Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended May 31, 2021

 

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

 

For the transition period from ________to________

 

Commission file number: 001-36865

 

Rocky Mountain Chocolate Factory, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware	47-1535633
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

265 Turner Drive, Durango, CO 81303

(Address of principal executive offices, including zip code)

 

(970) 259-0554

(Registrant’s telephone number, including area code)

 

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

 

Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.001 par value per share	RMCF	Nasdaq Global Market
Preferred Stock Purchase Rights	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 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 June 25, 2021, the registrant had outstanding 6,124,288 shares of its common stock, $0.001 par value.

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

PART I.     FINANCIAL INFORMATION
Item 1.		Financial Statements	3
CONSOLIDATED STATEMENTS OF OPERATIONS			3
CONSOLIDATED BALANCE SHEETS			4
CONSOLIDATED STATEMENTS OF CASH FLOWS			5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY			6
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.		Controls and Procedures	21
PART II.     OTHER INFORMATION			22
Item 1.		Legal Proceedings	22
Item 1A.		Risk Factors	22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.		Defaults Upon Senior Securities	22
Item 4.		Mine Safety Disclosures	22
Item 5.		Other Information	22
Item 6.		Exhibits	23
Signatures			24

 

 

 

		Three Months Ended May 31,
		2021				2020
Revenues
Sales		$	5,830,198			$	2,322,211
Franchise and royalty fees			1,763,513				380,226
Total Revenue			7,593,711				2,702,437
Costs and Expenses
Cost of sales			4,546,597				2,883,216
Franchise costs			551,650				421,245
Sales and marketing			412,657				474,090
General and administrative			844,821				3,179,475
Retail operating			444,067				319,211
Depreciation and amortization, exclusive of depreciation and amortization expense of $151,899, $157,510, respectively, included in cost of sales			148,015				185,605
Costs associated with Company-owned store closures			-				68,558
Total costs and expenses			6,947,807				7,531,400
Income (Loss) from Operations			645,904				(4,828,963	)
Other Income (Expense)
Interest Expense			-				(23,562	)
Interest Income			4,571				5,800
Gain on insurance recovery			167,123				-
Other income (expense), net			171,694				(17,762	)
Income (Loss) Before Income Taxes			817,598				(4,846,725	)
Income Tax Provision (Benefit)			237,793				(1,179,328	)
Consolidated Net Income (Loss)		$	579,805			$	(3,667,397	)
Basic Earnings (Loss) per Common Share		$	0.09			$	(0.61	)
Diluted Earnings (Loss) per Common Share		$	0.09			$	(0.61	)
Weighted Average Common Shares
Outstanding - Basic			6,118,433				6,058,851
Dilutive Effect of Employee
Stock Awards			171,277				-
Weighted Average Common Shares
Outstanding - Diluted			6,289,710				6,058,851

 

		May 31,				February 28,
		2021				2021
Assets		(unaudited)
Current Assets
Cash and cash equivalents		$	5,789,625			$	5,633,279
Accounts receivable, less allowance for doubtful accounts of $1,401,294 and $1,341,853, respectively			2,122,378				2,007,502
Notes receivable, current portion, less current portion of the valuation allowance of $32,586 and $32,571, respectively			76,137				84,819
Refundable income taxes			518,553				774,527
Inventories			4,399,030				4,062,885
Other			361,722				213,811
Total current assets			13,267,445				12,776,823
Property and Equipment, Net			5,593,453				5,152,015
Other Assets
Notes receivable, less current portion and valuation allowance of $79,701 and $79,716, respectively			29,573				42,525
Goodwill, net			729,701				729,701
Franchise rights, net			2,409,341				2,519,764
Intangible assets, net			385,030				395,946
Deferred income taxes			1,121,688				1,144,764
Lease right of use asset			2,214,248				1,925,591
Other			52,148				264,023
Total other assets			6,941,729				7,022,314
Total Assets		$	25,802,627			$	24,951,152
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable		$	1,152,572			$	1,297,211
Accrued salaries and wages			653,697				735,241
Gift card liabilities			553,373				617,438
Other accrued expenses			388,416				253,345
Contract liabilities			195,442				194,737
Lease liability			673,899				682,348
Total current liabilities			3,617,399				3,780,320
Lease Liability, Less Current Portion			1,576,839				1,278,354
Contract Liabilities, Less Current Portion			914,858				924,909
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding			-				-
Series A Junior Participating Preferred Stock, 50,000 authorized; -0- shares issued and outstanding			-				-
Undesignated series, 200,000 shares authorized; -0- shares issued and outstanding			-				-
Common stock, $.001 par value, 46,000,000 shares authorized, 6,118,995 shares and 6,074,293 shares issued and outstanding, respectively			6,119				6,074
Additional paid-in capital			8,117,824				7,971,712
Retained earnings			11,569,588				10,989,783
Total stockholders' equity			19,693,531				18,967,569
Total Liabilities and Stockholders' Equity		$	25,802,627			$	24,951,152

