UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
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Securities Registered Pursuant To Section 12(b) Of The Act:
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Securities Registered Pursuant To Section 12(g) Of The Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
The aggregate market value of the registrant’s common stock (based on the closing price as quoted on the Nasdaq Global Market on August 31, 2023, the last business day of the registrant’s most recently completed second fiscal quarter) held by non-affiliates was $
As of May 31, 2024, there were
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement in connection with the 2024 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference in Part III of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended February 29, 2024.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
TABLE OF CONTENTS
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ITEM 1. |
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ITEM 1.A |
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ITEM 1.B |
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ITEM 1.C |
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ITEM 2. |
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ITEM 5. |
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ITEM 7. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 7A. |
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ITEM 8. |
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ITEM 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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ITEM 9A. |
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ITEM 9B. |
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ITEM 9C. |
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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ITEM 10. |
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ITEM 11. |
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ITEM 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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ITEM 13. |
Certain Relationships and Related Transactions, and Director Independence |
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ITEM 16. |
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1
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (this “Annual Report”) contains 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 (the "Securities Act"), 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. All statements other than statements of historical fact are “forward-looking statements,” including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management, including for future operations, or capital expenditures; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; any statements of belief or expectation; and any statements of assumptions underlying any of the foregoing or other future events. Forward-looking statements may include, among others, words such as “will,” “may,” “would,” “could,” “might,” “likely,” “objective,” “predict,” “project,” “drive,” “seek,” “aim,” “target,” “outlook,” “continue” “intend,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “potential,” or similar expressions. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify all such risks and uncertainties, they include, but are not limited to, the factors discussed in Item 1A. “Risk Factors” of Part I of this Annual Report and as described elsewhere in this Annual Report. All forward-looking statements are expressly qualified in their entirety by these and other cautionary statements that we make from time to time in our other SEC filings and public communications. You should evaluate forward-looking statements in the context of these risks and uncertainties and are cautioned not to place undue reliance on such statements. Forward-looking statements in this Annual Report are made only as of the date hereof, and we undertake no obligation to update or revise any forward-looking statement except as may be required by law.
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PART I.
ITEM 1. BUSINESS
Our Company
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company,” “Rocky Mountain,” “we,” “us,” or “our”), including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), is an international franchisor, confectionery producer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolate candies and other confectionery products (“Durango Products”). Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionary products. We also sell our candy in select locations outside of our system of retail stores. As of February 29, 2024, we operated 2 Company-owned and had 115 licensee-owned and 152 Rocky Mountain Chocolate Factory franchised stores spread across 36 states and the Philippines.
In fiscal year (“FY”) 2024, roughly half of all retail store sales were of the products prepared on premises and the other half were of products purchased from our Durango plant. We believe that in-store product preparation creates a special store ambiance, and the aroma and sight of products being made attracts foot traffic and assures customers that products are fresh.
Our principal competitive advantage lies in our brand name recognition, and reputation for the quality, variety and taste of our products. Further, we believe the ambiance of our stores, our expertise in the production of chocolate candy products, the merchandising and marketing of confectionary products, and the control and training infrastructures we have implemented to ensure consistent customer service and execution of successful practices and techniques at our stores provides Rocky Mountain Chocolate Factory with a unique franchise offering.
We believe our production expertise and reputation for quality has facilitated the sale of select products through Specialty Markets. We are currently selling our products in a select number of Specialty Markets, including wholesale, fundraising, corporate sales, e-commerce, and private label (collectively “Specialty Markets”).
Our consolidated revenues in FY 2024 were primarily derived from three principal sources: (i) sales to franchisees and other third parties of chocolates and other confectionery products produced by us (74%-77%-76% in 2024, 2023 and 2022 respectively); (ii) sales at Company-owned stores of chocolates and other confectionery products (including products produced by us) (5%-3%-4%), and (iii) the collection of initial franchise, royalties and marketing fees from franchisees (21%-20%-20%). For FY 2024, nearly all of our revenues were derived from domestic sources, with less than 1% derived from international sources. As described below, the Company sold its frozen yogurt business subsequent to the end of FY 2023.
Sale of Frozen Yogurt Business
On May 1, 2023, subsequent to the end of FY 2023, we completed the sale of substantially all of the assets of its wholly-owned subsidiary and frozen yogurt business, U-Swirl International, Inc. (“U-Swirl”). The aggregate sale price of U-Swirl was $2.75 million, consisting of (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year secured promissory note. The business divestiture of the U-Swirl segment was preceded by a separate sale of our three owned U-Swirl locations on February 24, 2023. With the sale of our frozen yogurt segment on May 1, 2023, we continue to focus on our confectionery business to further enhance our competitive position and operating margin, simplify our business model, and deliver sustainable value to our stockholders. The consolidated financial statements present the historical financial results of the former U-Swirl segment as discontinued operations for all periods presented. See Note 17 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data", of this Annual Report for information on this divestiture.
Business Strategy
Our updated long term strategic objective is to build upon the solid market position of our brand and high-quality products to create a world-class experience for consumers of premium chocolate and confectionary products, whether in premium confection stores operated by our franchisees or by us, or purchased from us through a variety of other
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channels. We intend to lead this effort through the delivery of an exceptional store experience and development of category leadership through innovation. To accomplish this objective, we will employ a business strategy that includes the elements set forth below.
Product Quality and Variety
We maintain the gourmet taste and quality of our chocolate products by using the finest chocolate and other wholesome ingredients. We use our proprietary recipes, primarily developed by our master candy makers. A typical Rocky Mountain Chocolate Factory store offers up to 100 of our chocolate products throughout the year and as many as 200, including many packaged products, during holiday seasons. Individual stores also offer numerous varieties of gourmet caramel apples as well as other products prepared in the store from Company recipes. We continue to enhance our product development and innovation capabilities through the Company’s in-house R&D department.
Store Atmosphere and Ambiance
We seek to establish a fun, enjoyable and inviting atmosphere in each of our store locations. Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store prepares numerous products, including caramel apples, in the store. In-store preparation is designed to be both fun and entertaining for customers. We believe the in-store preparation and aroma of our products enhances the ambiance at Rocky Mountain Chocolate Factory stores, and conveys an image of freshness and homemade quality. We have been, and are committed to, deploying increased resources to our retail store network to further improve the store experience and enhance profitability, all while maintaining brand standards.
Site Selection
Careful selection of a new retail site is critical to the success of our stores. We consider many factors in identifying suitable sites, including tenant mix, visibility, attractiveness, accessibility, level of foot traffic and occupancy costs. Final site selection occurs only after our senior management has approved the site.
Increase Same Store Retail Sales at Existing Rocky Mountain Chocolate Factory Stores
We seek to increase profitability of our store system by increasing sales at existing store locations through a combination of offering the optimal product assortment to stores, improving order fulfillment, facilitating increased product availability to stores through streamlined logistics, and providing Company personnel to help franchised locations improve their sales and profitability. We estimate that a 10% system-wide increase in revenues from our existing store base would be the equivalent of opening 15 new stores.
Changes in system-wide domestic same store retail sales at Rocky Mountain Chocolate Factory locations are as follows:
FY 2020 compared to FY 2019 |
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0.5 |
% |
FY 2021 compared to FY 2020 |
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(24.8 |
)% |
FY 2022 compared to FY 2021 |
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62.4 |
% |
FY 2023 compared to FY 2022 |
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0.5 |
% |
FY 2024 compared to FY 2023 |
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(1.9 |
)% |
Same store sales declined during FY 2021 primarily as a result of nearly all of the franchise stores being directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. This decline was offset by a same store sales increase during FY 2022 when store operations resumed normal operations following the initial impacts of COVID-19.
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Increased System-Wide Annual Unit Volume (“AUV”)
A critical part of success in selling new franchises is the attractiveness of store level economics, which include robust and expanding system-wide annual sales. For FY 2024 our AUV was approximately $570,000, which represents a 30% increase from the FY 2020 AUV of $437,000.
Enhanced Operating Efficiencies
We have added highly experienced production and supply chain talent in order to bring sustained operating efficiencies to our Durango plant. In addition to such actions as investing in new and more efficient production equipment, we are rationalizing our portfolio of products and streamlining production lines to reduce labor costs as well as improve product quality and consistency.
Expansion Strategy
We are continually exploring opportunities to grow our brand and expand our business. Key elements of our expansion strategy are set forth below.
Unit Growth
We continue to pursue unit growth opportunities in locations where we have traditionally been successful, by improving and expanding our retail store concepts and product portfolio, and by targeting high pedestrian traffic environments.
High Traffic Environments
We currently establish franchised stores in the following environments: regional centers, outlet centers, tourist areas, street fronts, airports, other entertainment-oriented environments and festival and community centers. We have established business relationships with most of the major developers in the United States and believe that these relationships provide us with the opportunity to take advantage of attractive sites in new and existing real estate environments.
Multi-unit Operators
We have historically focused our franchise marketing efforts on single unit operators. By further enhancing our brand strength, product offering, and strong store experience, coupled with enhanced economics, we believe we will be able to appeal more, and market to, multi-unit operators looking to expand their portfolio of franchised opportunities into a premium chocolate franchise concept where we continue to identify substantial interest driven in large part by leased property owners.
Rocky Mountain Chocolate Factory Name Recognition and New Market Penetration
We believe the visibility of our stores and the high foot traffic at many of our locations has generated strong name recognition of Rocky Mountain Chocolate Factory and demand for our franchises. The Rocky Mountain Chocolate Factory system currently is concentrated in the western and Rocky Mountain region of the United States, but growth
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has generated a gradual easterly momentum as new stores have been opened in the eastern half of the country. We believe this growth has further increased our name recognition and demand for our franchises. We believe that distribution of Rocky Mountain Chocolate Factory products through our Specialty Market business also increases name recognition and brand awareness in areas of the country in which we have not previously had a significant presence and we believe it will also improve and benefit our entire store system.
We seek to establish a fun, enjoyable and inviting atmosphere in each of our store locations. Unlike many other confectionery stores, each Rocky Mountain Chocolate Factory store prepares a variety of products, including caramel apples and fudge, in the store. In FY 2024, approximately one-half of the revenues of franchised stores were generated by sales of products prepared on premises. In-store preparation is designed to be both fun and entertaining for customers and we believe the in-store preparation and aroma of our products enhance the ambiance at Rocky Mountain Chocolate Factory stores, conveys an image of freshness and homemade quality.
The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores are open seven days a week.
In January 2007, we began testing co-branded locations, such as the co-branded stores with Cold Stone Creamery. Co-branding a location is a vehicle to develop retail environments that would not typically support a stand-alone Rocky Mountain Chocolate Factory store. Co-branding can also be used to more efficiently manage rent structure, payroll and other operating costs in environments that have not historically supported stand-alone Rocky Mountain Chocolate Factory stores. As of February 29, 2024, Cold Stone Creamery franchisees operated 104 co-branded locations, and U-Swirl franchisees operated 11 co-branded locations. As of February 29, 2024, the Company had 3 international units in operation, all within the Republic of the Philippines.
Products and Packaging
We produce approximately 400 chocolates and other confectionery products using proprietary recipes developed primarily by our master candy makers. These products include many varieties of clusters, caramels, creams, toffees, mints and truffles. These products are offered for sale and also configured into approximately 250 varieties of packaged assortments. During the Christmas, Easter and other holiday seasons, we make a variety of seasonal items, including many candies offered in packages, that are specially designed for holidays. A typical Rocky Mountain Chocolate Factory store offers up to 100 of these approximately 400 chocolate candies and other confectionery products throughout the year and up to an additional 90 during the holiday seasons. Individual stores also offer more than 15 varieties of caramel apples and other products prepared in the store. In FY 2024, approximately one-half of the revenues of Rocky Mountain Chocolate Factory stores were generated by products produced at our Durango production facility, and one-half of products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and with a small amount of products such as ice cream, coffee and other sundries purchased from approved suppliers.
In FY 2024, approximately 10% of our Durango plant sales resulted from the sale of products outside of our system of franchised and licensed locations, which we refer to as Specialty Market customers, compared with 15% of our Durango plant sales resulting from Specialty Market customers in FY 2023. See Item 1A “Risk Factors—Risks Related to Our Company and Strategy—Our Sales to Specialty Market Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among a Small Number of Customers.” These products are produced using the same quality ingredients and production processes as the products sold in our network of retail stores.
We use the finest chocolates, nutmeats and other wholesome ingredients in our confectionary products and continually strive to offer new items in order to maintain the excitement and appeal of our offerings. We develop special packaging for the holidays and seasonal offerings, and consumers can have their purchases packaged in decorative boxes and fancy tins throughout the year.
Operating Environment
Rocky Mountain Chocolate Factory
We currently establish Rocky Mountain Chocolate Factory stores in six primary environments: outlet centers, festival and community centers, regional centers, tourist areas, street fronts, airports and other entertainment-oriented
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shopping centers. Each of these environments has a number of attractive features, including high levels of foot traffic. Rocky Mountain Chocolate Factory domestic franchise locations in operation as of February 29, 2024, include:
Outlet Centers |
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19.4 |
% |
Festival/Community Centers |
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20.8 |
% |
Regional Centers |
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19.5 |
% |
Tourist Areas |
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20.8 |
% |
Street Fronts |
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10.1 |
% |
Airports |
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5.4 |
% |
Other |
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4.0 |
% |
Outlet Centers
As of February 29, 2024, there were approximately 29 Rocky Mountain Chocolate Factory stores in outlet centers. We have established business relationships with a number of the major outlet center developers in the United States. Although not all factory outlet centers provide desirable locations for our stores, we believe our relationships with these developers will provide us with the opportunity to take advantage of attractive sites in new and existing outlet centers.
Festival and Community Centers
As of February 29, 2024, there were approximately 31 Rocky Mountain Chocolate Factory stores in festival and community centers. Festival and community centers offer retail shopping outside of traditional regional and outlet center shopping.
Regional Centers
As of February 29, 2024, there were Rocky Mountain Chocolate Factory stores in approximately 29 regional centers, including a location in the Mall of America in Bloomington, Minnesota. Although they often provide favorable levels of foot traffic, regional centers typically involve more expensive rent structures and competing food and beverage concepts.
Tourist Areas, Street Fronts, Airports and Other Entertainment-Oriented Shopping Centers
As of February 29, 2024, there were approximately 31 Rocky Mountain Chocolate Factory stores in locations considered to be tourist areas. Tourist areas are very attractive locations because they offer high levels of foot traffic and favorable customer spending characteristics, and greatly increase our visibility and name recognition. We believe there are a number of other environments that have the characteristics necessary for the successful operation of Rocky Mountain Chocolate Factory stores such as airports and casinos. As of February 29, 2024, there were 8 franchised Rocky Mountain Chocolate Factory stores at airport locations.
