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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2024

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File Number: 001-36865

img69441842_0.jpg 

Rocky Mountain Chocolate Factory, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

47-1535633

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

265 Tuner Drive, Durango, CO 81303

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (970) 259-0554

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share

 

RMCF

 

Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

On July 11, 2024, the registrant had 6,341,595 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


Table of Contents

Table of Contents

 

 

part I. financial information

3

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statement of Cash Flows

5

 

Condensed Consolidated Statements of Changes in Stockholders' Equity

6

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28

Item 4.

Controls and Procedures

28

 

part II. other information

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

32

Signatures

 

33

 

1


Table of Contents

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly 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. These forward-looking statements involve various risks and uncertainties. These statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as “will,” “intend,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “potential,” or similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future including statements expressing general views about future operating results are forward-looking statements. Management believes these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to: inflationary impacts, the outcome of legal proceedings, changes in the confectionery business environment, seasonality, consumer interest in our products, consumer and retail trends, costs and availability of raw materials, competition, and the success of our co-branding strategy and the effect of government regulations. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see Part II, Item 1A. “Risk Factors” and the risks described elsewhere in this Quarterly Report and the section entitled “Risk Factors” contained in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 29, 2024, filed with the Securities and Exchange Commission (“SEC”) on June 13, 2024, as updated by this Quarterly Report.

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended May 31,

 

 

 

2024

 

 

2023

 

Revenues

 

 

 

 

 

 

Sales

 

$

5,279

 

 

$

5,016

 

Franchise and royalty fees

 

 

1,128

 

 

 

1,420

 

Total Revenue

 

 

6,407

 

 

 

6,436

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

Cost of sales

 

 

5,586

 

 

 

4,758

 

Franchise costs

 

 

541

 

 

 

680

 

Sales and marketing

 

 

430

 

 

 

473

 

General and administrative

 

 

1,239

 

 

 

1,932

 

Retail operating

 

 

199

 

 

 

103

 

Depreciation and amortization, exclusive of depreciation
   and amortization expense of $
196 and $171,
   respectively, included in cost of sales

 

 

42

 

 

 

31

 

Total costs and expenses

 

 

8,037

 

 

 

7,977

 

 

 

 

 

 

 

Loss from Operations

 

 

(1,630

)

 

 

(1,541

)

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

Interest expense

 

 

(35

)

 

 

(6

)

Interest income

 

 

7

 

 

 

20

 

Other income (expense), net

 

 

(28

)

 

 

14

 

 

 

 

 

 

 

Loss Before Income Taxes

 

 

(1,658

)

 

 

(1,527

)

 

 

 

 

 

 

Income Tax Provision (Benefit)

 

 

-

 

 

-

 

 

 

 

 

 

 

Loss from Continuing Operations

 

 

(1,658

)

 

 

(1,527

)

 

 

 

 

 

 

Earnings from discontinued operations, net of tax

 

 

-

 

 

 

704

 

 

 

 

 

 

 

Net Loss

 

$

(1,658

)

 

$

(823

)

 

 

 

 

 

 

Basic Loss per Common Share

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.26

)

 

$

(0.24

)

Earnings from discontinued operations

 

 

 

 

 

0.11

 

Net loss

 

$

(0.26

)

 

$

(0.13

)

 

 

 

 

 

 

Diluted Loss per Common Share

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.26

)

 

$

(0.24

)

Earnings from discontinued operations

 

 

 

 

 

0.11

 

Net loss

 

$

(0.26

)

 

$

(0.13

)

 

 

 

 

 

 

Weighted Average Common Shares Outstanding - Basic

 

 

6,322,329

 

 

 

6,276,613

 

Dilutive Effect of Employee Stock Awards

 

 

-

 

 

-

 

Weighted Average Common Shares Outstanding - Diluted

 

 

6,322,329

 

 

 

6,276,613

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


Table of Contents

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

 

 

 

 

May 31, 2024
(unaudited)

 

 

February 29, 2024

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

637

 

 

