense associated with trucking and warehouse leases is included in the cost of sales on the consolidated statements of operations.
The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. During the nine months ended November 30, 2022, and 2021, lease expense recognized in the Consolidated Statements of Income was $636,202 and $582,344, respectively.
The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the life of its leases. This includes known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the sales performance of the location remains strong. Therefore, the Right of Use Asset and Lease Liability include an assumption on renewal options that have not yet been exercised by the Company and are not currently a future obligation. The Company has separated non-lease components from lease components in the recognition of the Asset and Liability except in instances where such costs were not practical to separate. To the extent that occupancy costs, such as site maintenance, are included in the Asset and Liability, the impact is immaterial. For franchised locations, the related occupancy costs including property taxes, insurance, and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee under non-store related leases such as storage facilities and trucking equipment. For leases where the implicit rate is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease. The weighted average discount rate used for operating leases was 3.4% as of November 30, 2022.
SUBSIDIARIES
As of November 30, 2022, the maturities of lease liabilities for the Company’s operating leases were as follows:
FYE 23 | $ | 216,848 | ||
FYE 24 | 760,952 | |||
FYE 25 | 611,988 | |||
FYE 26 | 514,346 | |||
FYE 27 | 242,558 | |||
Thereafter | 462,120 | |||
Total | $ | 2,808,812 | ||
Less: imputed interest | (226,761 | ) | ||
Present value of lease liabilities: | $ | 2,582,051 | ||
Weighted average lease term | 5.6 |
During the nine months ended November 30, 2022, the Company entered into leases for equipment used in the Company’s trucking operations. These leases resulted in the Company recognizing a total future lease liability of $1.4 million.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Contested Solicitation of Proxies
During the three and nine months ended November 30, 2022, the Company incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three and nine months ended November 30, 2022, the Company incurred approximately $764,000 and $2.9 million, respectively, of costs associated with the contested solicitation of proxies, compared with $800,000 and $1.7 million, respectively, of costs associated with a contested solicitation of proxies incurred in the three and nine months ended November 30, 2021. These costs are recognized as a general and administrative expense in the Consolidated Statement of Operations. The Company will realize material increased costs during the three months ending February 28, 2023 (the Company’s fourth quarter) associated with final expenses from the 2022 contested solicitation of proxies and the December 14, 2023 Settlement Agreement, as described above under “Subsequent Events.”
Employment Agreement Payments upon a Change in Control
We have entered into employment agreements with certain of our executives which contain, among other things, "change in control" severance provisions.
The employment agreement of Mr. Dudley generally provides that, if the Company or the executive terminates the executive's employment under circumstances constituting a "triggering termination," the executive will be entitled to receive, among other benefits, 2.99 times the sum of (i) the executive's annual salary using the highest annual base compensation rate in effect at any time during employment and (ii) the greater of (a) two times the bonus that would be payable to the executive for the bonus period in which the change in control occurred or (b) 25% of the amount described in clause (i). The employment agreement of Mr. Dudley also provided for a payment of $18,000, which represents the estimated cost to the executive of obtaining accident, health, dental, disability, and life insurance coverage for the 18-month period following the expiration of COBRA coverage.
A “change in control,” as used in the agreement for Mr. Dudley, generally means a change in the control of the Company following any number of events, but specifically, a proxy contest in which our Board of Directors prior to the transaction constitutes less than a majority of our Board of Directors after the transaction or the members of our Board of Directors during any consecutive two-year period who at the beginning of such period constituted the Board of Directors cease to be the majority of the Board of Directors at the conclusion of that period. We have determined that a change in control has taken place on October 6, 2021. A “triggering termination” generally occurs when an executive is terminated during a specified period preceding a change in control of us, or if the executive or the Company terminates the executive’s employment under circumstances constituting a triggering termination during a specified period after a change in control. A triggering termination may also include a voluntary termination under certain scenarios.
In connection with Mr. Dudley’s retirement, Mr. Dudley and the Company entered into a Separation Agreement and General Release (the “Separation Agreement”), dated September 30, 2022 (the “Effective Date”). Under the Separation Agreement, Mr. Dudley retired from the Company on the Effective Date and will be entitled, subject to the terms and conditions therein, to the following payments and separation benefits: (i) a cash separation payment amount in accordance with Mr. Dudley’s employment agreement; (ii) acceleration of vesting of Mr. Dudley’s 12,499 unvested restricted stock units as of the Effective Date; (iii) an additional cash severance payment of $70,000; and (iv) Mr. Dudley has agreed to provide consulting services to the Company through December 31, 2022, to the extent requested by the Company, for which he will receive a cash payment of $56,250. In addition, the Separation Agreement includes covenants related to cooperation, solicitation, and employment, as well as the customary release of claims and non-disparagement provisions in favor of the Company.
As a result of this Separation Agreement the Company incurred the following costs during the nine months ended November 30, 2022:
Accrued severance compensation: | $ | 928,938 | ||
Accelerated restricted stock unit compensation expense: | 95,156 | |||
Consulting Services: | 37,500 | |||
Total | $ | 1,061,594 |
Mr. Sarlls’ employment agreement provides for the following upon “change in control”: If Mr. Sarlls’ employment is involuntarily terminated without cause or if he resigns for good reason on or within 2 years following consummation of a change in control, the cash severance amount (15 months of base salary) which would otherwise be payable on the regular payroll schedule over a 15-month period following separation (if severance were due outside the change in control context) will be accelerated and paid in a lump sum promptly following separation. Mr. Sarlls’ agreement incorporates by reference the change in control definition set forth in Treasury Regulation Section 1.409A-3(i)(5).
Mr. Arroyo’s employment agreement provides for the following upon “change in control”: If Mr. Arroyo’s employment is involuntarily terminated without cause or if he resigns for good reason on or within 2 years following consummation of a change in control, the cash severance amount (9 months of base salary) which would otherwise be payable on the regular payroll schedule over a 9-month period following separation (if severance were due outside the change in control context) will be accelerated and paid in a lump sum promptly following separation. Mr. Arroyo’s agreement incorporates by reference the change in control definition set forth in Treasury Regulation Section 1.409A-3(i)(5).
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 November 30, 2022, the Company was contracted for approximately $36,000 of raw materials under such agreements. The Company has designated these contracts as normal under the normal purchase and sale exception under the accounting standards for derivatives. These contracts are not entered into for speculative purposes.