Franchising Program
General
We continue to attract qualified and experienced franchisees, whom we consider to be a vital part of our continued growth. We believe our relationship with our franchisees is fundamental to the performance of our brand and we strive to maintain a collaborative relationship with our franchisees. Our franchising philosophy is one of service and commitment to our franchise system and we continuously seek to improve our franchise support services. Our concept has been rated as an outstanding franchise opportunity by publications and organizations rating such opportunities. The Rocky Mountain Chocolate Factory concept has frequently been ranked in the Top 500 Franchises by Entrepreneur Magazine.
Franchisee Sourcing and Selection
The majority of new franchises are awarded to persons referred to us by existing franchisees, to interested consumers who have visited one of our domestic franchise locations and to existing franchisees. We also advertise for new
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franchisees in national and regional newspapers and online as suitable potential store locations come to our attention. We are exploring the use of third-party franchise lead generators to supplement our efforts. Franchisees are currently approved by a committee of the senior executive team based on the applicant's net worth and liquidity, business acumen, and prior experience with franchising and/or fast moving consumer goods (“FMCG”), together with an assessment of work ethic and personality compatibility with our operating philosophy.
International Franchising and Licensing
International growth is generally achieved through entry into a Master License Agreement covering specific countries, with a licensee that meets minimum qualifications to develop Rocky Mountain Chocolate Factory in that country. License agreements are generally entered into for a period of 3-10 years and allow the licensee exclusive development rights in a country. Generally, we require an initial license fee and commitment to a development schedule. Active international license agreements in place include the following:
Co-Branding
In August 2009, we entered into a Master License Agreement with Kahala Franchise Corp. Under the terms of the agreement, select current and future Cold Stone Creamery franchise stores are co-branded with both the Rocky Mountain Chocolate Factory and the Cold Stone Creamery brands. Locations developed or modified under the agreement are subject to the approval of both parties. Locations developed or modified under the agreement will remain franchisees of Cold Stone Creamery and will be licensed to offer the Rocky Mountain Chocolate Factory brand. As of February 29, 2024, Cold Stone Creamery franchisees operated 104 stores under this agreement.
Additionally, we allow U-Swirl brands to offer Rocky Mountain Chocolate Factory products under terms similar to other co-branding agreements. As of February 29, 2024, there were 11 U-Swirl cafés offering Rocky Mountain Chocolate Factory products.
Training and Support
Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a comprehensive training program in store operations and management. We have established a training center at our Durango headquarters in the form of a full-sized replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store. Topics covered in the training course include our philosophy of store operation and management, customer service, merchandising, pricing, cooking, inventory and cost control, quality standards, record keeping, labor scheduling and personnel management. Training is based on standard operating policies and procedures contained in an operations manual provided to all franchisees, which the franchisee is required to follow by terms of the franchise agreement. Additionally, and importantly, trainees are provided with a complete orientation to our operations by working in key factory operational areas and by meeting with members of our senior management.
Our operating objectives include providing knowledge and expertise in merchandising, marketing and customer service to all front-line store level employees to maximize their skills and ensure that they are fully versed in our operational techniques.
We provide ongoing support to franchisees through our field consultants, who maintain regular and frequent communication with the stores by phone and by site visits. The field consultants also review and discuss store operating results with the franchisee and provide advice and guidance in improving store profitability and in developing and executing store marketing and merchandising programs.
Quality Standards and Control
The franchise agreements for Rocky Mountain Chocolate Factory brand franchisees require compliance with our procedures of operation and food quality specifications and permit audits and inspections by us.
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Operating standards for Rocky Mountain Chocolate Factory brand stores are set forth in operating manuals. These manuals cover general operations, factory ordering, merchandising, advertising and accounting procedures. Through their regular visits to franchised stores, our field consultants audit performance and adherence to our brand standards. We have the right to terminate any franchise agreement for non‑compliance with our operating standards. Products sold at the stores and ingredients used in the preparation of products approved for on-site preparation must be purchased from us or from approved suppliers.
The Franchise Agreement: Terms and Conditions
The domestic offer and sales of our franchise concepts are made pursuant to the respective franchise disclosure document (FDD) prepared in accordance with federal and state laws and regulations. States that regulate the sale and operation of franchises require a franchisor to register or file certain notices with the state authorities prior to offering and selling franchises in those states.
Under the current form of our domestic franchise agreements, franchisees pay us (i) an initial franchise fee for each store, (ii) royalties based on monthly gross sales, and (iii) a marketing fee based on monthly gross sales. Franchisees are generally granted exclusive territory with respect to the operation of their stores only in the immediate vicinity of their stores. Chocolate products not made on premises by franchisees must be purchased from us or approved suppliers. The franchise agreements require franchisees to comply with our procedures of operation and food quality specifications, to permit inspections and audits by us and to remodel stores to conform with standards then in effect. We may terminate the franchise agreement upon the failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission by the franchisee of any unlawful or deceptive practice, which in our judgment is likely to adversely affect the network system. Our ability to terminate franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See “Regulation” below for additional information.
The agreements prohibit the transfer or assignment of any interest in a franchise without our prior written consent. The agreements also give us a right of first refusal to purchase any interest in a franchise if a proposed transfer would result in a change of control of that franchise. The refusal right, if exercised, would allow us to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee.
The term of franchise agreements signed before July 1, 2023 is ten years, and franchisees have the right to renew for one additional ten-year term. The term of franchise agreements signed after July 1, 2023 is ten years, and franchisees have the right to renew for two additional five-year terms. Our revised Franchise Agreement offers a flat royalty payment on all retail stores sales ranging from 6% to as low as 4% based upon the retail sales mix of Durango produced product sold in comparison to all retail store sales. These terms are only effective with Franchise Agreements entered into after July 1, 2023 or when a current franchise operator agrees to enter into a new agreement with the Company
Franchise Financing
We do not typically provide prospective franchisees with financing for their stores for new or existing franchises, but we have developed relationships with several sources of franchisee financing to whom we will refer franchisees. Typically, franchisees have obtained their own sources of such financing and have not required our assistance. In the normal course of business, we extend credit to customers, primarily franchisees that satisfy pre-defined credit criteria, for inventory and other operational costs.
In select instances, we have provided limited financing to franchisees. As a result, as of February 29, 2024, we have approximately $0.2 million of notes receivable as a result of financing our franchisees. When we finance franchisees the notes are secured by the assets financed.
Company Store Operations
As of February 29, 2024, there were two Company-owned Rocky Mountain Chocolate Factory stores. Our flagship store, located in Durango, Colorado, (“Flagship Store”) provides a training ground for Company personnel and a controllable testing ground for new products and promotions, operating and training methods and merchandising techniques, which may then be incorporated into the franchise store operations.
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Production Operations
General
We manufacture our chocolate and confectionary products at our production facility in Durango, Colorado. All products are produced consistent with our philosophy of using the finest high-quality ingredients to achieve our marketing motto of “The Peak of Perfection in Handmade Chocolates®.”
We have always believed that we should control the production of our own chocolate products. By controlling operations and production, we are able to better maintain our high quality standards, offer unique proprietary products, control production and shipment schedules and potentially pursue new or under-utilized distribution channels.
Production Processes
The production process primarily involves cooking or preparing candy centers, including nuts, caramel, peanut butter, creams and jellies, and then coating them with chocolate or other toppings. All of these processes are conducted in carefully controlled temperature ranges, and we employ strict quality control procedures at every stage of the production process. We use a combination of manual and automated processes at production facility. Although we believe that it is currently preferable to perform certain production processes, such as the dipping of some large pieces by hand, automation increases the speed and efficiency of the production process. We have from time-to-time automated certain processes formerly performed by hand where it has become cost-effective for us to do so without compromising product quality or appearance.
We also seek to ensure the freshness of products sold in Rocky Mountain Chocolate Factory stores with frequent shipments. Most Rocky Mountain Chocolate Factory stores do not have significant space for the storage of inventory, and we encourage franchisees and store managers to order only the quantities that they can reasonably expect to sell within approximately two to four weeks. For these reasons, we generally do not have a significant backlog of orders.
The production and sale of consumer food products is highly regulated. In the U.S., our activities are subject to regulation by various government agencies, including the Food and Drug Administration (“FDA”), the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate our businesses outside of the U.S.
We have a product quality and safety program. This program is integral to our supply chain platform and is intended to ensure that all products we purchase, produce, and distribute are safe, are of high quality and comply with applicable laws and regulations. Through our product quality and safety program, we evaluate our supply chain including ingredients, packaging, processes, products, distribution and the environment to determine where product quality and safety controls are necessary. We follow the FDA mandated Hazard Analysis and Risk-based Preventive Controls which includes a 12-step process to determine risks based on individual processes. To support this hazard analysis model, and in accordance with private and federal mandated requirements, we also adhere to all good manufacturing practices ("GMPs") including several supporting policies and procedures that ensure all risks identified are in control. Various government agencies and third-party firms, as well as our quality assurance staff, conduct audits of all facilities that produce our products to ensure effectiveness and compliance with our program and applicable laws and regulations.
Ingredients
The principal ingredients used in our products are chocolate, nuts, sugar, corn syrup, cream and butter. Our production facility receives shipments of ingredients daily. To ensure the consistency of our products, we buy ingredients from a limited number of reliable suppliers. In order to ensure a continuous supply of chocolate and certain nuts, we frequently enter into purchase contracts of between six to eighteen months for these products. Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall. We have one or more alternative sources for most essential ingredients and therefore believe that the loss of any one supplier would not have a material adverse effect on our business or results of operations. We currently purchase small amounts of finished candy from third parties on a private label basis for sale in Rocky Mountain Chocolate Factory stores. As a result of recent macro-economic inflationary trends and disruptions to the global supply chain, we have experienced and may continue to experience higher raw material, labor, and freight costs.
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Trucking Operations
We operate eight trucks and ship a substantial portion of our products from the production facility on our own fleet. Our trucking operations enable us to deliver our products to the stores quickly and cost-effectively. In addition, we back-haul our own ingredients and supplies, as well as products from third parties, on return trips, which helps achieve even greater efficiencies and cost savings.
Marketing
General
We rely primarily on in-store promotion and point-of-purchase materials to promote the sale of our products. The monthly marketing fees collected from franchisees are used by us to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update our local store marketing guides and materials.
We focus on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and brochures generated by our in-house Creative Services department. The department works directly with franchisees to implement local store marketing programs.
We have not historically, and do not intend to, engage in national traditional media advertising in the near future. Consistent with our commitment to community support, we seek opportunities to participate in local and regional events, sponsorships and charitable causes. This support leverages low-cost, high return publicity opportunities for mutual gain partnerships.
Internet and Social Media
We’ve initiated a program to leverage the marketing benefits of various social media outlets. These lower-cost marketing opportunities leverage the positive feedback of our customers, expanding brand awareness through a customer’s network of contacts. Complementary to local store marketing efforts, these networks also provide a medium for us to communicate regularly and authentically with customers. When possible, we work to facilitate direct relationships between our franchisees and their customers. We use social media as a tool to build brand recognition, increase repeat exposure, and enhance dialogue with consumers about their preferences and needs. The majority of stores have location-specific Facebook® and Instagram® accounts dedicated to helping customers interact directly with their local store. Proceeds from the monthly marketing fees collected from franchisees are used by us to facilitate and assist stores in managing their online presence consistent with our brand and marketing efforts.
Competition
The retailing of confectionery products is highly competitive. We and our franchisees compete with numerous businesses that offer products similar to those offered by our retail stores and Specialty Markets. Many of these competitors have greater name recognition and financial, marketing and other resources than us. In addition, there is intense competition among retailers for attractive commercial real estate sites suitable for Rocky Mountain Chocolate Factory stores, store personnel and qualified franchisees.
We believe that our principal competitive strengths lie in our name recognition and our reputation for the quality, value, variety and taste of our products and the ambiance of our stores; our knowledge and experience in applying criteria for the selection of new store locations; our expertise in merchandising and marketing of chocolate and other confectionary products; and the control and training infrastructures we have implemented to ensure execution of successful practices and techniques at our retail store locations. In addition, by controlling the production of our own confectionary products, we can better maintain our high product quality standards for those products, offer proprietary products, manage costs, control production and shipment schedules and pursue new or under-utilized distribution channels.
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Trade Name and Trademarks
The trade name “Rocky Mountain Chocolate Factory®,” the phrases, “The Peak of Perfection in Handmade Chocolates®”, “America's Chocolatier®” as well as all other trademarks, service marks, symbols, slogans, emblems, logos and designs used in the Rocky Mountain Chocolate Factory system, are our proprietary rights. We believe all of the foregoing are of material importance to our business. The trademark “Rocky Mountain Chocolate Factory” is registered in the United States and Canada. Applications to register the Rocky Mountain Chocolate Factory trademark have been filed and/or obtained in certain foreign countries.
We have not attempted to obtain patent protection for the proprietary recipes developed by our master candy-maker and instead rely upon our ability to maintain the confidentiality of those recipes.
Environmental Matters
We are not aware of any federal, state, local or international environmental laws or regulations that we expect to materially affect our earnings or competitive position or result in material capital expenditures. However, we cannot predict the effect of possible future environmental legislation or regulations on our operations. During FY 2024, we had no material environmental compliance-related capital expenditures, and no such material expenditures are anticipated in FY 2025.
Seasonal Factors
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays, such as Christmas, Easter and Valentine's Day, and the U.S. summer vacation season than at other times of the year, which may cause fluctuations in our quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings, the sale of franchises and the timing of purchases by customers outside our network of franchised locations. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year.
Regulation
Our two current Company-owned and other franchised Rocky Mountain Chocolate Factory stores are subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining the required licensing or approvals could delay or prevent the opening of new stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises. We are also subject to the Federal Trade Commission regulations relating to disclosure requirements in the sale of franchises and ongoing disclosure obligations.
Additionally, certain states have enacted and others may enact laws and regulations governing the termination or non-renewal of franchises and other aspects of the franchise relationship that are intended to protect franchisees, including among other things, limitation on the duration and scope of non-competition provisions applicable to franchisees. Although these laws and regulations, and related court decisions, may limit our ability to terminate franchises and alter franchise agreements, we do not believe that such laws or decisions will have a material adverse effect on our franchise operations. However, the laws applicable to franchise operations and relationships continue to develop, and we are unable to predict the effect on our intended operations of additional requirements or restrictions that may be enacted or of court decisions that may be adverse to franchisors.
Federal and state environmental regulations have not had a material impact on our operations but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay the construction of new stores, increase our capital expenditures and thereby decrease our earnings and negatively impact our competitive position.
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Companies engaged in the production, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time. Our product labeling is subject to and complies with the Nutrition Labeling and Education Act of 1990 and the Food Allergen Labeling and Consumer Protection Act of 2004.
We provide a limited amount of trucking services to third parties, to fill available space on our trucks. Our trucking operations are subject to various federal and state regulations, including regulations of the Federal Highway Administration and other federal and state agencies applicable to motor carriers, safety requirements of the Department of Transportation relating to interstate transportation and federal, state and Canadian provincial regulations governing matters such as vehicle weight and dimensions.
We believe that we are operating in substantial compliance with all applicable laws and regulations.