$

2,082

 

Accounts receivable, less allowance for credit losses
   of $
353 and $332, respectively

 

 

2,467

 

 

 

2,184

 

Notes receivable, current portion, less current portion of the
   allowance for credit losses of $
21 and $30, respectively

 

 

419

 

 

 

489

 

Refundable income taxes

 

 

52

 

 

 

46

 

Inventories

 

 

4,253

 

 

 

4,358

 

Other

 

 

283

 

 

 

443

 

Current assets held for sale

 

 

1,056

 

 

-

 

Total current assets

 

 

9,167

 

 

 

9,602

 

Property and Equipment, Net

 

 

6,833

 

 

 

7,758

 

Other Assets

 

 

 

 

 

 

Notes receivable, less current portion and allowance for credit losses
   of $
9 and $0, respectively

 

 

715

 

 

 

695

 

Goodwill

 

 

576

 

 

 

576

 

Intangible assets, net

 

 

231

 

 

 

238

 

Lease right of use asset

 

 

1,484

 

 

 

1,694

 

Other

 

 

14

 

 

 

14

 

Total other assets

 

 

3,020

 

 

 

3,217

 

Total Assets

 

$

19,020

 

 

$

20,577

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

 

$

3,226

 

 

$

3,411

 

Line of credit

 

 

2,000

 

 

 

1,250

 

Accrued salaries and wages

 

 

1,258

 

 

 

1,833

 

Gift card liabilities

 

 

628

 

 

 

624

 

Other accrued expenses

 

 

234

 

 

 

301

 

Contract liabilities

 

 

145

 

 

 

150

 

Lease liability

 

 

517

 

 

 

503

 

Deposit Liability

 

 

358

 

 

-

 

Total current liabilities

 

 

8,366

 

 

 

8,072

 

Lease Liability, Less Current Portion

 

 

969

 

 

 

1,191

 

Contract Liabilities, Less Current Portion

 

 

667

 

 

 

678

 

Total Liabilities

 

 

10,002

 

 

 

9,941

 

Commitments and Contingencies

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

Preferred stock, $.001 par value per share; 250,000
   authorized;
0 shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, $.001 par value, 46,000,000 shares authorized, 6,326,139 shares
   and
6,306,027 shares issued and outstanding, respectively

 

 

6

 

 

 

6

 

Additional paid-in capital

 

 

9,936

 

 

 

9,896

 

Retained earnings (accumulated deficit)

 

 

(924

)

 

 

734

 

Total stockholders' equity

 

 

9,018

 

 

 

10,636

 

Total Liabilities and Stockholders' Equity

 

$

19,020

 

 

$

20,577

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


Table of Contents

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended
May 31,

 

 

 

2024

 

 

2023

 

Cash Flows From Operating Activities

 

 

 

 

 

 

Net Loss

 

$

(1,658

)

 

$

(823

)

Less: Earnings from discontinued operations, net of tax

 

 

 

 

 

704

 

Loss from continuing operations

 

 

(1,658

)

 

 

(1,527

)

Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

238

 

 

 

201

 

Provision for obsolete inventory

 

 

13

 

 

 

28

 

Loss (gain) on sale or disposal of property and equipment

 

 

55

 

 

 

(22

)

Expense recorded for stock compensation

 

 

40

 

 

 

202

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(255

)

 

197

 

Refundable income taxes

 

 

(6

)

 

 

36

 

Inventories

 

 

372

 

 

 

676

 

Other current assets

 

 

161

 

 

 

(120

)

Accounts payable

 

 

(463

)

 

 

(185

)

Accrued liabilities

 

 

(637

)

 

 

141

 

Contract liabilities

 

 

(17

)

 

 

(9

)

Net cash used in operating activities
   of continuing operations

 

 

(2,157

)

 

 

(382

)

Net cash used in operating activities
   of discontinued operations

 

 

 

 

 

(40

)

Net cash used in operating activities

 

 

(2,157

)

 

 

(422

)

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Addition to notes receivable

 

 