 

		Three Months Ended
		May 31,
		2021				2020
Cash Flows From Operating Activities
Net income (loss)		$	579,805			$	(3,667,397	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			299,914				343,115
Provision for obsolete inventory			33,285				18,285
Provision for loss on accounts and notes receivable			-				1,468,815
Asset impairment and store closure losses			-				544,060
Loss (gain) on sale or disposal of property and equipment			(164,286	)			4,956
Expense recorded for stock compensation			146,157				143,718
Deferred income taxes			23,076				(1,179,329	)
Changes in operating assets and liabilities:
Accounts receivable			(114,876	)			476,533
Refundable income taxes			255,974				340
Inventories			(386,868	)			(452,217	)
Contract Liabilities			(6,213	)			(27,515	)
Other current assets			(147,911	)			12,393
Accounts payable			(123,087	)			680,748
Accrued liabilities			(9,159	)			35,453
Net cash (used in) provided by operating activities			385,811				(1,598,042	)
Cash Flows from Investing Activities
Proceeds received on notes receivable			21,634				17,825
Purchase of intangible assets			-				(41,464	)
Proceeds from insurance recovery			206,336				-
Purchases of property and equipment			(457,435	)			(22,488	)
Net cash used in investing activities			(229,465	)			(46,127	)
Cash Flows from Financing Activities
Proceeds from long-term debt			-				1,537,200
Proceeds from the line of credit			-				3,448,165
Dividends paid			-				(722,344	)
Net cash provided by (used in) financing activities			-				4,263,021
Net Increase in Cash and Cash Equivalents			156,346				2,618,852
Cash and Cash Equivalents, Beginning of Period			5,633,279				4,822,071
Cash and Cash Equivalents, End of Period		$	5,789,625			$	7,440,923

 

		Three Months Ended
		May 31,
		2021				2020
Common Stock
Balance at February 28 or 29:		$	6,074			$	6,020
Issuance of common stock			7				-
Equity compensation, restricted stock units			38				41
Balance at May 31:			6,119				6,061
Additional Paid-in Capital
Balance at February 28 or 29:			7,971,712				7,459,931
Issuance of common stock			34,643				-
Equity compensation, restricted stock units			111,469				143,677
Balance at May 31:			8,117,824				7,603,608
Retained Earnings
Balance at February 28 or 29:			10,989,783				11,889,560
Consolidated net income (loss)			579,805				(3,667,397	)
Balance at May 31:			11,569,588				8,222,163
Total Stockholders' Equity		$	19,693,531			$	15,831,832
Common Shares
Balance at February 28 or 29:			6,074,293				6,019,532
Issuance of common stock			7,000				-
Equity compensation, restricted stock units			37,702				41,131
Balance at May 31:			6,118,995				6,060,663

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Nature of Operations

 

The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation), Aspen Leaf Yogurt, LLC (“ALY”), and U-Swirl International, Inc. (“U-Swirl”), and its 46%-owned subsidiary, U-Swirl, Inc. (“SWRL”) (collectively, the “Company,” “we,” “us” or “our”).

 

The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.

 

U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt.”

 

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; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.