Human Capital Resources
As of February 29, 2024, we employed approximately 160 people, including 135 full-time employees. Most employees, with the exception of store management, production management and corporate management, are paid on an hourly basis. We also employ some individuals on a temporary basis during peak periods of store and factory operations. We seek to ensure that participatory management processes, mutual respect and professionalism and high-performance expectations for the employees exist throughout the organization. We believe that we provide working conditions, wages and benefits that compare favorably with those of our competitors. Our employees are not covered by a collective bargaining agreement. We consider our employee relations to be good.
Our franchisees are independent business owners, their employees are not our employees and therefore are not included in our employee count.
Labor and Supply Chain
As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs. We have seen labor and logistics challenges, which we believe have contributed to lower production facility, retail, and e-commerce sales of our products due to the availability of material, labor, and freight. In addition, we could experience additional lost sales 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 production facility, or if we or our franchisees experience delays in stocking our products. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of recent business developments.
Our principal executive offices are located at 265 Turner Drive, Durango, Colorado 81303, and our telephone number is (970) 259-0554. We have retail store locations throughout the Unites Stated and the Philippines. Our website address is www.rmcf.com. Information contained on or accessible through our websites is neither a part of this Annual Report nor incorporated by reference herein.
Ethics and Governance
We have adopted the Rocky Mountain Chocolate Factory Code of Conduct, which qualifies as a code of ethics under Item 406 of Regulation S-K. The code applies to all of our employees, officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions, and directors. Our Code of Conduct is available free of charge on our website at https://ir.rmcf.com/corporate-governance/governance-documents. We will disclose any waiver we grant to an executive officer or director under our code of ethics, or certain amendments to the Code of Conduct, on our website.
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In addition, we have adopted Code of Ethics for Senior Financial Officers, charters for each of the Board’s four standing committees and the Whistleblower/Complaint Procedures for Accounting and Auditing Matters. All of these materials are available on our web site at https://ir.rmcf.com/corporate-governance/governance-documents.
Available Information
The Internet address of our website is www.rmcf.com. Additional websites specific to our franchise opportunities and investor relations are www.sweetfranchise.com and https://ir.rmcf.com, respectively.
We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). We make available free of charge, through our Internet website, our Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains a website that contains these reports, proxy and information statements and other information that can be accessed, free of charge, at www.sec.gov. The contents of our websites are not incorporated into, and should not be considered a part of, this Annual Report.
ITEM 1A. RISK FACTORS
Our business, results of operations and financial position are subject to various risks, including those discussed below, which may affect the value of our common stock. The following risk factors, which we believe represent the most significant factors that may make an investment in our common stock risky, may cause our actual results to differ materially from those projected in any forward-looking statement. You should carefully consider these factors, as well as the other information contained in this Annual Report, including the information set forth in “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Results of Operations and Financial Position,” when evaluating an investment in our common stock.
Risks Specific to Our Company and the Industry in Which We Operate
Our Sales To Specialty Market Customers, Customers Outside Our System Of Franchised Stores, Are Concentrated Among A Small Number Of Customers.
The Company has historically sold its product to relatively few customers outside its network of franchised and licensed locations (Specialty Market customers).
During FY 2024 our sales to Specialty Market customers were approximately $2.7 million or 10% of our total revenue.
The Divestiture Of Our U-Swirl Business May Have Material Adverse Effects On Our Financial Condition, Results Of Operations Or Cash Flows.
In May 2023, subsequent to our fiscal year-end, we announced that we had completed the sale of substantially all of the assets of U-Swirl, our wholly-owned subsidiary and frozen yogurt business. The consummation of the sale of the U-Swirl business involves risks, including retention of uncertain contingent liabilities related to the divested business and risks associated with the collection of notes receivable contemplated in the sale, any of which could result in a material adverse effect to our financial condition, results of operations or cash flows. We cannot be certain that we will be successful in managing these or any other significant risks that we encounter as a result of divesting the U-Swirl business.
Our Growth Is Dependent Upon Attracting And Retaining Qualified Franchisees And Their Ability To Operate Their Franchised Stores Successfully.
Our continued growth and success are dependent in part upon our ability to attract, retain and contract with qualified franchisees. Our growth is dependent upon the ability of franchisees to operate their stores successfully, promote and develop our store concepts, and maintain our reputation for an enjoyable in-store experience and high-quality products. Although we have established criteria to evaluate prospective franchisees and have been successful in attracting franchisees, there can be no assurance that franchisees will be able to operate successfully in their franchise areas in a manner consistent with our concepts and standards. As a result, we may realize a reduction in number of units in operation or fail to achieve our opening targets.
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Increases In Costs Could Adversely Affect Our Operations.
Inflationary factors such as increases in the costs of ingredients, energy and labor directly affect our operations. Most of our leases provide for cost-of-living adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease costs for new facilities may reflect potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on our increased costs to our customers or that our customers will continue to purchase at historical levels in the event that we pass along cost increases in the form of higher prices. If we are unable to pass along cost increases we may realize a decrease in gross margin on products we sell and produce.
Price Increases May Not Be Sufficient To Offset Cost Increases And Maintain Profitability Or May Result In Sales Volume Declines Associated With Pricing Elasticity.
We may be able to pass some or all raw materials, energy and other input cost increases to customers by increasing the selling prices of our products, however, higher product prices may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices sufficiently, or in a timely manner, to offset increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our financial condition and results of operations.
Our Expansion Plans Are Dependent On The Availability Of Suitable Sites For Franchised Stores At Reasonable Occupancy Costs.
Our expansion plans are critically dependent on our ability to obtain suitable sites for franchised stores at reasonable occupancy costs for our franchised stores in high foot traffic retail environments. There is no assurance that we will be able to obtain suitable locations for our franchised stores in this environment at a cost that will allow such stores to be economically viable.
Same Store Sales Have Fluctuated and Will Continue to Fluctuate.
Our same store sales, defined as year-over-year sales for a store that has been open for at least one year, have fluctuated in the past on an annual and quarterly basis and are expected to continue to fluctuate in the future. Sustained declines in same store sales or significant same store sales declines in any single period could have a material adverse effect on our results of operations. Same store sales declined during FY 2021 and established the large negative percentage changes reflected above, primarily as a result of nearly all of the franchise stores being directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. Same store sales increased during FY 2022 and established the large positive percentage changes reflected above, primarily as a result of nearly all of the franchise stores being directly and positively impacted by a resurgence in consumer demand following the relaxing of many public health measures taken in response to COVID-19. If same store sales decline, we may experience a decrease in demand for products we sell and a decrease in revenue from royalty and marketing fees.
Higher Labor Costs, Increased Competition For Qualified Team Members And Ensuring Adequate Staffing Increases The Cost Of Doing Business. Additionally, Changes In Employment And Labor Laws, Including Health Care Legislation And Minimum Wage Increases, Could Increase Costs For Our System-Wide Operations.
Our success depends in part on our and our franchisees’ ability to recruit, motivate, train and retain a qualified workforce to work in our stores in an intensely competitive environment. We and our franchisees have experienced, and could continue to experience, a shortage of labor for stores positions due to job market trends and conditions, which could decrease the pool of available qualified talent for key functions. Our ability to attract and retain hourly employees in our stores and factory has been impacted by these trends and conditions, and we expect staffing and labor challenges to continue into 2025. Increased costs associated with recruiting, motivating and retaining qualified employees to work in the Company-owned stores, franchised stores and our production facility have had, and may in the future have, a negative impact on our Company-owned store and production margins and the margins of franchised stores. Competition for qualified drivers for both our stores and supply-chain function also continues to increase as
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more companies compete for drivers or enter the delivery space, including third party aggregators. Additionally, economic actions, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us (including our ability to recruit and retain talent) or our franchisees and suppliers. Social media may be used to foster negative perceptions of employment with our Company in particular or in our industry generally, and to promote strikes or boycotts.
We are also subject to federal, state and foreign laws governing such matters as minimum wage requirements, overtime compensation, benefits, working conditions, citizenship requirements and discrimination and family and medical leave and employee related litigation. Labor costs and labor-related benefits are primary components in the cost of operation. Labor shortages, increased employee turnover and health care mandates could increase our system-wide labor costs.
A significant number of hourly personnel are paid at rates at or above the federal and state minimum wage requirements. Accordingly, the enactment of additional state or local minimum wage increases above federal wage rates or regulations related to exempt employees has increased and could continue to increase labor costs for our domestic system-wide operations. A significant increase in the federal minimum wage requirement could adversely impact our financial condition and results of operations.
The Seasonality Of Our Sales And New Store Openings Can Have A Significant Impact On Our Financial Results From Quarter To Quarter.
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays and summer vacation season than at other times of the year, which causes fluctuations in our quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year.
The Retailing Of Confectionery Products Is Highly Competitive And Many Of Our Competitors Have Competitive Advantages Over Us.
The retailing of confectionery products is highly competitive. We and our franchisees compete with numerous businesses that offer similar products. Many of these competitors have greater name recognition and financial, marketing and other resources than we do. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees. Competitive market conditions could have a material adverse effect on us and our results of operations and our ability to expand successfully.
Changes In Consumer Tastes And Trends Could Have A Material Adverse Effect On Our Operations.
The sale of our products is affected by changes in consumer tastes and health concerns, including views regarding the consumption of chocolate. Numerous other factors that we cannot control, such as economic conditions, demographic trends, traffic patterns and weather conditions, influence the sale of our products. Changes in any of these factors could have a material adverse effect on us and our results of operations.
We Are Subject To Federal, State And Local Regulations.
We are subject to regulation by the Federal Trade Commission and must comply with certain state laws governing the offer, sale and termination of franchises and the refusal to renew franchises. Many state laws also regulate substantive aspects of the franchisor-franchisee relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees and regulating discrimination among franchisees in charges, royalties or fees. Franchise laws continue to develop and change, and changes in such laws could impose additional costs and burdens on franchisors. Our failure to obtain approvals to sell franchises and the adoption of new franchise laws, or changes in existing laws, could have a material adverse effect on us and our results of operations.
Each of our Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining required licenses or approvals from such agencies could delay or prevent the opening of a new store. We and our
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franchisees are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Because a significant number of our employees are paid at rates related to the state minimum wage, increases in the minimum wage would increase our labor costs. The failure to obtain required licenses or approvals, or an increase in the minimum wage rate, employee benefits costs (including costs associated with mandated health insurance coverage) or other costs associated with employees, could have a material adverse effect on us and our results of operations.
Companies engaged in the production, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time, and could have a material adverse effect on us and our results of operations.
Information Technology System Failures, Breaches Of Our Network Security Or Inability To Upgrade Or Expand Our Technological Capabilities Could Interrupt Our Operations And Adversely Affect Our Business.
We and our franchisees rely on our computer systems and network infrastructure across our operations, including point-of-sale (POS) processing at our stores. Our and our franchisees’ operations depend upon our and our franchisees’ ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external cybersecurity breaches, viruses and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us or our franchisees to litigation or to actions by regulatory authorities. Furthermore, the importance of such information technology systems and networks increased in FY 2021 and continued into FY 2022, FY 2023 and FY 2024 due to many of our employees working remotely as a result of the COVID-19 pandemic.
A party who is able to compromise the security measures on our networks or the security of our infrastructure could, among other things, misappropriate our proprietary information and the personal information of our customers and employees, cause interruptions or malfunctions in our or our franchisee’s operations, cause delays or interruptions to our ability to operate, cause us to breach our legal, regulatory or contractual obligations, create an inability to access or rely upon critical business records or cause other disruptions in our operations. These breaches may result from human errors, equipment failure, fraud, or malice on the part of employees or third parties.
We expend financial resources to protect against such threats and may be required to further expend financial resources to alleviate problems caused by physical, electronic, and cyber security breaches. As techniques used to breach security are growing in frequency and sophistication and are generally not recognized until launched against a target, regardless of our expenditures and protection efforts, we may not be able to implement security measures in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to an increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.
In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks despite not handling the data. Further, the regulatory framework around data custody, data privacy and breaches varies by jurisdiction and is an evolving area of law. We may not be able to limit our liability or damages in the event of such a loss.
We are also continuing to expand, upgrade and develop our information technology capabilities, including our point-of-sale systems, as well as the adoption of cloud services for e-mail, intranet, and file storage. If we are unable to successfully upgrade or expand our technological capabilities, we may not be able to take advantage of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures. Additionally, unforeseen problems with our point-of-sale system may affect our operational abilities and internal controls and we may incur additional costs in connection with such upgrades and expansion.
If We, Our Business Partners, Or Our Franchisees Are Unable To Protect Our Customers’ Data, We Could Be Exposed To Data Loss, Litigation, Liability And Reputational Damage.
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In connection with credit and debit card sales, we and our franchisees transmit confidential credit and debit card information by way of secure private retail networks. A number of retailers have experienced actual or potential security breaches in which credit and debit card information may have been stolen. Although we and our franchisees use private networks, third parties may have the technology or know-how to breach the security of the customer information transmitted in connection with credit and debit card sales, and our and our franchisees’ security measures and those of our and our franchisees’ technology vendors may not effectively prohibit others from obtaining improper access to this information. If a person were able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our and our franchisees’ operations. Any security breach could expose us and our franchisees to risks of data loss and liability and could seriously disrupt our and our franchisees’ operations and any resulting negative publicity could significantly harm our reputation. We may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to the theft of credit and debit card information may be brought by payment card providers, banks, and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit), and federal and state regulators. Any such proceedings could harm our reputation, distract our management team members from running our business and cause us to incur significant unplanned liabilities, losses and expenses.
We also sell and accept for payment gift cards, and our customer loyalty program provides rewards that can be redeemed for purchases. Like credit and debit cards, gift cards, and rewards earned by our customers are vulnerable to theft, whether physical or electronic. We believe that, due to their electronic nature, rewards earned through our customer loyalty program are primarily vulnerable to hacking. Customers affected by any loss of data or funds could litigate against us, and security breaches or even unsuccessful attempts at hacking could harm our reputation, and guarding against or responding to hacks could require significant time and resources.
We also receive and maintain certain personal information about our customers, including information received through our marketing programs, franchisees and business partners. Our collection, storage, handling, use, disclosure and security of this information is regulated by U.S. federal, state and local and foreign laws and regulations. If our security and information systems are compromised or our employees fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as the results of operations, and could result in litigation against us or the imposition of penalties. In addition, our ability to accept credit and debit cards as payment in our stores and online depends on us maintaining our compliance status with standards set by the PCI Security Standards Council. These standards, set by a consortium of the major credit card companies, require certain levels of system security and procedures to protect our customers’ credit and debit card information as well as other personal information. Privacy and information security laws and regulations change over time, and compliance with those changes may result in cost increases due to necessary system and process changes.
We Are Subject To Periodic Litigation, Which Could Result In Unexpected Expenses Of Time And Resources.