-

 

 

 

(48

)

Proceeds received on notes receivable

 

 

21

 

 

 

15

 

Proceeds from the sale of assets

 

 

358

 

 

 

28

 

Purchases of property and equipment

 

 

(417

)

 

 

(550

)

Net cash used in investing activities
   of continuing operations

 

 

(38

)

 

 

(555

)

Net cash provided by investing activities
   of discontinued operations

 

 

-

 

 

 

1,408

 

Net cash provided by (used in) investing activities

 

 

(38

)

 

 

853

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Proceeds from line of credit

 

 

750

 

 

-

 

Net cash provided by financing
   activities of discontinued operations

 

 

-

 

 

-

 

Net cash provided by financing activities

 

 

750

 

 

-

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

(1,445

)

 

 

431

 

 

 

 

 

 

 

Cash and Cash Equivalents, Beginning of Period

 

 

2,082

 

 

 

4,718

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

 

$

637

 

 

$

5,149

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


Table of Contents

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders' Equity

(In thousands, except per-share amounts)

(Unaudited)

 

 

 

Three Months Ended May 31, 2024

 

 

Convertible Preferred Stock

 

 

Common Stock

 

 

Additional Paid-In

 

 

Retained

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balances as of February 29, 2024

 

 

 

 

$

-

 

 

 

6,306,027

 

 

$

6

 

 

$

9,896

 

 

$

734

 

 

$

10,636

 

Equity compensation, restricted stock units, net of shares withheld

 

 

 

 

 

 

 

 

20,112

 

 

 

 

 

 

40

 

 

 

 

 

 

40

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,658

)

 

 

(1,658

)

Balances as of May 31, 2024

 

 

 

 

$

-

 

 

 

6,326,139

 

 

$

6

 

 

$

9,936

 

 

$

(924

)

 

$

9,018

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6


Table of Contents

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders' Equity (Continued)

(In thousands, except per-share amounts)

(Unaudited)

 

 

 

Three Months Ended May 31, 2023

 

 

Convertible Preferred Stock

 

 

Common Stock

 

 

Additional Paid-In

 

 

Retained

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balances as of February 28, 2023

 

 

 

 

$

-

 

 

 

6,257,137

 

 

$

6

 

 

$

9,458

 

 

$

4,906

 

 

$

14,370

 

Equity compensation, restricted stock units, net of shares withheld

 

 

 

 

 

 

 

 

33,027

 

 

 

 

 

 

202

 

 

 

 

 

 

202

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(823

)

 

 

(823

)

Balances as of May 31, 2023

 

 

 

 

$

-

 

 

 

6,290,164

 

 

$

6

 

 

$

9,660

 

 

$

4,083

 

 

$

13,749

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The accompanying condensed 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 (dissolved in November 2023), U-Swirl International, Inc. (dissolved in October 2023) (“U-Swirl”), and U-Swirl, Inc., a Nevada corporation (“SWRL”) (collectively, the “Company”, “we”, or “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, 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 15 – Discontinued Operations in the Notes to Condensed 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 four 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 accounting principles generally accepted in the United States of America (“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 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 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 May 31, 2024:

 

 

Stores
Open at
2/29/2024

 

 

Opened

 

 

Closed

 

 

Sold

 

 

Stores
Open at
5/31/2024

 

Rocky Mountain Chocolate Factory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company-owned stores

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

Franchise stores - Domestic stores
   and kiosks

 

 

149

 

 

 

-

 

 

 

(5

)

 

 

-

 

 

 

144

 

International license stores

 

 

3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3

 

Cold Stone Creamery - co-branded

 

 

104

 

 

 

2

 

 

 

(2

)

 

 

-

 

 

 

104

 

U-Swirl - co-branded

 

 

11

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11

 

Total

 

 

269

 

 

 

 

 

 

 

 

 

 

 

 

264

 

 

8


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 continue as a going concern within one year after the date the accompanying financial statements were issued. During the three months ended May 31, 2024, the Company incurred a net loss of $1.7 million and used cash in operating activities of $2.2 million. Additionally, the Company was not in compliance with the requirement under a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”) to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. The Company's current ratio as of May 31, 2024 was 1.10 to 1. The Credit Agreement is set to expire on September 30, 2024. These factors raise substantial doubts about the Company’s ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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 its held for sale assets including an unused parcel of land near its headquarters and unused manufacturing equipment, 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 chief financial officer to its management teams during the next twelve months. There are no assurances that the Company will be successful in implementing its business plan.