 

In FY 2020 and early FY 2021 we entered into a long-term strategic alliance and ecommerce agreements, respectively, with Edible Arrangements®, LLC and its affiliates (“Edible”), whereby it is intended that we would become the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Under the strategic alliance, Rocky Mountain Chocolate Factory branded products are intended to be available for purchase both on Edible’s website as well as through over 1,000 franchised Edible locations nationwide. In addition, due to Edible’s significant e-commerce expertise and scale, we have also executed an ecommerce licensing agreement with Edible, whereby Edible is expected to sell a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites. There is no assurance that the strategic alliance and ecommerce agreements will be deployed into our operations and to our satisfaction, or that we will achieve the expected full benefits from these agreements. During the three months ended May 31, 2021, certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable.  There can be no assurance historical revenue levels will be indicative of future revenues.

 

The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés at May 31, 2021:

 

 

During FY 2021 the Company initiated formal legal proceedings against Immaculate Confections ("IC"), the operator of RMCF locations in Canada. In its complaint, the Company is alleging, among other things, that IC has utilized the Company’s trademarks and other intellectual property without authority to do so and that IC has been unjustly enriched by their use of the Company’s trademarks and intellectual property.

 

In June 2021 a court order was issued declaring the original 1991 Development Agreement for Canada between RMCF and IC has expired. As a result of this judgement, the Company has removed locations operated by IC from the store information above and contained herein.  During the three months ended May 31, 2020 and 2021 the Company did not recognize any revenue from locations operated by IC in Canada.  As of February 28, 2021 IC operated 48 locations in Canada. The Company intends to continue to pursue its claims and is expecting to proceed to a trial scheduled for August 2021.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and Securities and Exchange Commission (the “SEC”) regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three months ended May 31, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

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 28, 2021, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2021. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Subsequent Events

 

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.

 

COVID-19 Update

 

As discussed in more detail throughout this Quarterly Report on Form 10-Q for the three months ended May 31, 2021 (this “Quarterly Report”), we have experienced significant business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus (“COVID-19”), including the vast mandated self-quarantines of customers and closures of non-essential business throughout the United States and internationally. During the year ended February 28, 2021 nearly all of the Company-owned and franchise stores were 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. As a result, franchisees and licensees are not ordering products for their stores in line with historical amounts. This trend has negatively impacted, and may continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees. Beginning in May 2020, most stores previously closed for much of March 2020 and April 2020 in response to the COVID-19 pandemic, began to re-open. As of February 28, 2021, approximately 53 stores had not re-opened and the future of these locations is uncertain. That is a closure rate significantly higher than historical levels. By May 31, 2021, many stores have met or exceeded pre-COVID-19 sales levels, however, many retail environments have continued to be adversely impacted by changes to consumer behavior as a result of COVID-19. Most stores re-opened subject to various local health restrictions and often with reduced operations. It is unclear when or if store operations will return to pre-COVID-19 levels.

 

In addition, as previously announced on May 11, 2020, the Board of Directors decided to suspend the Company’s first quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-19 pandemic. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of the Company and our stockholders.

 

Recent Accounting Pronouncements

 

Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on our condensed consolidated financial statements.

 

In 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. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2023 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We adopted this ASU effective March 1, 2021 (the first quarter of our 2022 fiscal year). The adoption of the ASU did not have a material impact on our consolidated financial statements.

 

 

NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

The Company recognizes revenue from contracts with its customer in accordance with ASC 606, which provides that revenues are to be 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. This new standard does not impact the Company's recognition of revenue from sales of confectionery items to the Company’s franchisees and others, or in its Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percentage of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement. 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.

 

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

 

Initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.

 

The following table summarizes contract liabilities as of May 31, 2021 and May 31, 2020:

 

 

On May 31, 2021, 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:

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

Gift Cards

 

The Company’s franchisees sell gift cards which do not have either 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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing 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.