From time to time, we are called upon to defend ourselves against lawsuits relating to our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome in any current or future legal proceedings could have an adverse impact on our business, and financial results. In addition, any significant litigation in the future, regardless of its merits, could divert management's attention from our operations and result in substantial legal fees. Any litigation could result in substantial costs and a diversion of management's attention and resources that are needed to successfully run our business.
Changes In Health Benefit Claims And Healthcare Reform Legislation Could Have A Material Adverse Effect On Our Operations.
We accrue for costs to provide self-insured benefits for our employee health benefits program. We accrue for self-insured health benefits based on historical claims experience and we maintain insurance coverage to prevent financial losses from catastrophic health benefit claims. We monitor pending and enacted legislation in an effort to evaluate the effects of such legislation upon our business. Our financial position or results of operations could be materially adversely impacted should we experience a material increase in claims costs or a change in healthcare legislation that impacts our business.
Our Expansion Into New Markets May Present Increased Risks Due To Our Unfamiliarity With Those Areas And Our Target Customers’ Unfamiliarity With Our Brands.
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Consumers in any new markets we enter will not be familiar with our brands, and we will need to build brand awareness in those markets through significant investments in advertising and promotional activity. We may find it more difficult in new markets to secure desirable locations and to hire, motivate and keep qualified employees.
Issues Or Concerns Related To The Quality And Safety Of Our Products, Ingredients Or Packaging Could Cause A Product Recall And/Or Result In Harm To The Company’s Reputation, Negatively Impacting Our Results Of Operations.
In order to sell our products, we need to maintain a good reputation with our customers and consumers. Issues related to the quality and safety of our products, ingredients or packaging could jeopardize our Company’s image and reputation. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, could decrease demand for our products or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. Costs associated with these potential actions could negatively affect our results of operations.
Our Financial Results May Be Adversely Impacted By The Failure To Successfully Execute Or Integrate Acquisitions, Divestitures And Joint Ventures.
From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our results of operations.
Provisions In Our Organizational Documents, As Well As Provisions Of Delaware Law, Could Make It More Difficult Or Costly For A Third Party To Acquire Us, Even If Doing So Would Benefit Our Stockholders, And Could Limit Attempts To Make Changes In Our Management.
Our amended and restated certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions include the following:
Although we believe all of these provisions will make a higher third-party bid more likely by requiring potential acquirers to negotiate with the Board of Directors, these provisions will apply even if an initial offer may be considered beneficial by some stockholders and therefore could delay and/or prevent a deemed beneficial offer from being considered. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of us. Any delay or prevention of a change of control or change in
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management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.
Our Common Stock Price May Be Volatile Or May Decline Regardless Of Our Operating Performance.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for such shares. Many factors, which are outside our control, may cause the market price of our common stock to fluctuate, including those described elsewhere in this “Risk Factors” section and this Annual Report, as well as the following:
As a result, volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the price they paid for such shares. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low. As a result, you may suffer a loss on your investment.
Our Auditor’s Opinion on Our Audited Consolidated Financial Statements for the Year Ended February 29, 2024, included in this Annual Report, Contains an Explanatory Paragraph Relating to our Ability to Continue as a Going Concern.
During the year ended February 29, 2024, we incurred a net loss of $4.2 million and used cash in operating activities of $2.4 million. In addition, at February 29, 2024, we were in violation of a debt covenant for our $1.25 million outstanding line of credit where the lender can demand repayment. These factors raise substantial doubts about our ability to continue as a going concern within one year of the date that the consolidated financial statements included
20
in this Annual Report are issued. Our auditor’s opinion on our audited consolidated financial statements for the year ended February 29, 2024 includes an explanatory paragraph stating that our losses and negative cash flows from operations and uncertainty in generating sufficient cash to meet our operating obligations raise substantial doubt about our ability to continue as a going concern. While we are considering a variety of funding sources and transactions that could raise capital, there can be no assurances that we will be successful in these efforts or will be able to resolve our liquidity issues or eliminate our operating losses. If we are unable to obtain sufficient funding, we would need to significantly reduce our operating plans and curtail some or all of our strategic plans. Accordingly, our business, prospects, financial condition, and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.
Our Inability to Meet a Financial Covenant Contained in our Revolving Credit Facility May Adversely Affect our Liquidity, Financial Condition and Results of Operations.
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $2.75 million was available for borrowing (subject to certain borrowing-based limitations) as of February 29, 2024 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.69% at February 29, 2024 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.
As of February 29, 2024, we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of February 29, 2024 was 1.19 to 1. In the past, we have requested, and the Lender has granted, waivers of our compliance with this requirement. We have requested a waiver from the Lender, but we have not yet received approval. There can be no assurance that the Lender will grant us a waiver for our current noncompliance or waivers for future noncompliance.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of the date of this Annual Report, we do not have enough cash on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the future, however, we may not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement which would have an adverse effect on our liquidity, financial condition and results of operations.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as we may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
Risks Related to the Economy
Global Or Regional Health Pandemics Or Epidemics Could Negatively Impact Our Business Operations, Financial Performance And Results Of Operations.
Our business and financial results could be negatively impacted by pandemics or epidemics. The severity, magnitude and duration of global or regional pandemics or epidemics are uncertain and hard to predict. COVID-19 significantly impacted economic activity and markets around the world, and resulted in broader supply, transportation and labor disruptions resulting in inflation and generally higher operating costs in our business. Relatedly, commodity and transportation costs have become more volatile and generally increased since the COVID-19 pandemic, as have supply chain disruptions, and transportation and labor shortages. Additionally, government or regulatory responses to pandemics could negatively impact our business. Mandatory lockdowns or other restrictions on operations in some
21
countries temporarily disrupted our ability to distribute our products in some markets. Resumption, continuation or expansion of these disruptions could materially adversely impact our operations and results.
These and other impacts of global or regional health pandemics or epidemics could have the effect of heightening many of the other risks described in the risk factors presented in this filing, including but not limited to those relating to our reputation, brands, consumer preferences, supply chain, product sales, pricing actions, results of operations or financial condition. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. The ultimate impact of these disruptions also depends on events beyond our knowledge or control, including the duration and severity of other pandemics or epidemics and actions taken by parties other than us to respond to them. Any of these disruptions could have a negative impact on our business operations, financial performance, results of operations and stock price, and this impact could be material.
General Economic Conditions Could Have A Material Adverse Effect On Our Business, Results Of Operations And Liquidity Or Our Franchisees, With Adverse Consequences To Us.
Consumer purchases of discretionary items, including our products, often decline during weak economic periods where disposable income is adversely affected. Our performance is subject to factors that affect worldwide economic conditions, including employment, consumer debt, reductions in net worth based on severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, public health, the value of the U.S. dollar versus foreign currencies and other macroeconomic factors. These factors may cause consumers to purchase products from lower priced competitors or to defer purchases of discretionary products altogether.
Economic weakness could have a material effect on our results of operations, liquidity and capital resources. It could also impact our ability to fund growth and/or result in us becoming more reliant on external financing, the availability and terms of which may be uncertain. In addition, a weak economic environment may exacerbate the other risks noted below.
We rely in large part on our franchisees and the manner in which they operate their stores to develop and promote our business. It is possible that additional franchisees could file for bankruptcy, become delinquent in their payments to us, or simply shut down which could have a significant adverse impact on our business due to loss of factory sales and loss or delay in payments of royalties, contributions to our marketing fund and other fees. Additionally, the availability of credit to our small business franchisees may be curtailed due to tighter credit conditions in the marketplace, and as a result could delay or preclude franchisees from making required store upgrades.
Although we have developed, and continue to develop, evolving criteria to evaluate and screen prospective developers and franchisees, we cannot be certain that the developers and franchisees we select will have the business acumen or financial resources necessary to open and operate successful franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise arrangements. Moreover, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. The failure of developers and franchisees to open and operate franchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees and could materially adversely affect our business, financial condition, results of operations and cash flows.
We Currently, And May In The Future, Have Assets Held At Financial Institutions That May Exceed The Insurance Coverage Offered By The Federal Deposit Insurance Corporation (“FDIC”), The Loss Of Which Would Have A Severe Negative Affect On Our Operations And Liquidity.
We may maintain our cash assets at financial institutions in the U.S. in amounts that may be in excess of the FDIC insurance limit of $250,000. In the event of a failure or liquidity issues at any of the financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material adverse effect upon our liquidity, financial condition and our results of operations. Similarly, if our customers or partners experience liquidity issues as a result of financial institution defaults or non-performance where they hold cash assets, their ability to pay us may become impaired and could have a material adverse effect on our results of operations, including the collection of accounts receivable and cash flows.
22
Risks Related to Our Franchisees
The Financial Performance Of Our Franchisees Can Negatively Impact Our Business.
Our financial results are dependent in part upon the operational and financial success of our franchisees. Franchisees purchase product from us and we receive royalties, franchise fees, contributions to our marketing fund, and other fees from our franchisees. We have established operational standards and guidelines for our franchisees; however, we have limited control over how our franchisees’ businesses are run. While we are responsible for ensuring the success of our entire system of stores and for taking a longer-term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may not be able to secure adequate financing to open or continue operating their Rocky Mountain Chocolate Factory stores. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience financial distress or even bankruptcy. If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalty revenues and the impact on our profitability could be greater than the percentage decrease in the royalty revenues. This would reduce our royalty revenues and could negatively impact margins, since we may not be able to reduce fixed costs which we continue to incur.
We Have Limited Control With Respect To The Operations Of Our Franchisees, Which Could Have A Negative Impact On Our Business.
Franchisees are independent business operators and are not our employees, and we do not exercise control over the day-to-day operations of their stores. We provide training and support to franchisees, and set and monitor operational standards, but the quality of franchised stores may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could decline significantly, which would reduce our royalty revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.
A Significant Shift By Franchisees From Company-Manufactured Products To Products Produced By Third Parties Could Adversely Affect Our Operations.
In FY 2024, approximately one-half of the revenues of Rocky Mountain Chocolate Factory stores were generated by products produced at our Durango production facility, and one-half of products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and with a small amount of products such as ice cream, coffee and other sundries purchased from approved suppliers. Franchisees' sales of products produced by us generate higher revenues to us than sales of store-made or other products. We have seen a significant increase in system-wide sales of store-made and other products, which has led to a decrease in purchases from us and has had an adverse effect on our revenues. If this trend continues, it could further adversely affect our total revenues and results of operations. Such a decrease could result from franchisees' decisions to sell more store-made products or products purchased from approved third party suppliers.
Risks Related to Our Supply Chain
Increase In Ingredient And Other Operating Costs, Including Those Caused By Weather And Food Safety, Could Adversely Affect Our Results Of Operations.
Our Company-owned and franchised stores could also be harmed by supply chain interruptions including those caused by factors beyond our control or the control of our suppliers. However, prolonged disruption in the supply of products from or to our manufacturing facility due to weather, natural disasters, food safety incidents, regulatory compliance, labor dispute or interruption of service by carriers could increase costs, limit the availability of ingredients critical to our store operations and have a significant impact on results. Increasing weather volatility or other long-term changes in global weather patterns could have a significant impact on the price or availability of some of our ingredients, energy and other materials throughout our supply chain. In particular, adverse weather or cocoa beans or nuts shortages could disrupt the supply of key ingredients to our and our franchisees’ stores. Insolvency of key suppliers could also cause similar business interruptions and negatively impact our business.
23
Disruption To Our Manufacturing Facility Or Supply Chain Could Impair Our Ability To Produce Or Deliver Finished Products, Resulting In A Negative Impact On Our Results Of Operations.
All of our manufacturing operations are located in Durango, Colorado. Disruption to our manufacturing facility or to our supply chain could result from a number of factors, including natural disasters, pandemics, outbreak of disease, weather, fire or explosion, terrorism or other acts of violence, labor strikes or other labor activities, unavailability of raw or packaging materials, and operational and/or financial instability of key suppliers and other vendors or service providers. We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if they were to occur. However, if we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing facility or supply chain, our financial condition and results of operations could be negatively impacted.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Our Board of Directors is responsible for exercising oversight of management’s identification and management of, and planning for, risks from cybersecurity threats.
We are developing processes, that seek to assess, identify, and manage material risks from cybersecurity threats to the IT systems and information that we use or will use, transmit, receive, and maintain. The processes for assessing, identifying, and managing material risks from cybersecurity threats include our efforts to identify the relevant assets that could be affected, determine possible threat sources and threat events, assess threats based on their potential likelihood and impact, and identify controls that are in place or necessary to manage and/or mitigate such risks.
We have not experienced any material cybersecurity incidents, and the expenses incurred from any security incidents have been immaterial. However, as discussed under “Risk Factors” in Part I, Item 1A of this Annual Report, cybersecurity threats pose multiple and potentially material risks to us, including potentially to our results of operations and financial condition. We rely extensively on information technology systems and could face cybersecurity risk. As cybersecurity threats become more frequent, sophisticated, and coordinated, it is reasonably likely that we may expend greater resources to continue to modify and enhance protective measures against such security risks
ITEM 2. PROPERTIES
Our production operations and corporate headquarters are located at 265 Turner Drive, Durango, Colorado 81303, which is a 53,000 square foot manufacturing facility that we own. During FY 2024, our manufacturing operations produced approximately 1.61 million pounds of chocolate products, which was a decrease of approximately 4.7% from the approximately 1.69 million pounds produced in FY 2023. In addition to our production facility, we own a two-acre parcel adjacent to our production facility.
As of February 29, 2024, the Company had obligations for one non-cancelable lease for our Flagship Store having an expiration date of January 31, 2026, which contains an optional ten-year renewal right. We do not deem this store lease to be material in relation to our overall operations.
For information as to the amount of our rental obligations under leases on both Company-owned and franchised stores, see Note 10 “Leasing Arrangements” to our consolidated financial statements included in Item 8 of this Annual Report.
ITEM 3. LEGAL PROCEEDINGS
Item 1. Legal Proceedings
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
We may, from time to time, become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially susceptible to litigation, such as asserting violations of
24
securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
25
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the Nasdaq Global Market tier of the Nasdaq Stock Market LLC under the symbol “RMCF.”
Holders
On May 31, 2024, there were approximately 442 record holders of our common stock. This figure does not include an estimate of the number of beneficial holders whose shares are held of record by banks, broker or other nominees.
Dividends
Although we have previously paid cash dividends on our common stock, we have no present intention of paying a cash dividend on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our existing and any future debt and other factors that our board of directors deems relevant.
Unregistered sales of equity securities
In connection with the appointment of Scott Ouellet as Senior Vice President, Manufacturing and Supply Chain, the Compensation Committee of the Board of Directors approved an inducement award, in accordance with Nasdaq Listing Rule 5635(c)(4), to Mr. Ouellet, granted on September 18, 2023, consisting of an aggregate of 19,591 restricted stock units ("RSUs”). The RSUs were granted as an inducement material to Mr. Ouellet’s acceptance of employment as Senior Vice President, Manufacturing and Supply Chain, and were granted outside of the Company’s 2007 Equity Incentive Plan (as amended and restated).