NOTE 7 -13 – OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: 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 and Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K10-K for the fiscal year ended February 28, 2017. 2022, as amended by Amendment No.1 on Form 10-K/A filed on June 28, 2022. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expenseexpenses or benefit.benefits. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based.market-based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:
Three Months Ended November 30, 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||||||||||||||||||||||||||
Three Months Ended November 30, 2022 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 1,242,855 | $ | 7,948,925 | $ | 366,049 | $ | 842,554 | $ | - | $ | 10,400,383 | $ | 1,239,938 | $ | 7,629,146 | $ | 301,594 | $ | 650,288 | $ | - | $ | 9,820,966 | ||||||||||||||||||||||||
Intersegment revenues | (1,228 | ) | (437,583 | ) | - | - | - | (438,811 | ) | (1,379 | ) | (344,206 | ) | - | - | - | (345,585 | ) | ||||||||||||||||||||||||||||||
Revenue from external customers | 1,241,627 | 7,511,342 | 366,049 | 842,554 | - | 9,961,572 | 1,238,559 | 7,284,940 | 301,594 | 650,288 | - | 9,475,381 | ||||||||||||||||||||||||||||||||||||
Segment profit (loss) | 423,213 | 1,664,643 | (86,741 | ) | (14,587 | ) | (809,332 | ) | 1,177,196 | 337,225 | 1,534,725 | 45,035 | (15,822 | ) | (2,113,142 | ) | (211,979 | ) | ||||||||||||||||||||||||||||||
Total assets | 1,106,155 | 14,748,965 | 1,236,501 | 8,202,628 | 4,038,968 | 29,333,217 | 1,010,798 | 13,639,903 | 624,705 | 4,138,398 | 5,428,786 | 24,842,590 | ||||||||||||||||||||||||||||||||||||
Capital expenditures | 881 | 124,312 | 15,182 | 4,967 | 17,605 | 162,947 | 15,925 | 150,735 | 4,860 | - | 52,334 | 223,854 | ||||||||||||||||||||||||||||||||||||
Total depreciation & amortization | $ | 11,644 | $ | 138,618 | $ | 10,543 | $ | 143,304 | $ | 32,180 | $ | 336,289 | $ | 8,432 | $ | 161,515 | $ | 1,407 | $ | 98,895 | $ | 17,643 | $ | 287,892 |
Three Months Ended November 30, 2021 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 1,251,381 | $ | 6,685,416 | $ | 275,530 | $ | 605,601 | $ | - | $ | 8,817,928 | ||||||||||||
Intersegment revenues | (1,245 | ) | (309,049 | ) | - | - | - | (310,294 | ) | |||||||||||||||
Revenue from external customers | 1,250,136 | 6,376,367 | 275,530 | 605,601 | - | 8,507,634 | ||||||||||||||||||
Segment profit (loss) | 578,357 | 1,339,108 | 16,706 | (56,790 | ) | (3,833,894 | ) | (1,956,513 | ) | |||||||||||||||
Total assets | 1,590,914 | 10,988,056 | 651,372 | 4,824,466 | 9,243,856 | 27,298,664 | ||||||||||||||||||
Capital expenditures | 650 | 59,095 | 2,620 | 12,751 | 58,485 | 133,601 | ||||||||||||||||||
Total depreciation & amortization | $ | 9,060 | $ | 156,696 | $ | 1,397 | $ | 116,648 | $ | 14,981 | $ | 298,782 |
Nine Months Ended November 30, 2022 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 4,222,694 | $ | 18,143,863 | $ | 815,197 | $ | 2,542,991 | $ | - | $ | 25,724,745 | ||||||||||||
Intersegment revenues | (3,994 | ) | (893,113 | ) | - | - | - | (897,107 | ) | |||||||||||||||
Revenue from external customers | 4,218,700 | 17,250,750 | 815,197 | 2,542,991 | - | 24,827,638 | ||||||||||||||||||
Segment profit (loss) | 1,756,239 | 3,062,876 | 27,947 | 352,922 | (7,779,818 | ) | (2,579,834 | ) | ||||||||||||||||
Total assets | 1,010,798 | 13,639,903 | 624,705 | 4,138,398 | 5,428,786 | 24,842,590 | ||||||||||||||||||
Capital expenditures | 17,106 | 685,420 | 5,435 | 32,547 | 70,224 | 810,732 | ||||||||||||||||||
Total depreciation & amortization | $ | 25,871 | $ | 484,980 | $ | 4,231 | $ | 295,908 | $ | 52,332 | $ | 863,322 |
Nine Months Ended November 30, 2021 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 4,289,116 | $ | 17,434,641 | $ | 829,542 | $ | 2,334,487 | $ | - | $ | 24,887,786 | ||||||||||||
Intersegment revenues | (4,258 | ) | (856,106 | ) | - | - | - | (860,364 | ) | |||||||||||||||
Revenue from external customers | 4,284,858 | 16,578,535 | 829,542 | 2,334,487 | - | 24,027,422 | ||||||||||||||||||
Segment profit (loss) | 1,866,829 | 3,254,726 | 61,029 | 262,202 | (6,323,294 | ) | (878,508 | ) | ||||||||||||||||
Total assets | 1,590,914 | 10,988,056 | 651,372 | 4,824,466 | 9,243,856 | 27,298,664 | ||||||||||||||||||
Capital expenditures | 1,832 | 593,043 | 3,688 | 14,150 | 91,749 | 704,462 | ||||||||||||||||||
Total depreciation & amortization | $ | 27,732 | $ | 469,562 | $ | 4,194 | $ | 350,047 | $ | 53,437 | $ | 904,972 |
Three Months Ended November 30, 2016 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 1,202,655 | $ | 7,783,888 | $ | 320,011 | $ | 1,009,360 | $ | - | $ | 10,315,914 | ||||||||||||
Intersegment revenues | (1,248 | ) | (359,427 | ) | - | - | - | (360,675 | ) | |||||||||||||||
Revenue from external customers | 1,201,407 | 7,424,461 | 320,011 | 1,009,360 | - | 9,955,239 | ||||||||||||||||||
Segment profit (loss) | 328,866 | 2,049,231 | (46,253 | ) | 102,906 | (850,695 | ) | 1,584,055 | ||||||||||||||||
Total assets | 1,151,783 | 13,761,091 | 1,132,268 | 9,138,026 | 4,939,480 | 30,122,648 | ||||||||||||||||||
Capital expenditures | 4,414 | 78,725 | 13,677 | 5,246 | 14,615 | 116,677 | ||||||||||||||||||
Total depreciation & amortization | $ | 13,441 | $ | 122,381 | $ | 3,357 | $ | 147,284 | $ | 33,262 | $ | 319,725 |
NOTE 14 – INCOME TAXES
Nine Months Ended November 30, 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 4,342,013 | $ | 19,659,108 | $ | 1,213,039 | $ | 3,446,543 | $ | - | $ | 28,660,703 | ||||||||||||
Intersegment revenues | (3,643 | ) | (1,082,350 | ) | - | - | - | (1,085,993 | ) | |||||||||||||||
Revenue from external customers | 4,338,370 | 18,576,758 | 1,213,039 | 3,446,543 | - | 27,574,710 | ||||||||||||||||||
Segment profit (loss) | 1,853,604 | 4,361,150 | (90,674 | ) | 639,251 | (2,844,889 | ) | 3,918,442 | ||||||||||||||||
Total assets | 1,106,155 | 14,748,965 | 1,236,501 | 8,202,628 | 4,038,968 | 29,333,217 | ||||||||||||||||||
Capital expenditures | 6,517 | 342,910 | 31,518 | 10,791 | 55,199 | 446,935 | ||||||||||||||||||
Total depreciation & amortization | $ | 34,590 | $ | 400,624 | $ | 18,202 | $ | 429,582 | $ | 96,714 | $ | 979,712 |
Nine Months Ended November 30, 2016 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 4,257,842 | $ | 19,070,069 | $ | 1,081,103 | $ | 4,438,630 | $ | - | $ | 28,847,644 | ||||||||||||
Intersegment revenues | (4,000 | ) | (910,244 | ) | - | - | - | (914,244 | ) | |||||||||||||||
Revenue from external customers | 4,253,842 | 18,159,825 | 1,081,103 | 4,438,630 | - | 27,933,400 | ||||||||||||||||||
Segment profit (loss) | 1,680,304 | 4,511,527 | 16,743 | 1,053,529 | (3,009,994 | ) | 4,252,109 | |||||||||||||||||
Total assets | 1,151,783 | 13,761,091 | 1,132,268 | 9,138,026 | 4,939,480 | 30,122,648 | ||||||||||||||||||
Capital expenditures | 13,540 | 785,889 | 16,997 | 35,722 | 196,519 | 1,048,667 | ||||||||||||||||||
Total depreciation & amortization | $ | 41,266 | $ | 336,541 | $ | 10,061 | $ | 473,730 | $ | 101,034 | $ | 962,632 |
Revenue from one customerThe Company provides for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax basis of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the Company’s Manufacturing segment represented approximately $2.8 million,asset or 10.3 percent,liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the Company’s revenues from external customers during the nine months ended November 30, 2017, comparedutilization of a net operating loss or other carryforward prior to $2.1 million, or 7.5 percent of the Company’s revenues from external customers during the nine months ended November 30, 2016.its expiration, is more likely than not.
