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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 August 31, 2023
☐ 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 |
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 October 10, 2023, the registrant had outstanding 6,302,185 shares of its common stock, $0.001 par value per share.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes 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, 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. The 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 that 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 28, 2023, filed with the Securities and Exchange Commission (“SEC”) on May 30, 2023, as updated by this Quarterly Report.
PART I. |
FINANCIAL INFORMATION |
Item 1. |
Financial Statements |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | Three Months Ended August 31, | | | Six Months Ended August 31, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Revenues | | | | | | | | | | | | | | | | |
Sales | | $ | 5,015,993 | | | $ | 5,071,393 | | | $ | 10,032,040 | | | $ | 10,479,413 | |
Franchise and royalty fees | | | 1,541,886 | | | | 1,485,963 | | | | 2,961,824 | | | | 2,980,141 | |
Total Revenue | | | 6,557,879 | | | | 6,557,356 | | | | 12,993,864 | | | | 13,459,554 | |
| | | | | | | | | | | | | | | | |
Costs and Expenses | | | | | | | | | | | | | | | | |
Cost of sales | | | 4,632,391 | | | | 3,889,587 | | | | 9,390,885 | | | | 8,415,908 | |
Franchise costs | | | 613,409 | | | | 448,732 | | | | 1,292,982 | | | | 867,816 | |
Sales and marketing | | | 442,245 | | | | 427,850 | | | | 915,136 | | | | 908,909 | |
General and administrative | | | 1,687,142 | | | | 4,036,788 | | | | 3,619,045 | | | | 5,642,655 | |
Retail operating | | | 161,783 | | | | 151,145 | | | | 264,764 | | | | 309,419 | |
Depreciation and amortization, exclusive of depreciation and amortization expense of $182,731, $160,767, $353,587 and $320,472, respectively, included in cost of sales | | | 31,638 | | | | 28,757 | | | | 62,867 | | | | 57,944 | |
Total costs and expenses | | | 7,568,608 | | | | 8,982,859 | | | | 15,545,679 | | | | 16,202,651 | |
Loss from Operations | | | (1,010,729 | ) | | | (2,425,503 | ) | | | (2,551,815 | ) | | | (2,743,097 | ) |
Other Income | | | | | | | | | | | | | | | | |
Interest Expense | | | (6,258 | ) | | | - | | | | (12,517 | ) | | | | |
Interest Income | | | 17,690 | | | | 3,857 | | | | 37,768 | | | | 6,498 | |
Other income, net | | | 11,432 | | | | 3,857 | | | | 25,251 | | | | 6,498 | |
Loss Before Income Taxes | | | (999,297 | ) | | | (2,421,646 | ) | | | (2,526,564 | ) | | | (2,736,599 | ) |
Income Tax Provision | | | - | | | | 730,845 | | | | - | | | | 701,659 | |
Net Income (Loss) from Continuing Operations | | $ | (999,297 | ) | | $ | (3,152,491 | ) | | $ | (2,526,564 | ) | | $ | (3,438,258 | ) |
Discontinued Operations | | | | | | | | | | | | | | | | |
Earnings (loss) from discontinued operations, net of tax | | | - | | | | (488,695 | ) | | | 69,044 | | | | (317,869 | ) |
Gain on disposal of discontinued operations, net of tax | | | - | | | | - | | | | 634,790 | | | | - | |
Earnings (loss) from discontinued operations, net of tax | | | - | | | | (488,695 | ) | | | 703,834 | | | | (317,869 | ) |
Consolidated Net Loss | | $ | (999,297 | ) | | $ | (3,641,186 | ) | | $ | (1,822,730 | ) | | $ | (3,756,127 | ) |
| | | | | | | | | | | | | | | | |
Basic Earnings (Loss) per Common Share | | | | | | | | | | | | | | | | |
Loss from continuing operations | | $ | (0.16 | ) | | $ | (0.51 | ) | | $ | (0.40 | ) | | $ | (0.55 | ) |
Earnings (loss) from discontinued operations | | | - | | | | (0.08 | ) | | | 0.11 | | | | (0.05 | ) |