The issuance of the above securities was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving any public offering.
ITEM 6. RESERVED
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) is intended to assist in an understanding of our financial condition and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in Item 8 of this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report, particularly in Item 1A. “Risk Factors.”
Overview
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”) (referred to as the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery producer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolate products and other confectionery products (“Durango Products”). Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionary products including gourmet caramel apples. We also sell our confectionary products in select locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of February 29, 2024, there was 2 Company-owned, 115 licensee-owned and 152 franchised Rocky Mountain Chocolate Factory stores operating in 36 states and the Philippines.
Recent Developments
On November 10, 2023, our board of directors adopted stock ownership guidelines for our non-employee directors and executive officers. Under the guidelines, non-employee directors are required to own certain eligible securities (“Eligible Shares”) of the Company worth three (3) times the cash portion of their annual directors’ base fees paid in cash, not including any retainers for service as the Board Chair or as a Board Committee Chair. Our Chief Executive Officer is required to own Eligible Shares worth three (3) times their base salary. Other executive officers of the Company are required to own Eligible Shares worth one (1) times their base salary. Non-employee directors elected prior to November 16, 2021 will have five (5) years from November 16, 2021 to meet the holding requirements. Non-employee directors elected after November 16, 2021 and up to November 10, 2023, will have five (5) years from the date of his or her election to meet the holding requirements. Executive officers serving as of November 10, 2023 will have five (5) years from that date to meet the minimum ownership requirement. All directors and executive officers who are elected or appointed after November 10, 2023 will have five (5) years from the time they are elected or appointed to meet the minimum ownership requirement.
On May 1, 2023, subsequent to the end of FY 2023, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiary and frozen yogurt business, U-Swirl International, Inc. The aggregate sale price of U-Swirl was $2.75 million, consisting of (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year secured promissory note. The business divestiture of the U-Swirl segment was preceded by a separate sale of the Company’s three owned U-Swirl locations on February 24, 2023. The consolidated financial statements present the historical financial results of the former U-Swirl segment as discontinued operations for all periods presented. See Note 17 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data“, of this Annual Report for information on this divestiture.
With the sale of U-Swirl, we continue to focus on our confectionery business to further enhance our competitive position and operating margin, simplify our business model, and deliver sustainable value to our stockholders.
Current Trends Affecting Our Business and Outlook
As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs. We have seen labor and logistics challenges, which we believe have contributed to lower factory, retail and e-commerce sales of our products due to the availability of material, labor and freight. In addition, we could experience additional lost sale opportunities
27
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 production facility, or if we or our franchisees experience delays in stocking our products.
During FY 2023, the Company incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During FY 2023, the Company incurred approximately $4.1 million of costs associated with the contested solicitation of proxies, however there were no such comparable costs in FY 2024. The Company also incurred $1.2 million of severance and retirement related costs for certain of our executives in FY 2024, compared to $1.1 million in FY 2023.
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in resort or tourist locations, and the nature of the products we sell, which are highly seasonal. Historically, the strongest sales of our products have occurred during key holidays and summer vacation seasons. Additionally, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
The most important factors in continued growth in our earnings are our ability to increase the sales of premium chocolate products produced in our Durango production facility, the ability to produce more efficiently, supporting our franchisees in increasing the frequency and average value of customer transactions, ongoing online revenue growth, and franchise store growth.
Our ability to successfully achieve expansion of our franchise systems depends on many factors not within our control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion.
Efforts to reverse the decline in same store pounds purchased from our production facility by franchised stores and to increase total Durango production depend on many factors, including new store openings, competition, the receptivity of our franchise system to our product introductions and promotional programs.
Results of Continuing Operations
Fiscal 2024 Compared To Fiscal 2023
Results Summary
Basic loss per share decreased from a loss from continuing operations of $(0.88) per share in FY 2023 to a loss from continuing operations of $(0.77) per share in FY 2024. Revenues decreased by 8.2% from $30.4 million for FY 2023 to $28.0 million for FY 2024. Operating loss was $4.9 million in FY 2023 compared to an operating loss of $4.9 million in FY 2024. Loss from continuing operations decreased from a loss of $5.5 million in FY 2023 to a loss of $4.9 million in FY 2024.
REVENUES
|
|
For the Year Ended |
|
|
|
|
|
|
|
|||||||
|
|
February 29 or 28, |
|
|
$ |
|
|
% |
|
|||||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|
||||
Durango product and retail sales |
|
$ |
22,022.3 |
|
|
$ |
24,456.9 |
|
|
|
(2,434.6 |
) |
|
|
(10.0 |
)% |
Franchise fees |
|
|
167.8 |
|
|
|
204.7 |
|
|
|
(36.9 |
) |
|
|
(18.0 |
)% |
Royalty and marketing fees |
|
|
5,760.6 |
|
|
|
5,770.8 |
|
|
|
(10.2 |
) |
|
|
(0.2 |
)% |
Total |
|
$ |
27,950.7 |
|
|
$ |
30,432.4 |
|
|
$ |
(2,481.7 |
) |
|
|
(8.2 |
)% |
Durango Product and Retail Sales
The decrease in total sales for FY 2024 compared to FY 2023 was primarily due to a 10%, or $2.4 million, decrease in sales of product to our network of franchised and licensed retail stores resulting from disruptions in our consumer
28
packaged product availability to our franchise system due to a relocation of our packaging line to Salt Lake City, Utah in October as part of our plan to address labor shortages in the Durango area
In FY 2024, same store pounds purchased by franchisees and licensees declined slightly compared to the prior fiscal year. We continue to add new products and focus our existing product lines in an effort to increase same store pounds purchased by existing locations.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees were approximately unchanged during FY 2024 compared to FY 2023. The slight decrease in franchise fee revenue during FY 2024 compared to FY 2023 was primarily the result of store closures offset by the acceleration of unrecognized franchise fee revenue.
COSTS AND EXPENSES
Cost of Sales
|
|
For the Year Ended |
|
|
|
|
|
|
|
|||||||
|
|
February 29 or 28, |
|
|
$ |
|
|
% |
|
|||||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|
||||
Total cost of sales |
|
$ |
20,655.6 |
|
|
$ |
20,455.4 |
|
|
$ |
200.2 |
|
|
|
1.0 |
% |
Franchise costs |
|
|
2,582.4 |
|
|
|
1,825.8 |
|
|
|
756.6 |
|
|
|
41.4 |
% |
Sales and marketing |
|
|
2,131.7 |
|
|
|
2,060.2 |
|
|
|
71.5 |
|
|
|
3.5 |
% |
General and administrative |
|
|
6,673.9 |
|
|
|
10,325.7 |
|
|
|
(3,651.8 |
) |
|
|
(35.4 |
)% |
Retail operating |
|
|
671.5 |
|
|
|
537.5 |
|
|
|
134.0 |
|
|
|
24.9 |
% |
Total |
|
$ |
32,715.1 |
|
|
$ |
35,204.6 |
|
|
$ |
(2,489.5 |
) |
|
|
(7.1 |
)% |
Gross Margin |
|
For the Year Ended |
|
|
|
|
|
|
|
|||||||
|
|
February 29 or 28, |
|
|
$ |
|
|
% |
|
|||||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|
||||
Total gross margin |
|
$ |
1,366.7 |
|
|
$ |
4,001.5 |
|
|
$ |
(2,634.8 |
) |
|
|
(65.8 |
)% |
Gross margin percentage |
|
|
6.2 |
% |
|
|
16.4 |
% |
|
|
(10.2 |
)% |
|
|
(62.1 |
)% |
Adjusted Gross Margin |
|
For the Year Ended |
|
|
|
|
|
|
|
|||||||
(a non-GAAP measure) |
|
February 29 or 28, |
|
|
$ |
|
|
% |
|
|||||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|
||||
Total gross margin |
|
$ |
1,366.7 |
|
|
$ |
4,001.5 |
|
|
$ |
(2,634.8 |
) |
|
|
(65.8 |
)% |
Plus: depreciation and amortization |
|
|
749.6 |
|
|
|
646.4 |
|
|
$ |
103.2 |
|
|
|
16.0 |
% |
Total Adjusted Gross Margin (non-GAAP measure) |
|
$ |
2,116.3 |
|
|
$ |
4,647.9 |
|
|
$ |
(2,531.6 |
) |
|
|
(54.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Adjusted Gross Margin (non-GAAP measure) |
|
|
9.6 |
% |
|
|
19.0 |
% |
|
|
(9.4 |
)% |
|
|
(49.4 |
)% |
Non-GAAP Measures
In addition to the results provided in accordance with U.S. GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with U.S. GAAP. Adjusted gross margin is a non-GAAP measure. Adjusted gross margin is equal to the sum of our total gross margin plus depreciation and amortization calculated in accordance with GAAP. We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin, and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin is 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 rather than gross margin to make incremental pricing decisions. Adjusted gross margin has limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary
29
element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin.
Cost of Sales and Gross Margin
Total gross margin decreased to 6.2% in FY 2024 compared to a gross margin of 16.4% during FY 2023, due primarily to an increase in overhead costs, a sharp increase in the cost of cocoa as a raw material as well as other inflationary pressures we were unable to capture through price increases, and a reduction in production volume. Additionally, production volume decreased and expense incurred increased as a result of the Company undertaking actions to relocated its consumer packaging operations to Salt Lake City, Utah in response to limited labor ability in the Durango labor pool, which lead to delays in order fulfillment going into our busy holiday sales season.
Franchise Costs
The increase in franchise costs in FY 2024 compared to FY 2023 was due primarily to investments in human capital and the ongoing brand update and store redesign expense. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 43.6% in FY 2024 from 30.6% in FY 2023. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of higher royalty fees partially offset by higher costs.
Sales and Marketing
The increase in sales and marketing costs during FY 2024 compared to FY 2023 was due primarily to an increase in equity compensation costs and contract labor associated with the retirement of our former Senior Vice President of Sales and Marketing, and an increase in advertising costs.
General and Administrative
The decrease in general and administrative costs during FY 2024, compared to FY 2023, was due primarily to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2023 annual meeting of stockholders. During FY 2024, the Company did not incur material costs associated with the contested solicitation of proxies, compared with $4.1 million of costs associated with a contested solicitation of proxies during FY 2023. The Company also incurred increased professional fees related to legal support for our Board of Directors and legal costs associated with compensation agreements 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 our former Senior Vice President of Sales and Marketing if a triggering termination was to occur. As a result of our former Senior Vice President of Sales and Marketing's retirement in September 2022, the Company incurred $1.1 million of associated severance costs. As a percentage of total revenues, general and administrative expenses decreased to 23.9% during FY 2024, compared to 33.9% during FY 2023.
Retail Operating Expenses
Retail operating expenses increased 24.9% during FY 2024 compared to FY 2023. This increase is primarily the result of the Company's new Corpus Christi, TX location. In November 2022 we sold a Company-owned store located in Peoria, Illinois, to a franchisee. The result is that as of February 29, 2024, we operated two Company-owned locations.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales was $0.1 million during FY 2024, relatively unchanged from $0.1 million during FY 2023. Depreciation and amortization included in cost of sales increased 16.0% from $0.6 million during FY 2023 to $0.7 million during FY 2024. This increase was the result of investment in production equipment.
Other Income (Expense)
30
Other income was $26,400 during FY 2024, compared to other income of $16,500 during FY 2023. This represents interest income of $79,836 during FY 2024 compared to $26,921 during FY 2023, and interest expense of $53,397 during FY 2024 compared to $10,431 during FY 2023.
Income Tax Expense
During FY 2024, we did not incur any income tax expense on a loss from continuing operations before income taxes of $4.9 million compared to an income tax expense of $0.6 million on a loss from continuing operations before income taxes of $4.9 million during FY 2023. The FY 2023 expense was the result of recording a full valuation allowance on our deferred income tax assets. See Note 13 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.
Liquidity and Capital Resources
As of February 29, 2024, working capital was $1.5 million compared with $6.2 million as of February 28, 2023. The decrease in working capital was due primarily to a strategic reduction of inventory on hand commensurate with the current product assortments actively marketed by us and our franchisees, and continued capital investment in the Durango production facility. We have historically generated excess operating cash flow.
Cash and cash equivalent balances decreased from $4.7 million as of February 28, 2023 to $2.1 million as of February 29, 2024 primarily as a result of cash used by operating and investing activities. Our current ratio was 1.19 to 1.0 on February 29, 2024 compared to 2.24 to 1.0 on February 28, 2023. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2024, we had a consolidated net loss of $4.2 million, less net loss from discontinued operations of $0.7 million. Operating activities used cash of $2.4 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $0.9 million, provision for obsolete inventory of $0.2 million and stock compensation expense of $0.4 million. During FY 2023, we had a consolidated net loss of $5.7 million. Operating activities used cash of $2.1 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being expense associated with establishing a full reserve of deferred tax assets of $0.7 million, depreciation and amortization of $0.8 million, provision for obsolete inventory of $0.7 million and stock compensation expense of $0.7 million.
During FY 2024, investing activities used cash of $1.45 million, primarily due to the purchases of property and equipment of $3.0 million, partially offset by investing cash flow from discontinued operations (the result of the sale of U-Swirl assets) of $1.4 million. In comparison, investing activities used cash of $0.8 million during FY 2023 primarily due to the purchases of property and equipment of $1.0 million, partially offset by investing cash flow from discontinued operations of $0.2 million.
There were $1.25 million cash flows from financing activities during FY 2024 compared to no cash flows from financing activities during the prior year. The Company drew down $1.25 million on its revolving line of credit during FY 2024 as discussed further below.
The conditions above raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial statements. In addition, our independent registered public accounting firm, in their report on the Company’s February 29, 2024, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.
Revolving Line of Credit
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $2.75 million was available for borrowing (subject to certain borrowing-based limitations) as of February 29, 2024 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.69% at February 29, 2024 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants. Per the Credit Agreement, the maturity date is September 30, 2024.
31
As of February 29, 2024 we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of February 29, 2024 was 1.19 to 1. We have requested a waiver from the Lender and received approval as of the date of this Annual Report. We were in compliance, however, with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of the date of this Annual Report, we do not have enough cash on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the future, however, we may not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities which could give us the ability to repay the Credit Line as needed.
Contractual Obligations
The table below presents significant contractual obligations of the Company at February 29, 2024.
(Amounts in thousands)
Contractual Obligations |
|
Total |
|
|
Less than |
|
|
2-3 Years |
|
|
4-5 years |
|
|
More |
|
|||||
Operating leases |
|
$ |
1,874,640 |
|
|
$ |
514,169 |
|
|
$ |
781,133 |
|
|
$ |
238,208 |
|
|
$ |
341,130 |
|
Purchase contracts |
|
|
269,808 |
|
|
|
269,808 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total |
|
$ |
2,144,448 |
|
|
$ |
783,977 |
|
|
$ |
781,133 |
|
|
$ |
238,208 |
|
|
$ |
341,130 |
|
The Company made an average of $1.7 million per year in capital expenditures during FY 2022 to FY 2024. For FY 2025 the Company anticipates making similar levels of capital expenditures. The planned increase is the result of expected investment in an updated Enterprise Resource Planning (ERP) management system, and machinery and equipment to replace equipment that has reached the end of its useful life.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on 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.