SUBSIDIARIES
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following:
November 30, 2017 | February 28, 2017 | ||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 212,277 | $ | 220,778 | $ | 211,152 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 125,072 | 715,339 | 92,758 | ||||||||||||||
Franchise Rights | 20 | 5,979,637 | 1,443,267 | 5,971,129 | 1,144,957 | ||||||||||||||||
Total | 7,467,557 | 2,332,419 | 7,459,049 | 2,000,670 | |||||||||||||||||
Intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment | |||||||||||||||||||||
Company stores goodwill | 1,099,328 | 267,020 | 1,099,328 | 267,020 | |||||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Manufacturing segment-Goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Trademark | 20,000 | - | 20,000 | - | |||||||||||||||||
Total Goodwill | 1,709,328 | 662,384 | 1,709,328 | 662,384 | |||||||||||||||||
Total Intangible Assets | $ | 9,176,885 | $ | 2,994,803 | $ | 9,168,377 | $ | 2,663,054 |
Effective March 1, 2002, under Accounting Standards Codification Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
Amortization expense related to intangible assets totaled $332,100 and $316,529 during the nine months ended November 30, 2017 and 2016, respectively.
At November 30, 2017, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following:
2018 | $ | 113,833 | ||
2019 | 452,069 | |||
2020 | 438,912 | |||
2021 | 427,203 | |||
2022 | 404,022 | |||
Thereafter | 3,299,099 | |||
Total | $ | 5,135,138 |
NOTE 9 – RESTRUCTURING AND ACQUISITION RELATED CHARGES
Restructuring and acquisition charges consisted of lease settlement costs of $60,000 during the nine months ended November 30, 2016, relating to the closure of an ALY Company-owned location.
The Company did not record any restructuring charges in the three and nine months ended November 30, 2017.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – SALE OR DISTRIBUTION OF ASSETSRealization of the Company's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the appropriate tax jurisdictions, in future years, to obtain benefit from the reversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. A valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable based upon recent past financial performance, tax reporting positions, and expectations of future taxable income. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change.
During the three and nine months ended November 30, 2017, 2022, the Company acquired two franchise stores in satisfaction of certain receivables due by the franchisees to the Company. The Company subsequently sold one of the stores and is planning to operate the other storeincurred a significant loss before income taxes, primarily as a Company-owned store. Duringresult of substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. Management evaluated recent losses before income taxes and determined that it is no longer more likely than not that our deferred income taxes are fully realized. Because of this determination, the nine months ended Company reserved for approximately $2.0 million of deferred tax assets. As of November 30, 2016, 2022, the Company sold two Company-owned U-Swirl locations and financed the transfer ofhas a franchised Rocky Mountain Chocolate Factory location. Associated with these asset disposal activities, the Company recorded the following in the nine months ended November 30, 2017 and 2016:full valuation allowance against its deferred tax assets.
2017 | 2016 | |||||||
Notes receivable | $ | 56,610 | $ | 145,585 |
NOTE 11 – NOTE PAYABLE
The Company’s long-term debt is comprised
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” withinIn addition to historical information, the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. Thesefollowing discussion contains certain forward-looking statements involve various risks and uncertainties. The nature of our operations and the environment in which we operate subject us to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this Quarterly Report areinformation. See “Forward-Looking Statements” above for certain information concerning forward-looking statements. Many of the forward-looking statements contained in this Quarterly Report may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect," "anticipate," "should," "plan," "estimate," "potential," or similar expressions. Factors which could cause results to differ include, but are not limited to: changes in the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the ability to attract and retain qualified franchisees, the success of our franchised stores, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding strategy, the success of international expansion efforts and the effect of government regulations. Government regulations which we and our franchisees either are or may be subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see the “Risk Factors” contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 28, 2017. These forward-looking statements apply only as of the date of this Quarterly Report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, we undertake no obligation to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this Quarterly Report or those that might reflect the occurrence of unanticipated events.
Unless otherwise specified, the “Company,” “we,” “us” or “our” refers to Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its consolidated subsidiaries(including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”)).
Overview
We are an international franchisor, confectionery manufacturer, and retail operator. Founded in 1981, we are headquartered in Durango, Colorado, and manufacture an extensive line of premium chocolate candies and other confectionery products. Our subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates self-servesoft-serve frozen yogurt cafés. Our revenues and profitability are derived principally from our franchised/licenselicensed system of retail stores that feature chocolate, frozen yogurt, and other confectioneryconfectionary products. We also sell our candy in selected locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of November 30, 2017,2022, there were 5was one Company-owned, 86 Cold Stone Creamery co-branded101 licensee-owned and 272162 franchised Rocky Mountain Chocolate Factory stores operating in 3937 states, Canada, South Korea,Panama, and the Philippines. As of November 30, 2017,2022, U-Swirl operated 5three Company-owned cafés and 12058 franchised cafés located in 2921 states and Canada.Qatar. U-Swirl operates and franchises self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!,” and “Aspen Leaf Yogurt”.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”),Labor and Supply Chain
As a result of macroeconomic inflationary trends and disruptions to the global supply chain, we entered into two agreementshave experienced and expect to sell all of the assetscontinue experiencing higher raw material, labor, and freight costs. We have begun to see labor and logistics challenges, which we believe have contributed to lower factory, retail, and e-commerce sales of our ALY frozen yogurt stores, alongproducts due to the availability of material, labor, and freight. In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our manufacturing facility, or if we or our franchisees experience delays in stocking our products. For additional information, see “Part I. Item 1A. - Risk Factors - The Availability and Price of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our Control” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022.
Contested Solicitation of Proxies
During the three and nine months ended November 30, 2022, the Company incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our interest in2022 annual meeting of stockholders. During the self-serve frozen yogurt franchisesthree and retail units branded as “Yogurtini” which we also acquired in January 2013, to U-Swirl, Inc., a publicly traded company (OTCQB: SWRL) (“SWRL”), in exchange for a 60% controlling equity interest in SWRL (46% interest as ofnine months ended November 30, 2017). At that time, U-Swirl was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions,2022, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitionsincurred approximately $764,000 and $2.9 million, respectively, of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowingscontested solicitation of proxies, compared with $800,000 and $1.7 million of costs associated with a contested solicitation of proxies incurred in the three and nine months ended November 30, 2021. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations. Future costs associated with the stockholder’s contested solicitation of proxies, the related legal proceedings, and the settlement thereof, as described in Note 1 to the consolidated financial statements appearing in Item 1 of Part I of this quarterly report under the SWRL Loan Agreement were secured by allcaption “Subsequent Events” in this Form 10-Q may have a material impact on the result of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. Asfuture periods. Additionally, as a result of certain defaults, we issuedthe contested solicitation of proxies in the prior year and the resulting changes to the composition of the Company’s Board of Directors, the Company incurred $934,000 of severance costs during the nine months ended November 30, 2022, resulting from the retirement of Edward L. Dudley in September 2022.
Termination of Strategic Partnership with Edible Arrangements
On November 1, 2022, the Company sent a demand for paymentformal notice to Edible Arrangements, LLC (“Edible Arrangements”), terminating the Exclusive Supplier Operating Agreement, dated December 20, 2019 (“Exclusive Supplier Agreement”), by and between the Company and Edible Arrangements, and the Ecommerce Licensing Agreement, dated March 16, 2020 (“Licensing Agreement”), by and between the Company and Edible Arrangements. Subsequent to the termination of allthe Supplier Agreement and Licensing Agreement, the Company has no remaining material obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL LoanStrategic Alliance Agreement, dated as of December 20, 2019, by and as a result, we foreclosed on all of the outstanding stock of U-Swirl on February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl becoming a wholly-owned subsidiary ofamong the Company, as of February 29, 2016.Farids & Co. LLC and Edible Arrangements; the Common Stock Purchase Warrant, dated December 20, 2019, issued to Edible Arrangements; and the Indemnification Letter Agreement, dated March 16, 2020, by and between the Company and Edible Arrangements.