 

Basis of Presentation and Consolidation

The accompanying consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The condensed consolidated financial statements have been prepared in accordance GAAP for interim financial reporting and Securities and Exchange Commission ("SEC") regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three months ended May 31, 2024 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 28, 2025. All intercompany balances and transactions have been eliminated in consolidation.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2024, filed with the SEC on June 13, 2024. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.

9


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Use of Estimates

 

The preparation of financial statements in conformity with 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 and the reserve for inventory obsolescence. The Company bases its estimates on historical experience and 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.

 

Assets Held for Sale

 

The Company classifies an asset as held for sale when management, having the authority to approve the action, commits to a plan to sell the asset, the sale is probable within one year and the asset is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the asset is marketed actively for sale at a price that is reasonable in relation to its current fair value and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures an asset that is classified as held for sale at the lower of its carrying amount or fair value less costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized until the date of sale. The Company assesses the fair value of an asset less costs to sell each reporting period it remains classified as held for sale and reports any subsequent changes as an adjustment to the carrying amount of the asset, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Assets are not depreciated or amortized while they are classified as held for sale.
 

In the first quarter of fiscal 2025, the Company commenced its plan to sell an unused parcel land in Durango, Colorado where the Company is headquartered. As of May 31, 2024, the land had a carrying value of approximately $0.4 million. As a result of the above, the Company determined that all of the criteria to classify the land as held for sale had been met as of May 31, 2024. Fair value was determined based upon the anticipated sales price of the asset based on current market conditions and assumptions made by management, which may differ from actual results and may result in an impairment if market conditions deteriorate. No impairment charge was recorded as the fair value less costs to sell was in excess of the carrying amount of the assets.

 

In the first quarter of fiscal 2025, the Company commenced its plan to sell a piece of factory machinery. As of May 31, 2024, the machinery had a carrying value of approximately $0.7 million. As a result of the above, the Company determined that all of the criteria to classify the machinery as held for sale had been met as of May 31, 2024. Fair value was determined based upon the anticipated sales price of these assets based on current market conditions and assumptions made by management, less selling costs. An impairment charge of $0.1 million was recorded as the carrying value of the machinery was in excess of the fair value less costs to sell.

 

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

10


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

On July 10, 2024, the Company sold its parcel of land in Durango, Colorado, which was classified as held for sale as of May 31, 2024 for a purchase price of approximately $0.9 million.

Accounts and Notes Receivable, Net

 

Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Notes receivable generally reflect the sale of assets. Accounts and notes receivables are stated at the net amount expected to be collected, using an estimate of current expected credit losses to determine the allowance for expected credit losses. The Company evaluates the collectability of its accounts and notes receivable and determines the appropriate allowance for expected credit losses based on a combination of factors, including the aging of the receivables and historical collection trends. When the Company is aware of a customer’s inability to meet its financial obligation, the Company may individually evaluate the related receivable to determine the allowance for expected credit losses. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due.

 

 

NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION

 

($'s in thousands)

 

Three Months Ended
May 31,

 

Cash paid (received) for:

 

2024

 

 

2023

 

Interest

 

$

35

 

 

-

 

Income taxes

 

 

6

 

 

 

(36

)

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

Sale of assets in exchange for note receivable

 

$

-

 

 

$

1,000

 

 

NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company recognizes revenue from contracts with its customers in accordance with Accounting Standards Codification® (“ASC”) 606, which provides that revenues are recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. The Company generally receives a fee associated with the franchise agreement or license agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These Customer Contracts have a term of up to 20 years, however the majority of Customer Contracts have a term of 10 years. During the term of the Customer Contract, the Company is obligated to many performance obligations that the Company has not determined

11


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

are distinct. The resulting treatment of revenue from Customer Contracts is that the revenue is recognized proportionately over the life of the Customer Contract.

Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees

The initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and are treated as a single performance obligation. Initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10 years.

The following table summarizes contract liabilities as of May 31, 2024 and May 31, 2023:

 

 

Three Months Ended
May 31,

 

($'s in thousands)

 

2024

 

 

2023

 

Contract liabilities at the beginning of the period:

 

$

829

 

 

$

943

 

Revenue recognized

 

 

(70

)

 

 

(45

)

Contract fees received

 

 

53

 

 

 

36

 

Contract liabilities at the end of the period:

 

$

812

 

 

$

934

 

 

At May 31, 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 (amounts in thousands):

 

2025

 

$

110

 

2026

 

 

137

 

2027

 

 

124

 

2028

 

 

97

 

2029

 

 

76

 

Thereafter

 

 

268

 

Total

 

$

812

 

 

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.

12


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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:

Three Months Ended May 31, 2024

Revenues recognized over time:

 

($'s in thousands)

 

Franchising

 

 

Manufacturing

 

Retail

 

Total

 

Franchise fees

 

$

70

 

 

 

 

 

 

$

70

 

 

Revenues recognized at a point in time:

 

($'s in thousands)

 

Franchising

 

 

Manufacturing

 

 

Retail

 

 

Total

 

Durango Product sales

 

 

 

 

$

4,957

 

 

 

 

 

$

4,957

 

Retail sales

 

 

 

 

 

 

 

 

322

 

 

 

322

 

Royalty and marketing fees

 

 

1,058

 

 

 

 

 

 

 

 

 

1,058

 

Total revenues recognized over time and point in time

 

$

1,128

 

 

$

4,957

 

 

$

322

 

 

$

6,407

 

 

Three Months Ended May 31, 2023

Revenues recognized over time:

 

($'s in thousands)

 

Franchising

 

 

Manufacturing

 

Retail

 

Total

 

Franchise fees

 

$

45

 

 

-

 

-

 

$

45

 

 

Revenues recognized at a point in time:

 

($'s in thousands)

 

Franchising

 

 

Manufacturing

 

 

Retail

 

 

Total

 

Durango Product sales

 

-

 

 

$

4,824

 

 

-

 

 

$

4,824

 

Retail sales

 

-

 

 

-

 

 

 

192

 

 

 

192

 

Royalty and marketing fees

 

 

1,375

 

 

-

 

 

-

 

 

 

1,375

 

Total revenues recognized over time and point in time

 

$

1,420

 

 

$

4,824

 

 

$

192

 

 

$

6,436

 

 

 

13


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 5 - INVENTORIES

Inventories consist of the following at May 31, 2024 and February 29, 2024:

 

($'s in thousands)

 

May 31, 2024

 

 

February 29, 2024

 

Ingredients and supplies

 

$

2,158

 

 

$

2,038

 

Finished candy

 

 

2,282

 

 

 

2,509

 

Reserve for slow moving inventory

 

 

(187

)

 

 

(189

)

Total inventories

 

$

4,253

 

 

$

4,358

 

 

NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment at May 31, 2024 and February 29, 2024 consisted of the following:

 

($'s in thousands)

 

May 31, 2024

 

 

February 29, 2024

 

Land

 

$

124

 

 

$

514

 

Building

 

 

5,109

 

 

 

5,109

 

Machinery and equipment

 

 

12,155

 

 

 

12,509

 

Furniture and fixtures

 

 

592

 

 

 

590

 

Leasehold improvements

 

 

139

 

 

 

139

 

Transportation equipment

 

 

326

 

 

 

326

 

 

 

18,445

 

 

 

19,187

 

 

 

 

 

 

 

Less accumulated depreciation

 

 

(11,612

)

 

 

(11,429

)

Property and equipment, net

 

$

6,833

 

 

$

7,758

 

 

Depreciation expense related to property and equipment totaled $0.2 million and $0.2 million during the three months ended May 31, 2024 and 2023, respectively.

14


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following at May 31, 2024 and February 29, 2024:

 

 

 

 

 

 

 

 

 

 

 

May 31, 2024

 

 

February 29, 2024

 

($'s in thousands)

 

Amortization Period (in Years)

 

 

Gross
Carrying
Value

 

 

Accumulated
Amortization

 

 

Gross
Carrying
Value

 

 

Accumulated
Amortization

 

Intangible assets subject to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Store design

 

 

 

 

 

10

 

 

 

 

 

$

395

 

 

$

(282

)

 

$

395

 

 

$

(277

)

Trademark/Non-competition agreements

 

 

5

 

 

 

-

 

 

 

20

 

 

 

259

 

 

 

(141

)

 

 

259

 

 

 

(139

)

Total

 

 

 

 

 

 

 

 

 

 

 

654

 

 

 

(423

)

 

 

654

 

 

 

(416

)

Goodwill and intangible assets not subject to
   amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

 

$

362

 

 

 

 

 

$

362

 

 

 

 

Franchising

 

 

 

 

 

 

 

 

 

 

 

97

 

 

 

 

 

 

97

 

 

 

 

Manufacturing

 

 

 

 

 

 

 

 

 

 

 

97

 

 

 

 

 

 

97

 

 

 

 

Trademark

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

20

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

576

 

 

 

 

 

 

576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Goodwill and Intangible Assets

 

 

 

 

 

 

 

 

 

 

$

1,230

 

 

$

(423

)

 

$

1,230

 

 

$

(416

)

 

Amortization expense related to intangible assets totaled approximately $7 thousand and $7 thousand during the three months ended May 31, 2024 and 2023, respectively.

At May 31, 2024, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following (amounts in thousands):

 

2025

 

$

27

 

2026

 

 

27

 

2027

 

 

27

 

2028

 

 

27

 

2029

 

 

27

 

Thereafter

 

 

96

 

Total

 

$

231

 

 

NOTE 8 – NOTES PAYABLE AND REVOLVING CREDIT LINE

Revolving Credit Line

As of May 31, 2024, the Company had a $4.0 million credit line for general corporate and working capital purposes, of which $2.0 million was available for borrowing (subject to certain borrowing base limitations). The Company drew down $0.8 million on the credit line during the three months ended May 31, 2024. Per the Credit 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

15


Table of Contents

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Financing Rate plus 2.37% (7.71% at May 31, 2024 and 7.69% at February 29, 2024). Additionally, the line of credit is subject to various financial ratio and leverage covenants.

As of May 31, 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 1.5 to 1. The Company's current ratio as of May 31, 2024 was 1.10 to 1. The Company is in compliance, however, with all other aspects of the Credit Agreement. Refer to Note 1 for further information.

NOTE 9 – STOCK COMPENSATION PLANS

 

Under the Company’s 2007 Equity Incentive Plan (as amended and restated) (the 2007 Plan”), the Company may authorize and grant stock awards to employees, non-employee directors and certain other eligible participants, including stock options, restricted stock and restricted stock units.

The Company recognized $40 thousand and $0.2 million of stock-based compensation expense during the three months ended May 31, 2024 and 2023, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.

 

The following table summarizes non-vested restricted stock unit transactions for common stock during the three months ended May 31, 2024:

 

 

Three Months Ended
May 31,

 

 

2024

 

Outstanding non-vested restricted stock units at beginning
   of year:

 

 

160,958

 

Granted

 

 

215,182

 

Vested

 

 

(20,112

)

Cancelled/forfeited

 

 

(219,880

)

Outstanding non-vested restricted stock units as of
   May 31:

 

 

136,148

 

 

 

 

Weighted average grant date fair value

 

$

3.62

 

Weighted average remaining vesting period (in years)