Critical Accounting Estimates
32
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The Company did not identify any critical estimates used in the preparation of our consolidated financial statements for the year ended February 29, 2024.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
Page |
|
|
Report of Independent Registered Public Accounting Firm ( |
35 |
|
|
Report of Independent Registered Public Accounting Firm ( |
|
|
|
37 |
|
|
|
38 |
|
|
|
39 |
|
|
|
40 |
|
|
|
41 |
34
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 29, 2024, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the fiscal year then ended, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 29, 2024, and the results of its operations and its cash flows for the fiscal year then ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company's ability to continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note 1 to the financial statements, the Company has incurred recurring losses and negative cash flows from operations in recent years and is dependent on debt financing to fund its operations, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ CohnReznick LLP
We have served as the Company’s auditor since 2023.
New York, New York
June 13, 2024
35
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2023, the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended February 28, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PLANTE & MORAN, PLLC
We served as the Company’s auditor from 2004 to 2023.
Cleveland, Ohio
May 30, 2023
36
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
FOR THE YEARS ENDED FEBRUARY 29 or 28, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Revenues |
|
|
|
|
|
|
|
|
|
|||
Sales |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Franchise and royalty fees |
|
|
|
|
|
|
|
|
|
|||
Total Revenue |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|||
Cost of sales |
|
|
|
|
|
|
|
|
|
|||
Franchise costs |
|
|
|
|
|
|
|
|
|
|||
Sales and marketing |
|
|
|
|
|
|
|
|
|
|||
General and administrative |
|
|
|
|
|
|
|
|
|
|||
Retail operating |
|
|
|
|
|
|
|
|
|
|||
Depreciation and amortization, exclusive of depreciation |
|
|
|
|
|
|
|
|
|
|||
Total costs and expenses |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Loss from Operations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|||
Gain on insurance recovery |
|
|
|
|
|
|
|
|
|
|||
Other income, net |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Loss Before Income Taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Income Tax Provision (Benefit) |
|
|
|
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|||
Loss from Continuing Operations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Earnings (loss) from discontinued operations, net of tax |
|
|
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|||
Net Loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Basic Loss per Common Share |
|
|
|
|
|
|
|
|
|
|||
Loss from continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Earnings (loss) from discontinued operations |
|
|
|
|
|
( |
) |
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Diluted Loss per Common Share |
|
|
|
|
|
|
|
|
|
|||
Loss from continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Earnings (loss) from discontinued operations |
|
|
|
|
|
( |
) |
|
$ |
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Weighted Average Common Shares Outstanding - Basic |
|
|
|
|
|
|
|
|
|
|||
Dilutive Effect of Employee Stock Awards |
|
|
|
|
|
|
|
|
|
|||
Weighted Average Common Shares Outstanding - Diluted |
|
|
|
|
|
|
|
|
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
37
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
AS OF FEBRUARY 29 or 28, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Assets |
|
|
|
|
|
|
||
Current Assets |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts receivable, less allowance for credit losses |
|
|
|
|
|
|
||
Notes receivable, current portion, less current portion of the |
|
|
|
|
|
|
||
Refundable income taxes |
|
|
|
|
|
|
||
Inventories |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Current assets held for sale |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Property and Equipment, Net |
|
|
|
|
|
|
||
Other Assets |
|
|
|
|
|
|
||
Notes receivable, less current portion and allowance for credit losses |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
||
Lease right of use asset |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Long-term assets held for sale |
|
|
|
|
|
|
||
Total other assets |
|
|
|
|
|
|
||
Total Assets |
|
$ |
|
|
$ |
|
||
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
||
Current Liabilities |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Line of credit |
|
|
|
|
|
|
||
Accrued salaries and wages |
|
|
|
|
|
|
||
Gift card liabilities |
|
|
|
|
|
|
||
Other accrued expenses |
|
|
|
|
|
|
||
Contract liabilities |
|
|
|
|
|
|
||
Lease liability |
|
|
|
|
|
|
||
Current liabilities held for sale |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Lease Liability, Less Current Portion |
|
|
|
|
|
|
||
Contract Liabilities, Less Current Portion |
|
|
|
|
|
|
||
Long-term liabilities - held for sale |
|
|
|
|
|
|
||
Total Liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Stockholders' Equity |
|
|
|
|
|
|
||
Preferred stock, $ |
|
|
|
|
|
|
||
Common stock, $ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Retained earnings |
|
|
|
|
|
|
||
Total stockholders' equity |
|
|
|
|
|
|
||
Total Liabilities and Stockholders' Equity |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these consolidated financial statements.
38
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
Convertible Preferred Stock |
|
|
Common Stock |
|
|
Additional Paid-In |
|
|
Retained |
|
|
Total Stockholders' |
|
|||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Equity |
|
|||||||
Balances as of February 28, 2021 |
|
|
— |
|
|
$ |
- |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Issuance of common stock, vesting of restricted stock units and other, net of shares withheld |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity compensation, restricted stock units, net of shares withheld |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss attributable to RMCF stockholders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Redemption of outstanding preferred stock purchase rights |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Balances as of February 28, 2022 |
|
|
— |
|
|
$ |
- |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Equity compensation, restricted stock units, net of shares withheld |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss attributable to RMCF stockholders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Balances as of February 28, 2023 |
|
|
— |
|
|
$ |
- |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Equity compensation, restricted stock units, net of shares withheld |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss attributable to RMCF stockholders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Balances as of February 29, 2024 |
|
|
|
|
$ |
- |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The accompanying notes are an integral part of these consolidated financial statements.
39
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
FOR THE YEARS ENDED FEBRUARY 29 or 28, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|||
Net Loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Less: Net Income (Loss) from discontinued operations, net of tax |
|
|
|
|
|
( |
) |
|
|
|
||
Net Loss from continuing operations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|||
Provision for obsolete inventory |
|
|
|
|
|
|
|
|
|
|||
Provision for loss (recovery) on accounts and notes receivable |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Asset impairment and store closure losses |
|
|
|
|
|
|
|
|
|
|||
Loss (gain) on sale or disposal of property and equipment |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Expense recorded for stock compensation |
|
|
|
|
|
|
|
|
|
|||
Deferred income taxes |
|
|
|
|
|
|
|
|
( |
) |
||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|||
Accounts receivable |
|
|
|
|
|
|
|
|
|
|||
Refundable income taxes |
|
|
|
|
|
|
|
|
|
|||
Inventories |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other current assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
|
|
|
|
|
|
|
|||
Accrued liabilities |
|
|
|
|
|
( |
) |
|
|
|
||
Contract liabilities |
|
|
( |
) |
|
|
|
|
|
|
||
Net cash (used in) provided by operating activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
( |
) |
|
|
|
|
|
|
||
Net cash (used in) provided by operating activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|||
Addition to notes receivable |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Proceeds received on notes receivable |
|
|
|
|
|
|
|
|
|
|||
Proceeds from insurance recovery |
|
|
|
|
|
|
|
|
|
|||
Proceeds from the sale or distribution of assets |
|
|
|
|
|
|
|
|
|
|||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
|
|
|
|
|
|
( |
) |
||
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net cash provided by investing activities |
|
|
|
|
|
|
|
|
|
|||
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|||
Repurchase of common stock through net |
|
|
|
|
|
|
|
|
( |
) |
||
Proceeds from line of credit |
|
|
|
|
|
|
|
|
|
|||
Dividends paid and redemption of outstanding |
|
|
|
|
|
|
|
|
( |
) |
||
Net cash (used in) provided by financing |
|
|
|
|
|
|
|
|
|
|||
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|||
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cash and Cash Equivalents, Beginning of Year |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Cash and Cash Equivalents, End of Year |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
40
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation), Aspen Leaf Yogurt, LLC (“ALY”), U-Swirl International, Inc. (dissolved in October 2023) (“U-Swirl”), and U-Swirl, Inc. (“SWRL”) (collectively, the “Company”, "we", “RMCF”).
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 (“Durango Products”). The Company also sells its candy in select locations outside of its system of retail stores.
On February 24, 2023 the Company entered into an agreement to sell its three Company-owned U-Swirl locations. Separately, on May 1, 2023, subsequent to the 2023 fiscal year end, the Company entered into an agreement to sell its franchise rights and intangible assets related to U-Swirl and associated brands. As a result, the activities of the Company’s U-Swirl subsidiary that have historically been reported in the U-Swirl segment have been reported as discontinued operations. See Note 17 – Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding the Company's discontinued operations, including net sales, operating earnings and total assets by segment. The Company’s financial statements reflect continuing operations only, unless otherwise noted.
The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; sales at Company-owned stores of chocolates and other confectionery products including gourmet caramel apples; and marketing fees.
The Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be measured on a recurring basis at fair value. The Company is not a party to any material derivative financial instruments. The Company does not have a material amount of non-financial assets or non-financial liabilities that are required under U.S. GAAP to be measured at fair value on a recurring basis. The Company has not elected to use the fair value measurement option, as permitted under U.S. GAAP, for any assets or liabilities for which fair value measurement is not presently required. The Company believes the fair values of cash equivalents, accounts and notes receivable, accounts payable and line of credit approximate their carrying amounts due to their short duration.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand at February 29, 2024:
|
|
Stores |
|
|
Opened |
|
|
Closed |
|
|
Sold |
|
|
Stores |
|
|||||
Rocky Mountain Chocolate Factory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Company-owned stores |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Franchise stores - Domestic stores |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
International license stores |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
Cold Stone Creamery - co-branded |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
U-Swirl - co-branded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liquidity and Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. In accordance with ASC 205-40, Going Concern, the Company’s management has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to
41
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
continue as a going concern within one year after the date the accompanying financial statements were issued. During the year ended February 29, 2024, the Company incurred a net loss of $
The Company’s ability to continue as a going concern is dependent on its ability to continue to implement its business plan. The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or, amending its Credit Line facility. The Company is also exploring supplemental debt facilities for other operational activities. During the next twelve months the Company intends to sell an unused parcel of land near its headquarters, cut overhead for manufacturing, and increase profits and gross margins through increasing chocolate price sales to its franchising system and Specialty Market customers. In addition, the Company intends to benefit from busy season of holiday product sales and add a CFO to its management teams during the next twelve months. In the event the Company is unable to generate profits, positive cash flow, and implement its business plan, it may have to curtail its business further and no longer continue as a going concern.
Basis of Presentation and Consolidation
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the estimate of the reserve for uncollectible accounts, revenue recognition, reserve for inventory obsolescence, and inputs for assessing goodwill impairment. The Company bases its estimates on historical experience and also on assumptions that the Company believes are reasonable. The Company assesses these estimates on a regular basis; however, actual results could materially differ from these estimates.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.
Accounts and Notes Receivable
Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Notes receivable generally reflect the sale of assets. Accounts and notes receivable are stated at the net amount expected to be collected, using an estimate of current expected credit losses to determine the allowance for expected credit losses. The Company evaluates the collectability of its accounts and notes receivable and determines the appropriate allowance for expected credit losses based on a combination of factors,
42
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
including the aging of the receivables and historical collection trends. When the Company is aware of a customer’s inability to meet its financial obligation, the Company may individually evaluate the related receivable to determine the allowance for expected credit losses. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of February 29, 2024, the Company had $
On February 29, 2024, the Company had total notes receivable of $
Inventories
Inventories are stated at the lower of cost or net realizable value, which is adjusted for obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. The inventory value is determined through analysis of items held in inventory, and, if the recorded value is higher than the net realizable value, the Company records an expense to reduce inventory to its actual net realizable value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, net realizable value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which ranges from to
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable.
Income Taxes
The Company provides for income taxes pursuant to the asset and liability method. The asset and liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax basis of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward prior to its expiration, is more likely than not. The Company has recorded a deferred tax asset related to historical U-Swirl losses and has determined that these losses are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The Company's temporary differences are listed in Note 13.
Gift Card Breakage
43
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company and its franchisees sell gift cards that are redeemable for product in stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in current liabilities in our balance sheets.
There are no expiration dates on the Company’s gift cards, and the Company does not charge any service fees. While the Company’s franchisees continue to honor all gift cards presented for payment, the Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company recognizes breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. Accrued gift card liability was $
Goodwill
Goodwill arose primarily from two transaction types. The first type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. The second type was from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis, generally the first day of its fourth quarter, or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. The recoverability of goodwill is evaluated through a comparison of the fair value of each of the Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. The Company’s goodwill is further described in Note 7 to the financial statements.
During FY 2023, the Company recorded $
Intangible Assets
Intangible assets represent non-physical assets that create future economic value and are primarily composed of packaging design, store design, trademarks and non-competition agreements. Intangible assets are amortized on a straight line basis over periods ranging from
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Sales
44
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has performance obligations to sell products to franchisees and other customers, and revenue is recognized at a point in time. Control is transferred when the order has been shipped to a customer, utilizing a third party, or at the time of delivery when shipped on the Company’s trucks. Revenue is measured based on the amount of consideration that is expected to be received by the Company for providing goods or services under a contract with a customer. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to the Company’s franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to Company-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
The Company recognizes franchise fees over the term of the associated franchise agreement, which is generally a period of
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
In FY 2021, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards. Stock-based compensation expense related to stock awards is measured based on the fair value of the awards granted and recognized as an expense over the requisite service period.
The fair value of each RSU award is based on the fair value of the underlying common stock as of the grant date. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, generally five to six years.
The Company accounts for forfeitures as they occur.
Related Party Transactions
45
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 14, 2022 the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”), by and among the Company, Bradley L. Radoff, an individual (“Radoff”), Andrew T. Berger, an individual, AB Value Partners, LP (“AB Value Partners”), AB Value Management LLC (“AB Value Management” and, together with AB Value Partners, “AB Value” and, together with Radoff, “ABV-Radoff”), and Mary Bradley, an individual, pertaining to, among other things, the dismissal of all pending lawsuits between the parties.
Pursuant to the Settlement Agreement, the Company and ABV-Radoff agreed to a “Standstill Period” commencing on the effective date of the agreement and ending on the date that is forty-five (45) days prior to the beginning of the Company’s advance notice period for the nomination of directors at the Company’s 2025 annual meeting of stockholders. During the Standstill Period, ABV-Radoff agreed, subject to certain exceptions, other than in Rule 144 open market broker sale transactions where the identity of the purchaser is not known and in underwritten widely dispersed public offerings, not to sell, offer, or agree to sell directly or indirectly, through swap or hedging transactions or otherwise, the securities of the Company or any rights decoupled from the underlying securities of the Company held by ABV-Radoff to any person or entity other than the Company or an affiliate of ABV-Radoff (a “Third Party”) that, to the ABV-Radoff’s knowledge would result in such Third Party, together with its Affiliates and Associates (as such terms are defined in the Settlement Agreement), owning, controlling, or otherwise having beneficial ownership or other ownership interest in the aggregate of more than
On August 3, 2023, the Board of Directors of the Company authorized and approved the issuance of a limited waiver (the “Limited Waiver”) of the Lock-Up Restriction with regard to a sale by ABV-Radoff of up to
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units.
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 year ended February 29, 2024,
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expenses amounted to $
Fair Value of Financial Instruments
46
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s financial instruments consist of cash and cash equivalents, trade and notes receivables, accounts payables, and its line of credit. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments. All of the Company’s financial instruments are classified as level 1 and level 2 assets within the fair value hierarchy. The Company does not have any financial instruments classified as level 3 assets.
Recently Adopted Accounting Pronouncements
Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on the Company's consolidated financial statements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments and affect the carrying value of accounts receivable. The Company
New Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 enhances the disclosures required for operating segments in the Company’s annual and interim consolidated financial statements. The disclosures required under ASU 2023-07 are also required for public entities with a single reportable segment. The updates in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The updates in this ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
Subsequent Events
Management evaluated all activity of the Company through the issue date of the financial statements and concluded that no subsequent events have occurred that would require recognition or disclosure in the financial statements.
47
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 29 or 28:
Cash paid (received) for: |
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Interest |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|||
Sale of assets in exchange for note receivable |
|
$ |
|
|
$ |
|
|
$ |
|
|||
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue from contracts with its customers in accordance with Accounting Standards Codification® (“ASC”) 606, which provides that revenues are recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. The Company generally receives a fee associated with the franchise agreement or license agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These Customer Contracts have a term of up to
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and are treated as a single performance obligation. Initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally
The following table summarizes contract liabilities as of February 29, 2024 and February 28, 2023:
|
|
Twelve Months Ended |
|
|||||
|
|
February 29 or 28: |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Contract liabilities at the beginning of the year: |
|
$ |
|
|
$ |
|
||
Revenue recognized |
|
|
( |
) |
|
|
( |
) |
Contract fees received |
|
|
|
|
|
|
||
Contract liabilities at the end of the year: |
|
$ |
|
|
$ |
|
||
At February 29, 2024, 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:
|
$ |
|
||
|
|
|
||
|
|
|
||
|
|
|
||
|
|
|
||
|
|
|
||
Total |
|
$ |
|
48
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The Company recognizes breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. The Company recognized breakage of $
Durango Product Sales of Confectionary Items, Retail Sales and Royalty and Marketing Fees
Confectionary items sold to the Company’s franchisees, others and its Company-owned stores’ sales are recognized at the time of the underlying sale, based on the terms of the sale and when ownership of the inventory is transferred, and are presented net of sales taxes and discounts. Royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales are recognized at the time the sales occur.
NOTE 4 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 29, 2024
Revenues recognized over time:
|
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Total |
|
||||
Franchise fees |
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
||||
Revenues recognized at a point in time:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Durango Product sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Retail sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Royalty and marketing fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues recognized over time and point in time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
For the Year Ended February 28, 2023
Revenues recognized over time:
|
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Total |
|
||||
Franchise fees |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues recognized at a point in time:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Durango Product sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Retail sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Royalty and marketing fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues recognized over time and point in time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
49
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended February 28, 2022
Revenues recognized over time:
|
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Total |
|
||||
Franchise fees |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues recognized at a point in time:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Durango Product sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Retail sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Royalty and marketing fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues recognized over time and point in time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
NOTE 5 - INVENTORIES
Inventories consist of the following at February 29 or 28:
|
|
2024 |
|
|
2023 |
|
||
Ingredients and supplies |
|
$ |
|
|
$ |
|
||
Finished candy |
|
|
|
|
|
|
||
Reserve for slow moving inventory |
|
|
( |
) |
|
|
( |
) |
Total inventories |
|
$ |
|
|
$ |
|
||
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 29 or 28:
|
|
2024 |
|
|
2023 |
|
||
Land |
|
$ |
|
|
$ |
|
||
Building |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Transportation equipment |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation expense related to property and equipment totaled $
50
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following at February 29 or 28:
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
|
2023 |
|
|||||||||||||
|
|
Amortization Period (in Years) |
|
|
Gross |
|
|
Accumulated |
|
|
Gross |
|
|
Accumulated |
|
|||||||||||||
Intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Store design |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Trademark/Non-competition agreements |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Goodwill and intangible assets not subject to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Retail |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|||||||
Franchising |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Trademark |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Goodwill and Intangible Assets |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
There was no c
|
|
Retail Segment |
|
|
Balance as of February 28, 2022 |
|
$ |
|
|
Impairment losses |
|
|
( |
) |
Goodwill written off related to sales of Company-owned stores |
|
|
( |
) |
Balance as of February 29, 2023 |
|
$ |
|
|
Amortization expense related to intangible assets totaled $
At February 29, 2024, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:
2025 |
|
$ |
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
NOTE 8 –NOTES PAYABLE AND REVOLVING CREDIT LINE
Revolving Credit Line
As of February 29, 2024, the Company had a $
51
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Agreement, the maturity date is September 30, 2024, at which point the full amount outstanding is due. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus
As of February 29, 2024, the Company was not in compliance with the requirement under the Credit Agreement to maintain a ratio of total assets to total current liabilities of at least
NOTE 9 - STOCK COMPENSATION PLANS
In FY 2021, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards. As of February 29, 2024, total shares authorized under the 2007 Plan was
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 29, 2024, and changes for the three years then ended was as follows:
|
|
Twelve Months Ended |
|
|||||||||
|
|
February 29 or 28: |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Outstanding non-vested restricted stock units at beginning |
|
|
|
|
|
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|||
Vested |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Cancelled/forfeited |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Outstanding non-vested restricted stock units as of |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Weighted average grant date fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Weighted average remaining vesting period (in years) |
|
|
|
|
|
|
|
|
|
|||
52
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company also issued
Information with respect to stock option awards outstanding under the 2007 Plan at February 29, 2024, and changes for the three years then ended was as follows:
|
|
Twelve Months Ended |
|
|||||||||
|
|
February 29 or 28: |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Outstanding stock options at beginning of year: |
|
|
|
|
|
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|||
Exercised |
|
|
|
|
|
|
|
|
|
|||
Cancelled/forfeited |
|
|
( |
) |
|
|
|
|
|
|
||
Outstanding stock options as of February 29 or 28: |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Weighted average exercise price |
|
$ |
|
|
$ |
|
|
n/a |
|
|||
Weighted average remaining contractual term (in years) |
|
|
|
|
|
|
|
n/a |
|
|||
During the year ended February 29, 2024, the Company issued a total of
During the year ended February 28, 2023, the Company issued
The Company recognized $
Except as noted above, restricted stock units generally vest in equal annual installments over a period of to
53
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
non-forfeited restricted stock units and stock options granted as of February 29, 2024 was $
NOTE 10 – LEASING ARRANGEMENTS
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.
The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing franchised locations are leased by the franchisee directly.
In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.
The Company also leases trucking equipment and warehouse space in support of its production operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.
The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. During the years ended February 29 or 28, 2024 and 2023, lease expense recognized in the consolidated statements of operations was $
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
54
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of February 29, 2024, maturities of lease liabilities for the Company’s operating leases were as follows:
FYE 25 |
|
$ |
|
|
FYE 26 |
|
|
|
|
FYE 27 |
|
|
|
|
FYE 28 |
|
|
|
|
FYE 29 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
Less: Imputed interest |
|
|
( |
) |
Present value of lease liabilities: |
|
$ |
|
|
The weighted average lease term at February 29 or 28, 2024, 2023, and 2022 was
The following is a schedule of cash paid for lease liabilities for the three years ended February 29 or 28:
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Cash paid for amounts included in the measurement of |
|
|
|
|
|
|
|
|
|
|||
During the years ended February 29 or 28, 2024, 2023, and 2022 the Company entered into new leases representing a future lease liability of $
The Company did not have any leases categorized as finance leases as of February 29, 2024 or February 28, 2023.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Purchase contracts
The Company frequently enters into purchase contracts of between to
Litigation
From time to time, the Company is involved in litigation relating to claims arising out of its operations. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. At February 29, 2024, the Company was not a party to any legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition or operating results.
NOTE 12 – STOCKHOLDERS’ EQUITY
Redemption of Preferred Stock Purchase Rights
55
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 2, 2021, the Board of Directors approved the redemption of all the outstanding preferred stock purchase rights (the “Rights”) granted pursuant to the Rights Agreement, dated March 1, 2015, between the Company and Computershare Trust Company, N.A., as Rights Agent (as amended, the “Rights Agreement”), commonly referred to as a “poison pill.” Immediately upon the action of the Board of Directors to approve the redemption of the Rights, the right to exercise the Rights terminated, which effectively terminated the Rights Agreement. Pursuant to the Rights Agreement, the Rights were redeemed at a redemption price of $
Warrants
In connection with a terminated supplier agreement with a former customer of the Company, the Company issued a warrant (the “Warrant”) to purchase up to
On November 1, 2022, the Company sent a formal notice to the customer terminating the agreement. As of February 29, 2024, no Warrant Shares had vested and, subsequent to the termination by the Company of supplier agreement, the Company has no remaining material obligations under the Warrant.
The Company determined that the grant date fair value of the Warrant was de minimis and did not record any amount in consideration of the warrants. The Company utilized a Monte Carlo model for purposes of determining the grant date fair value.
NOTE 13 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 29 or 28:
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Current |
|
|
|
|
|
|
|
|
|
|||
Federal |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
State |
|
|
|
|
|
|
|
|
||||
Total Current |
|
|
|
|
( |
) |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Deferred |
|
|
|
|
|
|
|
|
|
|||
Federal |
|
|
|
|
|
|
|
( |
) |
|||
State |
|
|
|
|
|
|
|
( |
) |
|||
Total Deferred |
|
|
|
|
|
|
|
( |
) |
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
56
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years ended February 29 or 28:
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Statutory rate |
|
|
% |
|
|
% |
|
|
% |
|||
State income taxes, net of federal benefit |
|
|
% |
|
|
% |
|
|
% |
|||
Work opportunity tax credits |
|
|
% |
|
|
% |
|
|
( |
)% |
||
Equity compensation tax expense |
|
|
% |
|
|
( |
)% |
|
|
( |
)% |
|
Compensation and benefits permanent differences |
|
|
( |
)% |
|
|
( |
)% |
|
|
( |
)% |
Other |
|
|
% |
|
|
% |
|
|
% |
|||
Valuation allowance |
|
|
( |
)% |
|
|
( |
)% |
|
|
% |
|
Impact of CARES act |
|
|
% |
|
|
% |
|
|
( |
)% |
||
Effective tax rate |
|
|
( |
)% |
|
|
( |
)% |
|
|
% |
|
During FY 2024, the Company's effective tax rate was
During FY 2023 the Company’s effective tax rate resulted in recognition of income tax expense despite incurring a pretax loss. During FY 2023 income tax expense was primarily the result of expense associated with an increase in reserves for deferred tax assets. 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 realizable. Because of this determination, the Company reserved for approximately $
During FY 2022 the low effective income tax rate was primarily the result of permanent differences between the Company’s expenses as valued for financial reporting purposes versus for income tax purposes. These differences were primarily valuation of restricted stock units and the period of recognition for employee retention credits. During FY 2021 the Company’s effective tax rate resulted in recognition of an income tax benefit as a result of a pretax loss being recognized for the year.
The components of deferred income taxes as of February 29 or 28 are as follows:
|
|
2024 |
|
|
2023 |
|
||
Deferred Tax Assets |
|
|
|
|
|
|
||
Allowance for doubtful accounts and notes |
|
$ |
|
|
$ |
|
||
Inventories |
|
|
|
|
|
|
||
Accrued compensation |
|
|
|
|
|
|
||
Loss provisions and deferred income |
|
|
|
|
|
|
||
Self-insurance accrual |
|
|
|
|
|
|
||
Interest & other |
|
|
|
|
|
|
||
Restructuring charges |
|
|
|
|
|
|
||
Right of use liabilities |
|
|
|
|
|
— |
|
|
Accumulated net losses |
|
|
|
|
|
|
||
Valuation allowance |
|
|
( |
) |
|
|
( |
) |
Net deferred tax assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Deferred Tax Liabilities |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Right of use assets |
|
|
( |
) |
|
|
— |
|
Prepaid expenses |
|
|
( |
) |
|
|
( |
) |
Deferred Tax Liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Net deferred tax assets |
|
$ |
|
|
$ |
|
||
57
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes deferred income tax valuation allowances as of February 29 or 28:
|
|
2024 |
|
|
2023 |
|
||
Valuation allowance at beginning of period |
|
$ |
|
|
$ |
|
||
Tax expense realized by valuation allowance |
|
|
|
|
|
|
||
Valuation allowance at end of period |
|
$ |
|
|
$ |
|
||
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2019.
Realization of the Company's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the appropriate tax jurisdictions, in future years, to obtain benefit from the reversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. A valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. The Company evaluates, 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. The Company periodically evaluates our deferred tax assets to determine if our assumptions and estimates should change. As of February 29, 2024 and February 28, 2023, the Company had a full valuation allowance against its deferred tax assets.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 29 or 28, 2024 or 2023. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for the years ended February 29 or 28, 2024 and 2023.
The Company’s subsidiaries, SWRL, along with U-Swirl had a history of net operating losses prior to the company’s acquisition of them and thus the Company has a related net operating loss carry forward. In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. The Company has performed a preliminary evaluation as to whether a change in control has taken place, and has concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
The Company estimates that the potential future tax deductions of U-Swirl’s Federal net operating losses, limited by section 382, to be approximately $
Income tax provision (benefit) allocated to continuing operations and discontinued operations for the years ended February 29 or 28, 2024, 2023 and 2022 was as follows:
58
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Continuing operations |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Discontinued operations |
|
|
|
|
|
|
|
|
|
|||
Total tax provision (benefit) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
NOTE 14 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a
NOTE 15 - OPERATING SEGMENTS
The Company classifies its business interests into
FY 2024 |
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Unallocated |
|
|
Total |
|
|||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Intersegment revenues |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Revenue from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Segment profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total depreciation & amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
FY 2023 |
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Unallocated |
|
|
Total |
|
|||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Intersegment revenues |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Revenue from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Segment profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total depreciation & amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
FY 2022 |
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Unallocated |
|
|
Total |
|
|||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Intersegment revenues |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Revenue from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Segment profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total depreciation & amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
NOTE 16 – CONTESTED SOLICITATION OF PROXIES AND EMPLOYEE AGREEMENTS
59
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contested Solicitation of Proxies
During FY 2023 and FY 2022, the Company incurred substantial costs associated with a contested solicitation of proxies in connection with its 2022 and 2021 annual meeting of stockholders. During FY 2023, the Company incurred approximately $
Employment Agreement Payments
The Company incurred charges as discussed below in relation to certain of its executives.