 

NOTE 4 – DISAGGREGATION OF REVENUE         

 

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

 

Three Months Ended May 31, 2021

Revenues recognized over time under ASC 606:

 

 

Revenues recognized at a point in time:

 

 

Three Months Ended May 31, 2020

Revenues recognized over time under ASC 606:

 

 

Revenues recognized at a point in time:

 

 

 

 

NOTE 5 – INVENTORIES

 

Inventories consist of the following inventory at May 31, 2021 and February 28, 2021:

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 - PROPERTY AND EQUIPMENT, NET

 

Property and equipment at May 31, 2021 and February 28, 2021 consisted of the following:

 

 

Depreciation expense related to property and equipment totaled $178,575 and $194,557 during the three months ended May 31, 2021 and 2020, respectively.

 

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

 

Intangible assets at May 31, 2021 and February 28, 2021 consist of the following:

 

 

Amortization expense related to intangible assets totaled $121,339 and $148,557 during the three months ended May 31, 2021 and 2020, respectively.

 

At May 31, 2021, annual amortization of placed in service intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS

 

We assess the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances indicate the carrying value of the assets or asset group may not be recoverable. Due to the significant impact of the COVID-19 pandemic on our operations, we determined it was necessary to perform an interim test of our long-lived assets during the three months ended May 31, 2020. Based on the results of these assessments, we recorded $545,000 of expense. This expense is presented within general and administrative expense on the Consolidated Statements of Operations.

 

The assessment of our goodwill, trademark and long lived asset fair values includes many assumptions that are subject to risk and uncertainties. The primary assumptions, which are all Level 3 inputs of the fair value hierarchy (inputs to the valuation methodology that are unobservable and significant to the fair value measurement), used in our impairment testing consist of:

 

●

Expected future cash flows from operation of our Company-owned units.

●

Forecasted future royalty revenue, marketing revenue and associated expenses.

●

Projected rate of royalty savings on trademarks.

●

Our cost of capital.

 

At May 31, 2020 costs associated with the impairment of long-lived and intangible assets consisted of the following:

 

 

Certain interim tests did not indicate a need for impairment during the three months ended May 31, 2020. Franchise rights, store design, manufacturing segment goodwill and franchising goodwill tests succeeded during the interim period. We believe we have made reasonable estimates and judgements, however, further COVID-19 related impacts could cause interim testing to be performed in future periods and further impairments recorded if testing of impairment is not successful in future periods.

 

During the three months ended May 31, 2021 the Company did not identify any triggering events and there were no costs associated with the impairment of long-lived assets during the three months ended May 31, 2021.

 

 

NOTE 9 – NOTES PAYABLE

 

Paycheck Protection Program

 

During the year ended February 28, 2021 the Company received promissory notes pursuant to the Paycheck Protection Program (“PPP”), under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA Loans”). The Company received total proceeds of $1.5 million from SBA Loans. During the three months ended November 30, 2020, approximately $108,000 of the original loan proceeds was forgiven by the SBA and during the three months ended February 28, 2021 the remaining approximately $1.4 million of the original loan proceeds was forgiven.

 

Revolving Credit Line

 

The Company has a $5.0 million credit line for general corporate and working capital purposes, of which $5.0 million was available for borrowing (subject to certain borrowing base limitations) as of May 31, 2021. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (2.4% at May 31, 2021). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At May 31, 2021, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2021.

 

 

NOTE 10 - STOCKHOLDERS’ EQUITY

 

Cash Dividend

 

The Company paid a quarterly cash dividend of $0.12 per share of common stock on March 13, 2020 to stockholders of record on February 28, 2020.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

As previously announced on May 11, 2020, the Board of Directors suspended the Company’s fiscal year 21 first quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment as a result of the economic impact of COVID-19. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and global economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of the Company and its stockholders.

 

Future declarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long-term interest of the Company’s stockholders.

 

Stock Repurchases

 

On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. As of May 31, 2021, approximately $638,000 remains available under the repurchase plan for further stock repurchases.

 

Warrants

 

In consideration of Edible entering into the exclusive supplier agreement and the performance of its obligations therein, on December 20, 2019, the Company issued Edible a warrant (the “Warrant”) to purchase up to 960,677 shares of the Company’s common stock (the “Warrant Shares”) at an exercise price of $8.76 per share. The Warrant Shares vest in annual tranches in varying amounts following each contract year under the exclusive supplier agreement, subject to, and only upon, Edible’s achievement of certain revenue thresholds on an annual or cumulative five-year basis in connection with its performance under the exclusive supplier agreement. The Warrant expires six months after the final and conclusive determination of revenue thresholds for the fifth contract year and the cumulative revenue determination in accordance with the terms of the Warrant.