Results of Operations
Three Months Ended November 30, 20172022, Compared to the Three Months EndedNovember 30, 2021
Results Summary2016
Basic earningsloss per share decreased 23.5% from $.17a loss of $0.24 per share in the three months ended November 30, 20162021, to $.13a loss of $0.03 per share in the three months ended November 30, 2017.2022. Revenues were unchanged at approximately $10.0increased 11.4% from $8.5 million in the three months ended November 30, 2016 and 2017. Operating income decreased 25.7% from $1.62021, to $9.5 million in the three months ended November 30, 2016 to $1.22022. The loss from operations decreased from a loss of $2.0 million in the three months ended November 30, 2017.2021, to a loss from operations of $215,000 in the three months ended November 30, 2022. Net incomeloss decreased 25.8% from $1.0a net loss of $1.5 million in the three months ended November 30, 20162021, to $751,000a net loss of $212,000 in the three months ended November 30, 2017. The decrease in operating income and net income was primarily the result of higher cost of sales partially offset by lower operating costs.2022.
Revenues | Three Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory sales | $ | 7,511.3 | $ | 7,424.4 | $ | 86.9 | 1.2 | % | ||||||||
Retail sales | 840.2 | 826.2 | 14.0 | 1.7 | % | |||||||||||
Franchise fees | 150.9 | 86.4 | 64.5 | 74.7 | % | |||||||||||
Royalty and Marketing fees | 1,459.1 | 1,618.2 | ( 159.1 | ) | (9.8 | %) | ||||||||||
Total | $ | 9,961.5 | $ | 9,955.2 | $ | 6.3 | 0.1 | % |
Revenues
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory sales | $ | 7,284.9 | $ | 6,376.4 | $ | 908.5 | 14.2 | % | ||||||||
Retail sales | 678.6 | 636.0 | 42.6 | 6.7 | % | |||||||||||
Franchise fees | 58.5 | 61.7 | (3.2 | ) | (5.2 | )% | ||||||||||
Royalty and marketing fees | 1,453.4 | 1,433.5 | 19.9 | 1.4 | % | |||||||||||
Total | $ | 9,475.4 | $ | 8,507.6 | $ | 967.8 | 11.4 | % |
Factory Sales
The increase in factory sales for the three months ended November 30, 2017 versus2022, compared to the three months ended November 30, 20162021, was primarily due to a 15.5%13.0%, $661,000, increase in sales of product to our network of franchised and licensed retail stores and a 19.1%, $248,000, increase in shipments of product to customers outside our network of franchisefranchised retail locations. Thisstores. The increase was mostly offset by a 5.3% decrease in purchases bysales of product to our network of franchised and licensed retail locations. Same storestores was primarily the result of a higher sell price and higher same-store pounds purchased. Same-store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and licenselicensed locations decreased 8.7% inincreased 5.7% during the three months ended November 30, 2017, compared with the three months ended November 30, 2016.
Retail Sales
The increase in retail sales was primarily due to changes in retail units in operation resulting from the acquisition of a franchise location from a franchisee partially offset by the closure of an underperforming location. Same store sales at all Company-owned stores and cafés decreased 0.8% in the three months ended November 30, 20172022, when compared to the three months ended November 30, 2016.2021.
Retail Sales
Retail sales at Company-owned stores increased 6.7% during the three months ended November 30, 2022, compared to the three months ended November 30, 2021, as a result of an increase in Company-owned same store sales. Same store sales at all Company-owned locations increased 12.9% during the three months ended November 30, 2022, when compared to the three months ended November 30, 2021. This increase was partially offset by a decrease in the average number of Company-owned stores in operation resulting from the sale of a Company-owned location to a franchisee.
Royalties, Marketing Fees, and Franchise Fees
The decreaseincrease in royaltiesroyalty and marketing fees from the three months ended November 30, 20162021, to the three months ended November 30, 2017 resulted from a 14.5% decrease2022, was primarily due to an increase in same store sales at domestic Rocky Mountain Chocolate Factory locations and at U-Swirl Frozen Yogurt cafés. Same-store sales at domestic franchise units in operationRocky Mountain Chocolate Factory locations increased by 3.0% and lower same store sales. The average number of total domestic franchise stores in operation decreased from 365 in the three months ended November 30, 2016 to 312same-store sales at U-Swirl Frozen Yogurt cafés increased by 14.0% during the three months ended November 30, 2017. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at total franchise stores and cafés in operation decreased 4.3% during the three months ended November 30, 20172022, when compared to the three months ended November 30, 2016. 2021.
Franchise fees increased primarily as a result of an increase in domestic franchise openings duringfee revenue for the three months ended November 30, 20172022, compared to the three months ended November 30, 2016.2021, was relatively unchanged.
Costs and Expenses | Three Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Cost of sales – factory | $ | 5,703.4 | $ | 5,221.7 | $ | 481.7 | 9.2 | % | ||||||||
Cost of sales - retail | 336.6 | 322.5 | 14.1 | 4.4 | % | |||||||||||
Franchise costs | 515.1 | 520.6 | (5.5 | ) | (1.1 | %) | ||||||||||
Sales and marketing | 593.0 | 642.0 | ( 49.0 | ) | (7.6 | %) | ||||||||||
General and administrative | 827.2 | 880.5 | ( 53.3 | ) | (6.1 | %) | ||||||||||
Retail operating | 584.8 | 551.2 | 33.6 | 6.1 | % | |||||||||||
Total | $ | 8,560.1 | $ | 8,138.5 | $ | 421.6 | 5.2 | % |
Gross Margin | Three Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,807.9 | $ | 2,202.7 | $ | ( 394.8 | ) | (17.9 | %) | |||||||
Retail gross margin | 503.6 | 503.7 | (.1 | ) | (0.0 | %) | ||||||||||
Total | $ | 2,311.5 | $ | 2,706.4 | $ | ( 394.9 | ) | (14.6 | %) |
Gross Margin | Three Months Ended | |||||||||||||||
November 30, | % | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 24.1 | % | 29.7 | % | (5.6 | %) | (18.9 | %) | ||||||||
Retail gross margin | 59.9 | % | 61.0 | % | (1.1 | %) | (1.8 | %) | ||||||||
Total | 27.7 | % | 32.8 | % | (5.1 | %) | (15.5 | %) |
Costs and Expenses
Adjusted Gross Margin | Three Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,807.9 | $ | 2,202.7 | $ | ( 394.8 | ) | (17.9 | %) | |||||||
Plus: depreciation and amortization | 134.3 | 118.2 | 16.1 | 13.6 | % | |||||||||||
Factory adjusted gross margin | 1,942.2 | 2,320.9 | ( 378.7 | ) | (16.3 | %) | ||||||||||
Retail gross margin | 503.6 | 503.7 | ( .1 | ) | (0.0 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 2,445.8 | $ | 2,824.6 | $ | ( 378.8 | ) | (13.4 | %) | |||||||
Factory adjusted gross margin | 25.9 | % | 31.3 | % | (5.4 | %) | (17.3 | %) | ||||||||
Retail gross margin | 59.9 | % | 61.0 | % | (1.1 | %) | (1.8 | %) | ||||||||
Total Adjusted Gross Margin | 29.3 | % | 34.2 | % | (4.9 | %) | (14.3 | %) |
Cost of Sales
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 5,613.7 | $ | 4,960.9 | $ | 652.8 | 13.2 | % | ||||||||
Cost of sales - retail | 255.9 | 239.8 | 16.1 | 6.7 | % | |||||||||||
Franchise costs | 551.5 | 458.5 | 93.0 | 20.3 | % | |||||||||||
Sales and marketing | 607.2 | 377.2 | 230.0 | 61.0 | % | |||||||||||
General and administrative | 2,111.7 | 3,865.9 | (1,754.2 | ) | (45.4 | )% | ||||||||||
Retail operating | 422.4 | 420.3 | 2.1 | 0.5 | % | |||||||||||
Total | $ | 9,562.4 | $ | 10,322.6 | $ | (760.2 | ) | (7.4 | )% |
Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross profit | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Retail gross profit | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total | $ | 2,093.9 | $ | 1,811.7 | $ | 282.2 | 15.6 | % |
Three Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 22.9 | % | 22.2 | % | 0.7 | % | 3.2 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total | 26.3 | % | 25.8 | % | 0.5 | % | 1.9 | % |
Adjusted Gross Margin
Three Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,671.2 | $ | 1,415.5 | $ | 255.7 | 18.1 | % | ||||||||
Plus: depreciation and amortization | 160.0 | 155.2 | 4.8 | 3.1 | % | |||||||||||
Factory adjusted gross margin | 1,831.2 | 1,570.7 | 260.5 | 16.6 | % | |||||||||||
Retail gross margin | 422.7 | 396.2 | 26.5 | 6.7 | % | |||||||||||
Total Adjusted Gross Margin | $ | 2,253.9 | $ | 1,966.9 | $ | 287.0 | 14.6 | % | ||||||||
Factory adjusted gross margin | 25.1 | % | 24.6 | % | 0.5 | % | 2.0 | % | ||||||||
Retail gross margin | 62.3 | % | 62.3 | % | 0.0 | % | 0.0 | % | ||||||||
Total Adjusted Gross Margin | 28.3 | % | 28.0 | % | 0.3 | % | 1.1 | % |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin minusplus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin, and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider itthem in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margins decreased 560 basis pointsincreased to 22.9% in the three months ended November 30, 20172022, compared to 22.2% in the three months ended November 30, 2016.2021. This decreaseincrease was due primarily to an increase in prices partially offset by increased productionlabor and material costs and product mix shiftexpense associated with inventory obsolescence.
Retail gross margins were unchanged at 62.3% during the three months ended November 30, 2017 compared to the three months ended November 30, 2016. The decrease in Company-owned store margin is due primarily to a decrease in Company-owned café revenue resulting from the sale of yogurt2022, and the associated higher margins. This change is the result of a decrease in units in operation during the three months ended November 30, 2017 compared to the prior year.2021.
Franchise Costs
The decreaseincrease in franchise costs in the three months ended November 30, 2017 versus2022, compared to the three months ended November 30, 2016 is2021, was due primarily to loweran increase in franchise support costs, primarily the result of fewer unitsconvention and travel expenses in operation. This decrease was mostly offset by increased professional fees incurred during the three months ended November 30, 2017 compared with the three months ended November 30, 2016.2022. As a percentage of total royalty and marketing fees, and franchise fee revenue, franchise costs increased to 32.0%36.5% in the three months ended November 30, 20172022, from 30.5%30.7% in the three months ended November 30, 2016.2021. This increase as a percentage of royalty, marketing and franchise fees is primarily the result of higher costs.
Sales and Marketing
The decreaseincrease in sales and marketing costs for the three months ended November 30, 20172022, compared to the three months ended November 30, 2016 is2021, was primarily due to lower marketing-relatedan increase in equity compensation costs and lower marketing-related costscontract labor associated with U-Swirl franchise locations, the resultretirement of fewer unitsEdward Dudley, and an increase in operation. advertising costs.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 20172022, compared to the three months ended November 30, 20162021, is primarily due primarily to lower professional fees, the resultcosts associated with a stockholder’s contested solicitation of resolving legal proceedings, and lower compensation costs. Forproxies in connection with our 2022 annual meeting of stockholders. During the three months ended November 30, 2017,2022, the Company incurred approximately $66,000$764,000 of U-Swirl general and administrative costs were consolidated within our results,associated with the contested solicitation of proxies, compared with $86,000$2.7 million of costs associated with a contested solicitation of proxies and associated severance costs during the three months ended November 30, 2021. This decrease was partially offset by an increase in legal expenses and salaries and wages in the three months ended November 30, 2016.2022, compared with the three months ended November 30, 2021. As a percentage of total revenues, general and administrative expenses decreased to 8.3%22.3% in the three months ended November 30, 20172022, compared to 8.8%45.4% in the three months ended November 30, 2016.2021.
Retail Operating Expenses
Retail Operating Expenses
The increase in retail operating expenses forwere relatively unchanged during the three months ended November 30, 20172022, compared to the three months ended November 30, 2016 was due to changes in retail units in operation resulting from the acquisition of a franchise location partially offset by the closure of an underperforming location.2021. Retail operating expenses, as a percentage of retail sales, increaseddecreased from 66.7%66.1% in the three months ended November 30, 20162021, to 69.6%62.2% in the three months ended November 30, 2017.2022. This increasedecrease is primarily the result of a change in units in operation from the prior year.higher retail sales.
Depreciation and Amortization
Depreciation and amortization,, exclusive of depreciation and amortization included in cost of sales, was $202,000$128,000 in the three months ended November 30, 2017, unchanged2022, a decrease of 10.9% from $202,000 incurred$144,000 in the three months ended November 30, 2016.2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the consolidated financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 13.7% from $118,0003.1% to $160,000 in the three months ended November 30, 20162022, compared to $134,000$155,000 in the three months ended November 30, 2017. This increase was the result of an increase in production assets in service.2021.
Other Income (Expense)
Net interest expense income was $22,300$3,000 in the three months ended November 30, 20172022, compared to net interest expenseincome of $31,300$2,200 incurred in the three months ended November 30, 2016. This change was the result of less interest expense incurred on lower average outstanding promissory note balances.2021.
Income Tax Expense (Benefit)
Our effective income tax rate for During the three months ended November 30, 20172022, we did not incur any income tax benefit on a loss before income taxes of $212,000. This was 36.2%, compared to 36.1%the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the three months ended November 30, 2016. Beginning March 1, 20172021, was 24.5%. See Note 14 to the Company adopted ASU No. 2019-09, which requires recognitionfinancial statements for a description of excessincome taxes, deferred tax benefitsassets, and tax deficiencies in the income statement.associated reserves.
Beginning on March 1, 2016, the results
Nine Months Ended November 30, 2022, Compared to the net operating losses of U-Swirl when we acquired a 60% ownership interest of SWRL in January 2013 and when we foreclosed upon the stock of U-Swirl International, Inc. in February 2016.Nine Months Ended November 30, 2021
Nine MonthsResults Summary Ended November 30, 2017Compared to the Nine Months Ended November 30, 2016
Basic earnings per share decreased 10.6% from $.47 ina net loss of $0.11 per share for the nine months ended November 30, 2016 compared2021, to $.42 ina net loss of $0.64 per share for the nine months ended November 30, 2017.2022. Revenues decreased 1.3% to $27.6increased 3.3% from $24.0 million for the nine months ended November 30, 2017 compared2021, to $27.9$24.8 million infor the nine months ended November 30, 2016. Operating income decreased 8.2%2022. The loss from $4.4operations increased from a loss of $1.1 million infor the nine months ended November 30, 20162021, to $4.0a loss from operations of $2.6 million infor the nine months ended November 30, 2017.2022. Net income decreased 8.3%loss increased from $2.7 million ina net loss of $701,000 for the nine months ended November 30, 20162021, to $2.5a net loss of $4.0 million infor the nine months ended November 30, 2017. The decrease in operating income and net income was due primarily to a decrease in revenue and an increase in operating expenses.2022.
Revenues | Nine Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory sales | $ | 18,576.8 | $ | 18,159.8 | $ | 417.0 | 2.3 | % | ||||||||
Retail sales | 3,045.1 | 3,431.6 | ( 386.5 | ) | (11.3 | %) | ||||||||||
Franchise fees | 563.0 | 241.5 | 321.5 | 133.1 | % | |||||||||||
Royalty and marketing fees | 5,389.8 | 6,100.5 | ( 710.7 | ) | (11.6 | %) | ||||||||||
Total | $ | 27,574.7 | $ | 27,933.4 | $ | ( 358.7 | ) | (1.3 | %) |
Revenues
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory sales | $ | 17,250.8 | $ | 16,578.5 | $ | 672.3 | 4.1 | % | ||||||||
Retail sales | 2,267.9 | 2,208.1 | 59.8 | 2.7 | % | |||||||||||
Franchise fees | 180.0 | 165.0 | 15.0 | 9.1 | % | |||||||||||
Royalty and marketing fees | 5,128.9 | 5,075.8 | 53.1 | 1.0 | % | |||||||||||
Total | $ | 24,827.6 | $ | 24,027.4 | $ | 800.2 | 3.3 | % |
Factory Sales
The increase in factory sales for the nine months ended November 30, 2017 versus2022, compared to the nine months ended November 30, 20162021, was primarily due to an 18.8%8.0%, $1.1 million, increase in sales of product to our network of franchised and licensed retail stores partially offset by a 15.7%, $429,000, decrease in shipments of product to customers outside our network of franchised retail stores.
Retail Sales
Retail sales at Company-owned stores partially offset by a 3.4% decrease in shipments to our network of franchised and licensed stores. Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 4.0% inincreased 2.7% during the nine months ended November 30, 2017, compared with the nine months ended November 30, 2016.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of certain Company-owned locations and the closure of a certain underperforming Company-owned location, partially offset by the acquisition of a franchised location. Same store sales at all Company-owned stores and cafés decreased 3.9% in the nine months ended November 30, 20172022, compared to the nine months ended November 30, 2016.2021, primarily as a result of an increase in same-store sales at Company-owned locations. Same-store sales at all Company-owned locations increased 6.1% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021.
Royalties, Marketing Fees, and Franchise Fees
The decreaseslight increase in royaltiesroyalty and marketing fees for the nine months ended November 30, 20172022, compared to the nine months ended November 30, 2016 resulted from a 15.3% decrease2021, was primarily due to an increase in same-store sales at domestic franchise units in operation and lower same store sales. The average number of totalfrozen yogurt cafés. Same-store sales at all domestic franchise stores in operation decreased from 380 in the nine months ended November 30, 2016 to 322locations increased 3.8% during the nine months ended November 30, 2017. This decrease is the result of domestic store closures exceeding domestic store openings, primarily the result of franchise and license closures of U-Swirl franchise locations. Same store sales at total franchise stores and cafés in operation decreased 3.2% during the nine months ended November 30, 20172022, when compared to the nine months ended November 30, 2016. Franchise fee revenues increased as a result of an increase in international license fees recognized2021, with same-store sales at the Company’s domestic franchise frozen yogurt cafés increasing 19.2% during the nine months ended November 30, 20172022, compared to the nine months ended November 30, 2016.2021.
Costs and Expenses | Nine Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Cost of sales – factory | $ | 13,823.2 | $ | 13,196.9 | $ | 626.3 | 4.7 | % | ||||||||
Cost of sales - retail | 1,084.2 | 1,176.6 | ( 92.4 | ) | (7.9 | %) | ||||||||||
Franchise costs | 1,588.3 | 1,571.6 | 16.7 | 1.1 | % | |||||||||||
Sales and marketing | 1,785.4 | 1,959.1 | ( 173.7 | ) | (8.9 | %) | ||||||||||
General and administrative | 2,932.6 | 3,101.7 | ( 169.1 | ) | (5.5 | %) | ||||||||||
Retail operating | 1,774.5 | 1,876.8 | ( 102.3 | ) | (5.5 | %) | ||||||||||
Total | $ | 22,988.2 | $ | 22,882.7 | $ | 105.5 | 0.5 | % |
The increase in franchise fee revenue for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was the result of store closures and the acceleration of unrecognized franchise fee revenue, and more franchise agreements outstanding and subject to revenue recognition.
Gross margin | Nine Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,753.6 | $ | 4,962.9 | $ | ( 209.3 | ) | (4.2 | %) | |||||||
Retail gross margin | 1,960.9 | 2,255.0 | ( 294.1 | ) | (13.0 | %) | ||||||||||
Total | $ | 6,714.5 | $ | 7,217.9 | $ | ( 503.4 | ) | (7.0 | %) |
Gross Margin | Nine Months Ended | |||||||||||||||
November 30, | % | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 25.6 | % | 27.3 | % | (1.7 | %) | (6.2 | %) | ||||||||
Retail gross margin | 64.4 | % | 65.7 | % | (1.3 | %) | (2.0 | %) | ||||||||
Total | 31.1 | % | 33.4 | % | (2.3 | %) | (6.9 | %) |
Adjusted Gross Margin | Nine Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 4,753.6 | $ | 4,962.9 | $ | ( 209.3 | ) | (4.2 | %) | |||||||
Plus: depreciation and amortization | 387.8 | 324.4 | $ | 63.4 | 19.5 | % | ||||||||||
Factory adjusted gross margin | 5,141.4 | 5,287.3 | ( 145.9 | ) | (2.8 | %) | ||||||||||
Retail gross margin | 1,960.9 | 2,255.0 | ( 294.1 | ) | (13.0 | %) | ||||||||||
Total Adjusted Gross Margin | $ | 7,102.3 | $ | 7,542.3 | $ | ( 440.0 | ) | (5.8 | %) | |||||||
Factory adjusted gross margin | 27.7 | % | 29.1 | % | (1.4 | %) | (4.8 | %) | ||||||||
Retail gross margin | 64.4 | % | 65.7 | % | (1.3 | %) | (2.0 | %) | ||||||||
Total Adjusted Gross Margin | 32.8 | % | 34.9 | % | (2.1 | %) | (6.0 | %) |
Costs and Expenses
Cost of Sales
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Cost of sales - factory | $ | 13,823.2 | $ | 13,065.3 | $ | 757.9 | 5.8 | % | ||||||||
Cost of sales - retail | 848.8 | 754.1 | 94.7 | 12.6 | % | |||||||||||
Franchise costs | 1,569.8 | 1,747.4 | (177.6 | ) | (10.2 | )% | ||||||||||
Sales and marketing | 1,617.1 | 1,195.8 | 421.3 | 35.2 | % | |||||||||||
General and administrative | 7,810.6 | 6,575.0 | 1,235.6 | 18.8 | % | |||||||||||
Retail operating | 1,364.7 | 1,304.6 | 60.1 | 4.6 | % | |||||||||||
Total | $ | 27,034.2 | $ | 24,642.2 | $ | 2,392.0 | 9.7 | % |
Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross profit | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Retail gross profit | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total | $ | 4,846.7 | $ | 4,967.2 | $ | (120.5 | ) | (2.4 | )% |
Nine Months Ended | ||||||||||||||||
November 30, | % | % | ||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
Factory gross margin | 19.9 | % | 21.2 | % | (1.3 | )% | (6.2 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total | 24.8 | % | 26.4 | % | (1.6 | )% | (6.1 | )% |
Adjusted Gross Margin
Nine Months Ended | ||||||||||||||||
November 30, | $ | % | ||||||||||||||
($'s in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
Factory gross margin | $ | 3,427.6 | $ | 3,513.2 | $ | (85.6 | ) | (2.4 | )% | |||||||
Plus: depreciation and amortization | 480.5 | 464.8 | 15.7 | 3.4 | % | |||||||||||
Factory adjusted gross margin | 3,908.1 | 3,978.0 | (69.9 | ) | (1.8 | )% | ||||||||||
Retail gross margin | 1,419.1 | 1,454.0 | (34.9 | ) | (2.4 | )% | ||||||||||
Total Adjusted Gross Margin | $ | 5,327.2 | $ | 5,432.0 | $ | (104.8 | ) | (1.9 | )% | |||||||
Factory adjusted gross margin | 22.7 | % | 24.0 | % | (1.3 | )% | (5.6 | )% | ||||||||
Retail gross margin | 62.6 | % | 65.8 | % | (3.3 | )% | (5.0 | )% | ||||||||
Total Adjusted Gross Margin | 27.3 | % | 28.9 | % | (1.6 | )% | (5.6 | )% |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin minusplus depreciation and amortization expense. We believe adjusted gross margin, and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider itthem in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Costs and Expenses
Cost of Sales and Gross Margin
Factory gross margins decreased 170 basis points. This decrease was due primarily to increased production costs and product mix shift19.9% in the nine months ended November 30, 2022, compared to a gross margin of 21.2% during the nine months ended November 30, 2017 compared2021, due primarily to an increase in costs from wage and material inflation and the impacts of Employee Retention Credits recognized in the nine months ended November 30, 2016.2021, with no comparable credits in the nine months ended November 30, 2022. These cost increases were partially offset by an increase in product prices. The decreaseCompany recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits (“ERC”) in Company-owned store margin is due primarilythe nine months ended November 30, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to a decrease in Company-owned café revenue resultingretroactively benefit from the sale of yogurt and the associated higher margins. This change is the result of a change in units in operationERCs.
Retail gross margins decreased from 65.8% during the nine months ended November 30, 2017 compared2021, to 62.6% during the prior year.nine months ended November 30, 2022. The decrease in retail gross margins was primarily the result of an increase in the costs of raw materials.
FranchiseFranchise Costs
The increasedecrease in franchise costs in the nine months ended November 30, 2017 versus2022, compared to the nine months ended November 30, 2016 is2021, was due primarily to an increasea decrease in professional fees, the result of litigation with our licensee in Canada incurred during the nine months ended November 30, 2021, with no comparable legal and professional expenses.expense in the nine months ended November 30, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increaseddecreased to 26.7%29.6% in the nine months ended November 30, 20172022, from 24.8%33.3% in the nine months ended November 30, 2016.2021. This increasedecrease as a percentage of royalty, marketing, and franchise fees is primarily athe result of lower royalty and marketing revenues.franchise costs.
Sales and Marketing
The decreaseincrease in sales and marketing costs for the nine months ended November 30, 20172022, compared to the Ninenine months ended November 30, 2016 is due primarily2021, was due to lower marketing relatedan increase in equity compensation costs and lower marketing-related costscontract labor associated with U-Swirl franchise locations.the retirement of Edward Dudley, and an increase in advertising costs.
General and Administrative
The decreaseincrease in general and administrative costs for the nine months ended November 30, 20172022, compared to the nine months ended November 30, 2016 is2021, was due primarily to lower professional fees, the resultcosts associated with a stockholder’s contested solicitation of resolving legal proceedings, and lower compensation costs. Forproxies in connection with our 2022 annual meeting of stockholders. During the nine months ended November 30, 2017,2022, the Company incurred approximately $259,000$2.9 million of U-Swirl general and administrative costs were consolidated within our results,associated with the contested solicitation of proxies, compared with $347,000 in$1.7 million of costs associated with a contested solicitation of proxies during the nine months ended November 30, 2016.2021. The Company also incurred increased professional fees related to legal support for our Board of Directors and legal costs associated with compensation arrangements for our former Chief Executive Officer and Chief Financial Officer and legal and professional costs associated with the search for, and appointment of, a new Chief Executive Officer and a new Chief Financial Officer. Additionally, due to a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholders the Company had become contingently liable for certain change in control severance payments to Mr. Dudley if a triggering termination was to occur. As a result of Mr. Dudley’s retirement in September 2022, the Company incurred $934,000 of associated severance costs. As a percentage of total revenues, general and administrative expenses decreasedincreased to 10.6%31.5% in the nine months ended November 30, 20172022, compared to 11.1%27.4% in the nine months ended November 30, 2016.2021.
Retail Operating Expenses
The decreaseThe increase in retail operating expenses for the nine months ended November 30, 20172022, compared to the nine months ended November 30, 20162021, was due primarily to changesan increase in unitssalaries and wages, and utilities in operation, resulting from the sale of certainour Company-owned unitsstores and the closure of certain underperforming Company-owned units.cafés. Retail operating expenses, as a percentage of retail sales, increased from 54.7%59.1% in the nine months ended November 30, 20162021, to 58.3%60.2% in the nine months ended November 30, 2017.2022. This increase is primarily the result of a change in units in operation from the prior year.higher retail costs.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $592,000$383,000 in the nine months ended November 30, 2017,2022, a decrease of 7.3%13.0% from $638,000 incurred$440,000 in the nine months ended November 30, 2016.2021. This decrease was the result of fewer Company-owned storelower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the financial statements for a summary of the annual amortization of intangible assets in service.based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 19.6%3.4% from $324,000$465,000 in the nine months ended November 30, 20162021, to $388,000$480,000 in the nine months ended November 30, 2017.2022. This increase was the result of an increaseinvestment in production assets in service.equipment.
Restructuring and acquisition related chargesOther Income
There were no restructuring and acquisition related chargesOther income was $9,600 in the nine months ended November 30, 2022, compared to other income of $176,500 during the nine months ended November 30, 2017 a decrease from $60,0002021. Net interest income was $9,600 in the nine months ended November 30, 2022, compared to interest income of $9,300 during the nine months ended November 30, 2016. 2021.
The decrease is primarily the resultCompany recognized a gain on insurance recovery of lease settlement costs related to the closure of an ALY company-owned location incurred$167,100 during the nine months ended November 30, 20162021, compared with no comparable expense incurredsimilar amounts recognized during the nine months ended November 30, 2017.2022.
OtherIncome (Expense)Tax Expense (Benefit)
Net interest expense was $76,100 inDuring the nine months ended November 30, 2017, a decrease of 24.1% compared to net interest2022, we incurred income tax expense of $100,300 in the nine months ended November 30, 2016.$1.4 million on a loss before income taxes of $2.6 million. This changeexpense was the result of less interest expense incurredrecording a full reserve on lower average outstanding promissory note balances.
Income Tax Expense
our deferred income tax asset. Our effective income tax rate for the nine months ended November 30, 2017 was 36.4%, compared to 36.1% for the nine months ended November 30, 2016. The increase2021, was 20.2%. See Note 14 to the financial statements for a description of 0.3% was primarily due to an increase in income taxes, deferred tax expenseassets, and associated with the vesting of restricted stock units. Beginning March 1, 2017 the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement.reserves.
Beginning on March 1, 2016, the results
Liquidity and Capital Resources
As of November 30, 2017,2022, working capital was $7.0$7.4 million, compared with $7.1to $9.7 million as of February 28, 2017,2022, a decrease of $100,000.$2.3 million. The decrease in working capital was primarily due to the paymentcosts associated with a stockholder’s contested solicitation of dividends and payments on long-term debt partially offset by positive operating results.proxies in connection with our 2022 annual meeting of stockholders.
Cash and cash equivalent balances decreased $1.7approximately $4.4 million from $5.8to $3.2 million as of November 30, 2022, compared to $7.6 million as of February 28, 20172022. This decrease in cash and cash equivalents was primarily due to $4.1funding of a rabbi trust established for severance payments to our former Chief Executive Officer and the resulting $1.3 million asdecrease in cash balances and an increase in inventory of November 30, 2017 as a result of cash flow used by financing activities, including repayment of indebtedness and payment of dividends.$2.1 million. Our current ratio was 1.92.2 to 1 at November 30, 2017 and2022, compared to 2.8 to 1 at February 28, 2017.2022. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
ForDuring the nine months ended November 30, 2017,2022, we had a net incomeloss of $2,493,012.$4.0 million. Operating activities providedused cash of $1,647,658,$3,583,418, with the principal adjustment to reconcile the net income to net cash providedused by operating activities being deferred income taxes of $1,388,271, depreciation and amortization of $979,712, stock-based$863,322, an increase in accounts payable of $1,976,869 and expense recorded for stock compensation expense of $458,275 and$471,530, mostly offset by an increase in inventory of $2,091,099, a decrease in accrued liabilities of $362,718 more than offset by an increase to inventory of $990,398, an increase in deferred income taxes of $444,747$1,284,330 and an increase in accounts receivable of $1,307,149.$1,171,146. During the comparable 20162021 period, we had a net incomeloss of $2,718,446,$700,908, and operating activities provided cash of $2,997,051.$857,048. The principal adjustment to reconcile the net income to net cash providedused by operating activities was depreciation and amortizationbeing an increase in accrued liabilities of $962,632, stock-based compensation expense of $447,581, and$1,343,856, an increase in accounts payable of $156,150 mostly$1,079,671, depreciation and amortization of $904,972, and expense related to stock-based compensation of $709,210, partially offset by an increase to inventory of $771,281 and an increase in accounts receivable of $650,708.$985,887 and an increase in inventory of $936,483.