Robert J. Sarlls Separation Agreement
Effective January 27, 2024, the Company terminated the services of its CEO and entered into a separation agreement which specified that, due to the involuntary termination, certain cash payments would be made. These severance payments and the Company’s share of associated payroll taxes in the amount of approximately $
In addition, all unvested RSU awards and stock options were cancelled upon effectiveness of the separation agreement. Stock options in the amount of
Service-based RSU awards in the amount of
Gregory L. Pope, Sr. Retirement Agreement
On May 8, 2023, the Company announced that Gregory L. Pope, Sr., Senior Vice President – Franchise Development, retired effective as of May 3, 2023 (the “Retirement Date”). In connection with his retirement, the Company and Mr. Pope entered into a retirement agreement and general release (the “Retirement Agreement”) that provides (i) Mr. Pope will provide consulting services to the Company, as an independent contractor, until December 31, 2023, for a monthly consulting fee of $
In connection with Mr. Dudley’s retirement in FY 2023, 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
60
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $
During FY 2022 Bryan J. Merryman agreed to voluntarily step down as President and Chief Executive Officer (“CEO”) of the Company upon the hiring of a new President and CEO for the Company. On May 5, 2022 the Company concluded its search for a new CEO with the announcement that Robert Sarlls will succeed Mr. Merryman as the Company’s CEO beginning on May 9, 2022.
In connection therewith, the Company and Mr. Merryman entered into a letter agreement dated November 8, 2021 (the “Letter Agreement”), effective November 3, 2021 (the “Effective Date”), amending that certain Second Restated Employment Agreement, dated as of February 26, 2019, by and between the Company and Mr. Merryman (the “Current Employment agreement”). Pursuant to the Letter Agreement, among other things, Mr. Merryman agreed to (i) continue as Chief Financial Officer of the Company, and (ii) until the Company hires a new President and CEO, as the interim President and CEO of the Company. Except as specifically set forth in the Letter Agreement, all the terms and provisions of the Current Employment Agreement remain unmodified and in full force and effect. In addition, on November 3, 2021, the Compensation Committee of the Board of Directors recommended, and the Board of Directors unanimously approved, the acceleration of vesting of approximately
As a result of the above agreements, the Company incurred the following costs during the fiscal years ended February 29 or 28, 2024, 2023 and 2022:
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Severance compensation: |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accelerated restricted stock unit compensation expense: |
|
|
|
|
|
|
|
|
|
|||
Reversal of previously recorded restricted stock unit compensation expense: |
|
|
( |
) |
|
|
|
|
|
|
||
Consulting Services and Retirement Bonus: |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
These costs are recognized as general and administrative expense in the Consolidated Statement of Operations.
NOTE 17 – DISCONTINUED OPERATIONS
On February 24, 2023 and May 1, 2023, the Company entered into agreements to sell: 1) all operating assets and inventory associated with the Company’s three U-Swirl Company-owned locations, and 2) all franchise rights and intangible assets associated with the franchise operations of U-Swirl, respectively. The May 1, 2023 sale was completed pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”), dated May 1, 2023, by and among the Company, as guarantor, U Swirl as seller, LLC (“Purchaser”), a related company of Fosters Freeze, Inc., a California corporation. Pursuant to the Asset Purchase Agreement, on the Closing Date, Purchaser paid to U-Swirl $
61
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 31, 2023, the Company filed a certificate of dissolution with the Secretary of State of the State of Nevada with respect to U-Swirl. As a result, U-Swirl is effectively fully dissolved and no longer in legal existence.
The following table discloses the results of operations of the businesses reported as discontinued operations for the years ended February 29 or 28, 2024, 2023 and 2022, respectively:
|
|
FOR THE YEARS ENDED FEBRUARY 29 or 28, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Total Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Cost of sales |
|
|
|
|
|
|
|
|
||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|||
|
|
( |
) |
|
|
|
|
|||||
Other expense, net |
|
|
|
|
|
( |
|
|||||
Earnings from discontinued operations before |
|
|
|
|
|
|
|
|
|
|||
Income tax provision |
|
|
|
|
|
|
|
|
||||
Earnings (loss) from discontinued operations, net of tax |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
The following table reflects the summary of assets and liabilities held for sale for U-Swirl as of February 29 or 28, 2024 and 2023, respectively:
|
|
AS OF FEBRUARY 29 or 28, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Accounts and notes receivable, net |
|
$ |
|
|
$ |
|
||
Inventory, net |
|
|
|
|
|
|||
Other |
|
|
|
|
|
|||
Current assets held for sale |
|
|
|
|
|
|||
|
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
||||
Franchise rights, net |
|
|
|
|
|
|||
Intangible assets, net |
|
|
|
|
|
|||
Deferred income taxes |
|
|
|
|
||||
Other |
|
|
|
|
|
|||
Long-term assets held for sale |
|
|
|
|
|
|||
Total Assets Held for Sale |
|
|
|
|
|
|||
|
|
|
|
|
|
|
||
Accounts payable |
|
|
|
|
|
|||
Accrued compensation |
|
|
|
|
|
|||
Accrued liabilities |
|
|
|
|
|
|||
Contract liabilities |
|
|
|
|
|
|||
Current liabilities held for sale |
|
|
|
|
|
|||
|
|
|
|
|
|
|
||
Contract liabilities, less current portion |
|
|
|
|
|
|||
Long term liabilities held for sale |
|
|
|
|
|
|||
Total Liabilities Held for Sale |
|
$ |
|
|
$ |
|
||
62
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the gain recognized during the year ended February 29, 2024 related to the sale of assets on May 1, 2023, as described above:
Cash proceeds from the sale of assets |
|
$ |
|
|
Notes receivable |
|
|
|
|
|
|
|
|
|
Total consideration received |
|
|
|
|
|
|
|
|
|
Assets and liabilities transferred |
|
|
|
|
Franchise rights |
|
|
|
|
Inventory |
|
|
|
|
Liabilities |
|
|
( |
) |
|
|
|
|
|
Net assets transferred |
|
|
|
|
|
|
|
|
|
Costs associated with the sale of assets |
|
|
|
|
|
|
|
|
|
|
$ |
|
||
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), that are designed to ensure that material information relating to the Company is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management, under the supervision and with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), as of February 29, 2024, of the Company’s disclosure controls and procedures. Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of February 29, 2024.
Management’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed under supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Management, with the participation of our Interim Chief Executive Officer, has evaluated the effectiveness, as of February 29, 2024, of the Company’s internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its publication Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that the Company’s internal control over financial reporting was effective as of February 29, 2024.
Under the applicable SEC rules, we are not required to include an attestation report of our independent registered public accounting firm, CohnReznick LLP, on the Company’s internal control over financial reporting.
Changes in Internal Control over Financial Reporting — During the year ended February 28, 2023, we identified a material weakness in our internal controls resulting from our finance department not being able to process and account for complex, non-routine transactions in accordance with GAAP. During the year ended February 29, 2024, we retained the assistance of several accounting experts to assist us in the accounting and reporting of complex, non-routine transactions and ensure correct accounting under US GAAP. As of February 29, 2024, management determined that the enhancements to the controls noted above have been in place for a sufficient period of time and has concluded, through testing, that the material weakness identified in the prior year has been remediated.
Except as noted above, our management, including our Interim Chief Executive Officer, confirm that there were no other changes in our company's internal control over financial reporting during the fiscal year ended February 29, 2024 that have materially affected, or are reasonably likely to materially affect, our company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
64
During the three months ended February 29, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
65
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120 days after February 29, 2024.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120 days after February 29, 2024.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120 days after February 29, 2024.
Equity Compensation Plan Information
The following table provides information with respect to the Company’s equity compensation plan, as of February 29, 2024, which consists solely of the Company’s 2007 Equity Incentive Plan:
Plan category |
|
Number of |
|
|
Weighted- |
|
|
Number of |
|
|||
Equity compensation plans approved by the Company’s |
|
|
178,656 |
|
|
$ |
6.49 |
|
|
|
183,974 |
|
Equity compensation plans not approved by the Company’s |
|
-0- |
|
|
-0- |
|
|
-0- |
|
|||
Total |
|
|
178,656 |
|
|
$ |
6.49 |
|
|
|
183,974 |
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120 days after February 29, 2024.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120 days after February 29, 2024.
66
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
Page |
|
|
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 596) |
35 |
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 166) |
|
37 |
|
38 |
|
39 |
|
40 |
|
41 |
Schedule II
Valuation and Qualifying Accounts
|
|
Balance at |
|
|
Additions |
|
|
Deductions |
|
|
Balance at |
|
||||
Year Ended February 29, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Valuation Allowance for Accounts and Notes |
|
|
763,905 |
|
|
|
112,922 |
|
|
|
515,039 |
|
|
|
361,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Year Ended February 28, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Valuation Allowance for Accounts and Notes |
|
|
983,022 |
|
|
|
(173,600 |
) |
|
|
45,517 |
|
|
|
763,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Year Ended February 28, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Valuation Allowance for Accounts and Notes |
|
|
1,454,140 |
|
|
|
- |
|
|
|
471,118 |
|
|
|
983,022 |
|
67
The exhibits listed on the Exhibit Index are filed as part of this Form 10-K.
EXHIBIT INDEX
Exhibit Number |
|
Description |
|
Incorporated by Reference or |
|
|
|
|
|
2.1 |
|
|
Exhibit 2.1 to the Current Report on Form 8-K filed on May 4, 2023 (File No. 001-36865) |
|
|
|
|
|
|
3.1 |
|
|
Exhibit 3.1 to the Current Report on Form 8-K12G3 filed on March 2, 2015 (File No. 001-36865) |
|
|
|
|
|
|
3.2 |
|
Third Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc. |
|
Exhibit 3.1 to the Current Report on Form 8-K filed on September 12, 2023 (File No. 001-36865) |
|
|
|
|
|
4.1** |
|
|
Filed herewith. |
|
|
|
|
|
|
10.1** |
|
|
Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) |
|
|
|
|
|
|
10.2 |
|
Form of Franchise Agreement for Rocky Mountain Chocolate Factory |
|
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended May 31, 2010 (File No. 000-14749) |
|
|
|
|
|
10.3** |
|
Rocky Mountain Chocolate Factory, Inc. 2007 Equity Incentive Plan (as Amended and Restated)
|
|
Exhibit 10.1 to the Current Report on Form 8-K filed on September 18, 2020 (File No. 001-36865) |
|
|
|
|
|
10.4** |
|
|
Exhibit 10.7 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) |
|
|
|
|
|
|
10.5** |
|
|
Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 000-14749) |
|
|
|
|
|
|
10.6* |
|
|
|
Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2009 (File No. 000-14749) |
|
|
|
|
|
10.7 |
|
|
Exhibit 10.3 to the Current Report on Form 8-K filed on October 6, 2022 (File No. 001-36865) |
|
|
|
|
|
|
10.8 |
|
|
Exhibit 10.1 to the Current Report on Form 8-K filed on October 6, 2022 (File No. 001-36865) |
|
|
|
|
|
|
68
10.9 |
|
|
Exhibit 10.1 to the Current Report on Form 8-K filed on October 3, 2023 (File No. 001-36865) |
|
|
|
|
|
|
10.9 |
|
|
Exhibit 10.2 to the Current Report on Form 8-K filed on October 3, 2023 (File No. 001-36865) |
|
|
|
|
|
|
10.10† |
|
|
Exhibit 10.1 to the Current Report on Form 8-K filed on December 16, 2022 (File No. 001-36865) |
|
|
|
|
|
|
10.11** |
|
|
Exhibit 10.1 to the Current Report on Form 8-K filed on May 6, 2022 (File No. 001-36865) |
|
|
|
|
|
|
10.12** |
|
|
Exhibit 10.1 to the Current Report on Form 8-K filed on May 8, 2023 (File No. 001-36865) |
|
|
|
|
|
|
10.13** |
|
Offer Letter, dated July 15, 2022, between Rocky Mountain Chocolate Factory, Inc. and Allen Arroyo |
|
Exhibit 10.1 to the Current Report on Form 8-K filed on July 21, 2022 (File No. 001-36865) |
|
|
|
|
|
10.14 |
|
|
Exhibit 10.1 to the Current Report on Form 8-K filed on May 4, 2023 (File No. 001-36865) |
|
|
|
|
|
|
10.15 |
|
|
Exhibit 10.2 to the Current Report on Form 8-K filed on May 4, 2023 (File No. 001-36865) |
|
|
|
|
|
|
10.16 |
|
|
Exhibit 10.3 to the Current Report on Form 8-K filed on May 4, 2023 (File No. 001-36865) |
|
|
|
|
|
|
10.18 |
|
Waiver and Consent, dated August 3, 2023, to Settlement Agreement and Release |
|
Exhibit 10.1 to the Current Report on Form 8-K filed on August 7, 2023 (File No. 001-36865) |
|
|
|
|
|
10.19 |
|
Covenant Breach Waiver, dated January 22, 2024, issued by Wells Fargo Bank, N.A., |
|
Exhibit 10.3 to the Current Report on Form 8-K filed on January 26, 2024 (File No. 001-36865) |
|
|
|
|
|
10.20 |
|
|
Exhibit 10.1 to the Current Report on Form 8-K filed on March 28, 2024 (File No. 001-36865 |
|
|
|
|
|
|
10.21 |
|
|
Filed herewith. |
|
|
|
|
|
|
21.1 |
|
|
Filed herewith. |
|
|
|
|
|
|
23.1 |
|
Consent of Plante & Moran, PLLC Independent Registered Public Accounting Firm |
|
Filed herewith. |
69
|
|
|
|
|
23.2 |
|
Consent of CohnReznick LLP Independent Registered Public Accounting Firm |
|
Filed herewith. |
|
|
|
|
|
31.1 |
|
Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
|
Filed herewith. |
|
|
|
|
|
32.1 |
|
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 |
|
Filed herewith. |
|
|
|
|
|
97.1 |
|
|
Filed herewith. |
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) (1) |
|
Filed herewith. |
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
|
Filed herewith. |
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
|
Filed herewith. |
* Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.
** Management contract or compensatory plan required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
(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.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. |
|
|
|
|
Date: June 13, 2024 |
|
/s/ Jeffrey R. Geygan |
|
|
JEFFREY R. GEYGAN |
|
|
Interim Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: June 13, 2024 |
|
/s/ Jeffrey R. Geygan |
|
|
JEFFREY R. GEYGAN |
|
|
Interim Chief Executive Officer |
|
|
(Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) |
|
|
|
Date: June 13, 2024 |
|
/s/ Starlette B. Johnson |
|
|
STARLETTE B. JOHNSON, Chair of Board |
|
|
|
Date: June 13, 2024 |
|
/s/ Steven L. Craig |
|
|
STEVEN L. CRAIG, Director |
|
|
|
Date: June 13, 2024 |
|
/s/ Mark Riegel |
|
|
MARK RIEGEL, Director |
|
|
|
71