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.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
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.
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 comprisedTable of a promissory note, the proceeds of which were loaned to SWRL and used to finance SWRL’s business acquisitions.As of November 30, 2017 and February 28, 2017, notes payable consisted of the following:
| | | November 30, 2017 | | | February 28, 2017 | |
Promissory note | | $ | 2,859,320 | | | $ | 3,831,741 | |
Less: current maturities | | | (1,340,010 | ) | | | (1,302,501 | ) |
Long-term obligations | | $ | 1,519,310 | | | $ | 2,529,240 | |
The following table summarizes annual maturities of our notes payable as of November 30, 2017:
| | | Amount | |
2018 | | | 330,023 | |
2019 | | | 1,352,893 | |
2020 | | | 1,176,404 | |
Total minimum payments | | $ | 2,859,320 | |
Less: current maturities | | | (1,340,010 | ) |
| | | | | |
Long-term obligations | | $ | 1,519,310 | |
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of financial condition and results of operations is qualified by reference and should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the 10-K filed with the SEC on May 27, 2022, for the fiscal year ended February 28, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022. | Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
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.
PART II.OTHER INFORMATION
Item 1.Legal Proceedings
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively,The 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.
Item 1A.Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, Item“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.
Item 5.Other Information
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.
Item 6.Exhibits
| | 3.210.1
| Certificate of Designations of Series A Junior Participating Preferred Stock, par value $0.001 per share, ofSettlement and Release Agreement, dated December 14, 2022, by and among Bradley L. Radoff, Andrew T. Berger, AB Value Partners, LP, AB Value Management LLC, Mary Bradley and Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.210.1 to the Current Report on Form 8-K filed on March 2, 2015)December 16, 2022).
|
| | 101.INS | * Inline XBRL Instance Document.Document (the Instance Document does not appear in the Interactive Data File because it’s XBRL (1)) |
| | 101.SCH | * Inline XBRL Taxonomy Extension Schema Document.Document (1) |
| | 101.CAL | * Inline XBRL Taxonomy Extension Calculation Linkbase Document.Document (1) |
| | 101.DEF | * Inline XBRL Taxonomy Extension Definition Linkbase Document.Document (1) |
| | 101.LAB | * Inline XBRL Taxonomy Extension Label Linkbase Document.Document (1) |
| | 101.PRE | * Inline XBRL Taxonomy Extension Presentation Linkbase Document.Document (1) |
| | 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. |
| | ** | * FiledFurnished herewith. |
| | + | ** Furnished herewith. Management contract or compensatory plan |
Signatures
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 12, 201813, 2023 | | /s/ Bryan J. MerrymanAllen Arroyo | |
| | Bryan J. Merryman, Chief Operating Officer,
| Allen Arroyo, Chief Financial Officer Treasurer and Director |
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