 

The Company determined that the grant date fair value of the warrants was de minimis and did not record any amount in consideration of the warrants. The Company utilized a Monte Carlo model for purposes of determining the grant date fair value.

 

Stock-Based Compensation

 

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

 

The Company recognized $146,157 of stock-based compensation expense during the three months ended May 31, 2021 compared with $143,718 during the three months ended May 31, 2020. 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, 2021 and 2020:

 

 

The Company issued 7,000 unrestricted shares of stock to non-employee directors during the three months ended May 31, 2021 compared to no shares issued during the three months ended May 31, 2020. In connection with these non-employee director stock issuances, the Company recognized $34,650 and $0 of stock-based compensation expense during the three months ended May 31, 2021 and 2020, respectively.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

During the three months ended May 31, 2021, the Company recognized $111,507 of stock-based compensation expense related to non-vested, non-forfeited restricted stock unit grants compared to $143,718 during the three months ended May 31, 2020. The restricted stock units generally vest in equal annual installments over a period of five to six years. Total unrecognized stock-based compensation expense of non-vested, non-forfeited restricted stock units, as of May 31, 2021, was $1,494,326, which is expected to be recognized over the weighted average period of 3.41 years.

 

The Company has no outstanding stock options as of May 31, 2021.

 

 

 

NOTE 11 - EARNINGS PER SHARE

 

Basic earnings per share is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through the settlement of restricted stock units. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.

 

The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include outstanding common shares issuable if their effect would be anti-dilutive. During the three months ended May 31, 2021, 960,677 shares of common stock warrants and no shares of issuable common stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. During the three months ended May 31, 2020, 960,677 shares of common stock warrants and 209,960 shares of issuable common stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

 

 

NOTE 12 – 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 locations are leased by the franchisee directly. Currently, there are not indications that the Company will be required to make any payments on behalf of franchisees.

 

In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.

 

The Company also leases trucking equipment and warehouse space in support of its manufacturing operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.

 

ASU 2016-02 allows, as a practical expedient, the retention of the classification of existing leases as operating or financing. All of the Company’s leases are classified as operating leases and that classification has been retained upon adoption. The Company does not believe the utilization of this practical expedient has a material impact on lease classifications.

 

The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. As of May 31, 2021 and 2020, lease expense recognized in the Consolidated Statements of Income was $209,025 and $212,063, respectively.

 

The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the life of its leases. This includes known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the sales performance of the location remains strong. Therefore, the Right of Use Asset and Lease Liability include an assumption on renewal options that have not yet been exercised by the Company, and are not currently a future obligation. The Company has separated non-lease components from lease components in the recognition of the Asset and Liability except in instances where such costs were not practical to separate. To the extent that occupancy costs, such as site maintenance, are included in the Asset and Liability, the impact is immaterial. For franchised locations, the related occupancy costs including property taxes, insurance and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee under non-store related leases such as storage facilities and trucking equipment. For leases where the implicit rate is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease. The weighted average discount rate used for operating leases was 3.2% as of May 31, 2021. The total estimated future minimum lease payments is $2.5 million.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

As of May 31, 2021, maturities of lease liabilities for our operating leases were as follows:

 

 

During the three months ended May 31, 2021 the Company entered into lease amendments to extend the terms of leases for certain Company-owned locations. These lease amendments resulted in the Company recognizing a present value of future lease liability of $475,908 based upon a total lease liability of $504,946.

 

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

Purchase contracts

 

The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of May 31, 2021, the Company was contracted for approximately $234,000 of raw materials under such agreements. The Company has designated these contracts as normal under the normal purchase and sale exception under the accounting standards for derivatives. These contracts are not entered into for speculative purposes.

 

 

NOTE 14 - OPERATING SEGMENTS

 

The Company classifies its business interests into five reportable segments: Franchising, Manufacturing, Retail Stores, U-Swirl and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2021, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2021. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services: