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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 August 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

img69444725_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 Turner 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, a 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 October 10, 2024, the registrant had 7,597,819 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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4.

Controls and Procedures

31

 

part II. other information

33

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

37

Signatures

 

38

 

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,” “may,” “would,” “could,” “continue,” “likely,” “might,” “seek,” “outlook,” “explore,” or the negative of these terms or other 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

 

 

Six Months Ended

 

 

August 31,

 

 

August 31,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

4,918

 

 

$

5,016

 

 

$

10,197

 

 

$

10,032

 

Franchise and royalty fees

 

 

1,462

 

 

 

1,542

 

 

 

2,590

 

 

 

2,962

 

Total Revenue

 

 

6,380

 

 

 

6,558

 

 

 

12,787

 

 

 

12,994

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

4,350

 

 

 

4,632

 

 

 

9,936

 

 

 

9,391

 

Franchise costs

 

 

952

 

 

 

614

 

 

 

1,493

 

 

 

1,293

 

Sales and marketing

 

 

138

 

 

 

442

 

 

 

568

 

 

 

915

 

General and administrative

 

 

1,622

 

 

 

1,687

 

 

 

2,861

 

 

 

3,619

 

Retail operating

 

 

194

 

 

 

162

 

 

 

393

 

 

 

265

 

Depreciation and amortization, exclusive of depreciation
   and amortization expense of $
190, $183, $386 and $354,
   respectively, included in cost of sales

 

 

38

 

 

 

32

 

 

 

80

 

 

 

63

 

Total costs and expenses

 

 

7,294

 

 

 

7,569

 

 

 

15,331

 

 

 

15,546

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Operations

 

 

(914

)

 

 

(1,011

)

 

 

(2,544

)

 

 

(2,552

)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(63

)

 

 

(6

)

 

 

(98

)

 

 

(13

)

Interest income

 

 

7

 

 

 

18

 

 

 

14

 

 

 

38

 

Gain (loss) on disposal of assets

 

 

248

 

 

 

-

 

 

 

248

 

 

 

-

 

Other income, net

 

 

192

 

 

 

12

 

 

 

164

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss Before Income Taxes

 

 

(722

)

 

 

(999

)

 

 

(2,380

)

 

 

(2,527

)

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Provision (Benefit)

 

 

-

 

 

-

 

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations

 

 

(722

)

 

 

(999

)

 

 

(2,380

)

 

 

(2,527

)

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from discontinued operations, net of tax

 

-

 

 

-

 

 

-

 

 

69

 

Gain on disposal of discontinued operations, net of tax

 

-

 

 

-

 

 

-

 

 

 

635

 

Earnings from discontinued operations, net of tax

 

-

 

 

-

 

 

-

 

 

704

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(722

)

 

$

(999

)

 

$

(2,380

)

 

$

(1,823

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic Loss per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.11

)

 

$

(0.16

)

 

$

(0.37

)

 

$

(0.40

)

Earnings from discontinued operations

 

 

-

 

 

-

 

 

 

-

 

 

 

0.11

 

Net loss

 

$

(0.11

)

 

$

(0.16

)

 

$

(0.37

)

 

$

(0.29

)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Loss per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.11

)

 

$

(0.16

)

 

$

(0.37

)

 

$

(0.40

)

Earnings from discontinued operations

 

 

-

 

 

-

 

 

 

-

 

 

 

0.11

 

Net loss

 

$

(0.11

)

 

$

(0.16

)

 

$

(0.37

)

 

$

(0.29

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding - Basic

 

 

6,686,537

 

 

 

6,239,078

 

 

 

6,507,323

 

 

 

6,284,846

 

Dilutive Effect of Employee Stock Awards

 

 

-

 

 

-

 

 

 

-

 

 

-

 

Weighted Average Common Shares Outstanding - Diluted

 

 

6,686,537

 

 

 

6,239,078

 

 

 

6,507,323

 

 

 

6,284,846

 

 

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)

 

 

 

 

August 31, 2024 (unaudited)

 

 

February 29, 2024

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

973

 

 

$

2,082

 

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

 

 

2,439

 

 

 

2,184

 

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

 

 

36

 

 

 

489

 

Refundable income taxes

 

 

63

 

 

 

46

 

Inventories

 

 

6,115

 

 

 

4,358

 

Other

 

 

702

 

 

 

443

 

Current assets held for sale

 

 

666

 

 

-

 

Total current assets

 

 

10,994

 

 

 

9,602

 

Property and Equipment, Net

 

 

7,724

 

 

 

7,758

 

Other Assets

 

 

 

 

 

 

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

 

 

77

 

 

 

695

 

Goodwill

 

 

576

 

 

 

576

 

Intangible assets, net

 

 

224

 

 

 

238

 

Lease right of use asset

 

 

1,460

 

 

 

1,694

 

Other

 

 

75

 

 

 

14

 

Total other assets

 

 

2,412

 

 

 

3,217

 

Total Assets

 

$

21,130

 

 

$

20,577

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

 

$

2,714

 

 

$

3,411

 

Line of credit

 

 

3,450

 

 

 

1,250

 

Accrued salaries and wages

 

 

962

 

 

 

1,833

 

Gift card liabilities

 

 

688

 

 

 

624

 

Other accrued expenses

 

 

154

 

 

 

301

 

Contract liabilities

 

 

147

 

 

 

150

 

Lease liability

 

 

380

 

 

 

503

 

Deposit Liability

 

 

358

 

 

-

 

Total current liabilities

 

 

8,853

 

 

 

8,072

 

Lease Liability, Less Current Portion

 

 

1,081

 

 

 

1,191

 

Contract Liabilities, Less Current Portion

 

 

671

 

 

 

678

 

Total Liabilities

 

 

10,605

 

 

 

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, 7,588,587 shares
   and
6,306,027 shares issued and outstanding, respectively

 

 

8

 

 

 

6

 

Additional paid-in capital

 

 

12,163

 

 

 

9,896

 

Retained earnings (accumulated deficit)

 

 

(1,646

)

 

 

734

 

Total stockholders' equity

 

 

10,525

 

 

 

10,636

 

Total Liabilities and Stockholders' Equity

 

$

21,130

 

 

$

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)

 

 

Six Months Ended
August 31,

 

 

 

2024

 

 

2023

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net Loss

 

$

(2,380

)

 

$

(1,823

)

Less: Earnings from discontinued operations, net of tax

 

 

-

 

 

 

704

 

Loss from continuing operations

 

 

(2,380

)

 

 

(2,527

)

Adjustments to reconcile loss from continuing operations to net cash
used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

467

 

 

 

416

 

Provision for obsolete inventory

 

 

9

 

 

 

48

 

Gain (loss) on disposal of assets

 

 

(248

)

 

 

(40

)

Expense recorded for stock compensation

 

 

81

 

 

 

325

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(255

)

 

54

 

Refundable income taxes

 

 

(17

)

 

 

30

 

Inventories

 

 

(1,386

)

 

 

375

 

Other current assets

 

 

(258

)

 

 

(92

)

Accounts payable

 

 

(1,075

)

 

 

(16

)

Accrued liabilities

 

 

(598

)

 

 

543

 

Contract liabilities

 

 

(10

)

 

 

(43

)

Net cash used in operating activities
   of continuing operations

 

 

(5,670

)

 

 

(927

)

Net cash used in operating activities
   of discontinued operations

 

 

-

 

 

 

(39

)

Net cash used in operating activities

 

 

(5,670

)

 

 

(966

)

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Addition to notes receivable

 

 

-

 

 

 

(49

)

Proceeds received on notes receivable

 

 

154

 

 

 

36

 

Proceeds from the sale of assets

 

 

1,607

 

 

 

112

 

Purchases of property and equipment

 

 

(1,534

)

 

 

(1,252

)

Increase in other assets

 

 

(54

)

 

 

(31

)

Net cash provided by (used in) investing activities
   of continuing operations

 

 

173

 

 

 

(1,184

)

Net cash provided by investing activities
   of discontinued operations

 

 

-

 

 

 

1,418

 

Net cash provided by investing activities

 

 

173

 

 

 

234

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Proceeds from line of credit

 

 

2,200

 

 

-

 

Issuance of common stock through securities purchase agreement

 

 

2,188

 

 

 

-

 

Net cash provided by financing
   activities of discontinued operations

 

 

-

 

 

-

 

Net cash provided by financing activities

 

 

4,388

 

 

-

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

 

(1,109

)

 

 

(732

)

 

 

 

 

 

 

Cash and Cash Equivalents, Beginning of Period

 

 

2,082

 

 

 

4,717

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

 

$

973

 

 

$

3,985

 

 

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 share amounts)

(Unaudited)

 

 

 

Six Months Ended August 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

 

Equity compensation, restricted stock units, net of shares withheld

 

 

-

 

 

 

-

 

 

 

12,448

 

 

 

-

 

 

 

41

 

 

 

-

 

 

 

41

 

Issuance of common stock through securities purchase agreement

 

 

-

 

 

 

-

 

 

 

1,250,000

 

 

 

2

 

 

 

2,186

 

 

 

-

 

 

 

2,188

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(722

)

 

 

(722

)

Balances as of August 31, 2024

 

 

-

 

 

 

-

 

 

 

7,588,587

 

 

 

8

 

 

 

12,163

 

 

 

(1,646

)

 

 

10,525

 

 

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 share amounts)

(Unaudited)

 

 

 

Six Months Ended August 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

 

 

 

-

 

 

 

201

 

 

 

-

 

 

 

201

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(823

)

 

 

(823

)

Balances as of May 31, 2023

 

 

-

 

 

$

-

 

 

 

6,290,164

 

 

$

6

 

 

$

9,659

 

 

$

4,083

 

 

$

13,748

 

Issuance of common stock, vesting of restricted stock units

 

 

-

 

 

 

-

 

 

 

9,661

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Equity compensation, restricted stock units and stock options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

123

 

 

 

-

 

 

 

123

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(999

)

 

 

(999

)

Balances as of August 31, 2023

 

 

-

 

 

 

-

 

 

 

6,299,825

 

 

$

6

 

 

$

9,782

 

 

$

3,084

 

 

$

12,872

 

 

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. 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 August 31, 2024:

 

 

Stores
Open at
2/29/2024

 

 

Opened

 

 

Closed

 

 

Sold

 

 

Stores
Open at
8/31/2024

 

Rocky Mountain Chocolate Factory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company-owned stores

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

Franchise stores - Domestic stores
   and kiosks

 

 

149

 

 

 

1

 

 

 

(5

)

 

 

(1

)

 

 

144

 

International license stores

 

 

3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3

 

Cold Stone Creamery - co-branded

 

 

104

 

 

 

2

 

 

 

(2

)

 

 

-

 

 

 

104

 

U-Swirl - co-branded

 

 

11

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

10

 

Total

 

 

269

 

 

 

 

 

 

 

 

 

 

 

 

263

 

 

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 six months ended August 31, 2024, the Company incurred a net loss of $2.4 million and used cash in operating activities of $5.7 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 August 31, 2024 was 1.24 to 1. The Credit Agreement was set to expire on September 30, 2024, and was repaid on September 30, 2024 (see Note 8). 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 our lender. The Company continues to explore supplemental liquidity sources. During the next twelve months, the Company intends to further reduce overhead costs, improve manufacturing efficiencies, and increase profits and gross margins by better aligning its costs with the delivery and sale to its franchising system and Specialty Market customers. In addition, the Company intends to benefit from its historically busy season of holiday product sales while also increasing sales through its e-commerce distribution channel on a year-round basis. 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 presentation of the results for the interim periods presented. The condensed consolidated financial statements have been prepared in accordance with 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 six months ended August 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. 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, and recorded a gain of approximately $0.5 million in connection with the sale.

 

In the first quarter of fiscal 2025, the Company commenced its plan to sell a piece of factory machinery. As of August 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 August 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. The Company recorded an impairment charge of $0.1 million during the six months ended August 31, 2024, 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 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.

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Table of Contents

 

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

 

In July 2024, the Company and Isaac Lee Collins, LLC entered into a Promissory Note and Security Assignment and Assumption Agreement (the “Agreement”) related to the outstanding U-Swirl promissory note which had an outstanding principal and accrued interest balance of $1.0 million. Pursuant to the terms of the Agreement, the Company irrevocably assigned and transferred to the purchaser all of its right, title, and interest in and to the U-Swirl promissory note and the purchaser agreed to assume the same in consideration of $0.7 million. The Company recorded a loss of $0.2 million in connection with the sale and is included within gain (loss) on disposal of assets on the statements of operations.

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, other than the execution of the New Credit Agreement discussed in Note 8.

 

NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION

 

($'s in thousands)

 

Six Months Ended
August 31,

 

Cash paid (received) for:

 

2024

 

 

2023

 

Interest

 

$

98

 

 

-

 

Income taxes

 

 

17

 

 

 

(30

)

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

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Table of Contents

 

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 August 31, 2024 and August 31, 2023:

 

 

Six Months Ended
August 31,

 

($'s in thousands)

 

2024

 

 

2023

 

Contract liabilities at the beginning of the year:

 

$

828

 

 

$

943

 

Revenue recognized

 

 

(108

)

 

 

(86

)

Contract fees received

 

 

98

 

 

 

43

 

Contract liabilities at the end of the period:

 

$

818

 

 

$

900

 

 

At August 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

 

$

74

 

2026

 

 

142

 

2027

 

 

129

 

2028

 

 

102

 

2029

 

 

80

 

Thereafter

 

 

291

 

Total

 

$

818

 

 

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 did not recognize any gift card breakage during the three months ended August 31, 2024 or six months ended August 31, 2024.

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.

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Table of Contents

 

 

Rocky Mountain Chocolate Factory, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 4 – DISAGGREGATION OF REVENUE

The following table presents disaggregated revenue by the method of recognition and segment:

Three Months Ended August 31, 2024

Revenues recognized over time:

 

($'s in thousands)

 

Franchising

 

 

Manufacturing

 

 

Retail

 

 

Total

 

Franchise fees

 

$

38

 

 

$

-

 

 

$

-

 

 

$