ForDuring the nine months ended November 30, 2017,2022, investing activities used cash of $274,052,$787,824, primarily due to the purchases of property and equipment of $446,935 partially offset by proceeds on notes receivable of $194,646.$810,732. In comparison, investing activities used cash of $1,171,779$407,457 during the nine months ended November 30, 20162021, primarily due to the purchases of property and equipment of $1,048,667.$704,462 partially offset by proceeds from insurance recovery of $206,336.
Financing activities used cash of $3,085,883 forDuring the nine months ended November 30, 2017 and2022, there were no cash flows from financing activities. In comparison, financing activities used cash of $3,423,767 during the prior year period. This change was primarily due to a decrease$61,276 in cash used to repurchase common stock during the nine months ended November 30, 2017 compared2021, due to the nine months ended November 30, 2016.
We have a $5.0 million ($5.0 million available asredemption of November 30, 2017) working capital line of credit collateralized by substantially all of our assets with the exception of our retail store assets. Additionally, the line of credit is subject to various financial ratio and leverage covenants. As of November 30, 2017, we were in compliance with all such covenants. The line is subject to renewal in September 2019. As of November 30, 2017, no amount was outstanding under this line of credit.shareholder rights plan.
The Company’s long-term debt is comprised of a promissory note, the proceeds of which were loaned to SWRL and used to finance business acquisitions by SWRL (unpaid balance as of November 30, 2017, $2.9 million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. The promissory note matures on January 15, 2020, with amortized principal and accrued interest due monthly on the promissory note. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of November 30, 2017, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo Bank, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into the SWRL Loan Agreement with SWRL. Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, we foreclosed on all of the outstanding stock of U-Swirl as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016, and concurrently the Company ceased to have financial control of SWRL as of February 29, 2016. As of February 29, 2016 and November 30, 2017, SWRL had no operating assets.
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. The Company did not repurchase any shares during the three and nine months ended November 30, 2017. As of November 30, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
We believe believes that cash flows generated by operating activities and available financingflow from operations will be sufficient to fund our operations capital expenditures and working capital requirements for at least the next twelve months.FY 2023. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
As of November 30, 2017,2022, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
As of November 30, 2022, we had purchase obligations of approximately $36,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect our operations. Most of our leases provide for cost-of-living adjustments and require us to pay taxes, insurance, and maintenance expenses, all of which are subject to inflation. Additionally, our future lease costs for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.
Depreciation expense is based on the historical cost to us of our fixed assets and is therefore potentially less than it would be if it were based on the current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Seasonality
We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of our confectionary products have occurred during the Christmas holiday through Mother’s Day. We believe the strongest sales of frozen yogurt products will occur duringkey holidays and the summer months.vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We do not engage in commodity futures trading or hedging activities and do not enter into derivative financial instrument transactions for trading or other speculative purposes. We also do not engage in transactions in foreign currencies or in interest rate swap transactions that could expose us to market risk. However,As a smaller reporting company, we are exposed to some commodity price and interest rate risks.
We frequently enter into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit us to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may benot required to pay above-market prices if prices fall and we are unable to renegotiateprovide the terms of the contract. As of November 30, 2017, based on future contractual obligations for ingredients, we estimate that a 10.0% change in the prices of contracted ingredients would result in a $100,000 favorable or unfavorable price benefit or cost, respectively, resulting from our contracts.
We have a $5.0 million bank line of credit that bears interest at a variable rate. As of November 30, 2017, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related toinformation required by this credit facility.Item.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of November 30, 2017, $2.9 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”))Act) that are designed to ensure that material information relating to us is made known to the officers who certify as to our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Company management,Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures wereare effective as of November 30, 2017.2022.
Changes in Internal Control over Financial Reporting
ThereThere were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarter ended November 30, 20172022, that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
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 information set forth in Note 1 to the “CherryBerry Entities”), and their respective owners, pursuant to which SWRL acquired the franchise rightsconsolidated financial statements appearing in Item 1 of frozen yogurt stores branded as “CherryBerry”. As previously disclosed, among other actions, on January 13, 2016, the CherryBerry Entities filed a lawsuit in the United States District Court for the Northern DistrictPart I of Oklahoma (the “Oklahoma Court”) asserting certain claims for alleged wrongful actions against SWRL and RMCF under the CherryBerry Purchase Agreement. On July 11, 2017, the Oklahoma Court granted summary judgement in favor of SWRL and RMCF on all of the claims made by the CherryBerry Entities, and in connection therewith, on September 26, 2017, the Oklahoma Court dismissed all counterclaims made by SWRL. The Company does not expect any further proceedings with respect to this matter. See Item 3. “Legal Proceedings” of our Annual Report on Form 10-K for the fiscal year ended February 28, 2017 and Item 1. “Legal Proceedings” of our Quarterly Report on Form 10-Q forunder the quarter ended August 31, 2017 for additional information concerning this matter.
The Companycaption “Subsequent Events” is party to various other legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.incorporated by reference herein.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, Item“Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2017.2022, filed on May 27, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022, which could materially and adversely affect our business, financial condition and results of operations. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2017.2022, as amended by Amendment No. 1 on Form 10-K/A.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. The Company did not repurchase any shares during the three and nine months ended November 30, 2017. As of November 30, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
The Company plans to continue the repurchase plan until it has been completed. The number, price, structure and timing of the repurchases, if any, will be at the Company’s sole discretion and future repurchases will be evaluated by the Company depending on market conditions, liquidity needs and other factors. The repurchase authorization does not have an expiration date and does not oblige the Company to acquire any particular amount of its common stock. The Board of Directors may suspend, modify or terminate the repurchase program at any time without prior notice.None.
Item 3.Defaults Upon Senior Securities
None.None.
Item 4.Mine Safety Disclosures
Not Applicable.Applicable.
NoneOn December 14, 2022, the Company filed a Form 8-K, which is incorporated herein by reference, disclosing Gabriel Arreaga’s December 8, 2022, notification to the Board of Directors of the Company (the “Board”) of his decision to resign from the Board effective upon the earlier of (a) the nomination of a new chairperson of the Compensation Committee of the Board, (b) the nomination of a new member to the Board, or (c) the conclusion of the Company’s current fiscal year (February 28, 2023). On January 11, 2023, the Board nominated and elected Jeffrey R. Geygan as the new chairperson of the Compensation Committee of the Board. Consequently, Mr. Arreaga’s resignation as a member of the Board, as the chairperson of the Compensation Committee of the Board and as a member of the Audit Committee of the Board was effective on January 11, 2023.
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31.1* |
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101.INS | * Inline XBRL Instance |
101.SCH | * Inline XBRL Taxonomy Extension Schema |
101.CAL | * Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | * Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB | * Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | * Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | * Cover page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101.1) |
(1) | These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1937, as amended, or otherwise subject to liability under those sections. |
* | Filed herewith. |
** | Furnished herewith. |
+ | Management contract or compensatory plan |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: January | /s/ | ||
| Allen Arroyo, Chief Financial Officer |
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