Net loss | | $ | (0.16 | ) | | $ | (0.59 | ) | | $ | (0.29 | ) | | $ | (0.60 | ) |
| | | | | | | | | | | | | | | | |
Diluted Earnings (Loss) per Common Share | | | | | | | | | | | | | | | | |
Loss from continuing operations | | $ | (0.16 | ) | | $ | (0.51 | ) | | $ | (0.40 | ) | | $ | (0.55 | ) |
Earnings (loss) from discontinued operations | | | - | | | | (0.08 | ) | | | 0.11 | | | | (0.05 | ) |
Net loss | | $ | (0.16 | ) | | $ | (0.59 | ) | | $ | (0.29 | ) | | $ | (0.60 | ) |
Weighted Average Common Shares Outstanding - Basic | | | 6,293,078 | | | | 6,215,186 | | | | 6,284,846 | | | | 6,211,815 | |
Dilutive Effect of Employee Stock Awards | | | - | | | | - | | | | - | | | | - | |
Weighted Average Common Shares Outstanding - Diluted | | | 6,293,078 | | | | 6,215,186 | | | | 6,284,846 | | | | 6,211,815 | |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | August 31, | | | February 28, | |
| | 2023 | | | 2023 | |
| | (unaudited) | | | | | |
Assets | | | | | | | | |
Current Assets | | | | | | | | |
Cash and cash equivalents | | $ | 3,984,607 | | | $ | 4,717,068 | |
Accounts receivable, less allowance for doubtful accounts of $589,460 and $666,315, respectively | | | 1,962,317 | | | | 2,055,694 | |
Notes receivable, current portion, less current portion of the valuation allowance of $42,504 and $35,173, respectively | | | 173,086 | | | | 23,698 | |
Refundable income taxes | | | 314,987 | | | | 344,885 | |
Inventories | | | 3,232,587 | | | | 3,639,780 | |
Other | | | 434,225 | | | | 340,847 | |
Current assets held for sale | | | - | | | | 83,004 | |
Total current assets | | | 10,101,809 | | | | 11,204,976 | |
| | | | | | | | |
Property and Equipment, Net | | | 6,488,430 | | | | 5,710,739 | |
| | | | | | | | |
Other Assets | | | | | | | | |
Notes receivable, less current portion and valuation allowance of $31,447 and $38,778, respectively | | | 1,009,087 | | | | 94,076 | |
Goodwill, net | | | 575,608 | | | | 575,608 | |
Intangible assets, net | | | 251,600 | | | | 265,927 | |
Lease right of use asset | | | 2,054,084 | | | | 2,355,601 | |
Other | | | 54,006 | | | | 14,054 | |
Long-term assets held for sale | | | - | | | | 1,765,846 | |
Total other assets | | | 3,944,385 | | | | 5,071,112 | |
| | | | | | | | |
Total Assets | | $ | 20,534,624 | | | $ | 21,986,827 | |
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current Liabilities | | | | | | | | |
Accounts payable | | $ | 2,405,746 | | | $ | 2,189,760 | |
Accrued salaries and wages | | | 1,445,223 | | | | 978,606 | |
Gift card liabilities | | | 570,276 | | | | 592,932 | |
Other accrued expenses | | | 283,207 | | | | 162,346 | |
Contract liabilities | | | 159,209 | | | | 161,137 | |
Lease liability | | | 717,858 | | | | 746,506 | |
Current liabilities held for sale | | | - | | | | 178,939 | |
Total current liabilities | | | 5,581,519 | | | | 5,010,226 | |
| | | | | | | | |
Lease Liability, Less Current Portion | | | 1,339,798 | | | | 1,640,017 | |
Contract Liabilities, Less Current Portion | | | 741,290 | | | | 782,278 | |
Long-term liabilities - held for sale | | | - | | | | 184,142 | |
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, 6,299,825 shares and 6,257,137 shares issued and outstanding, respectively | | | 6,300 | | | | 6,257 | |
Additional paid-in capital | | | 9,782,415 | | | | 9,457,875 | |
Retained earnings | | | 3,083,302 | | | | 4,906,032 | |
| | | | | | | | |
Total stockholders' equity | | | 12,872,017 | | | | 14,370,164 | |
| | | | | | | | |
Total Liabilities and Stockholders' Equity | | $ | 20,534,624 | | | $ | 21,986,827 | |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | Six Months Ended | |
| | August 31, | |
| | 2023 | | | 2022 | |
Cash Flows From Operating Activities | | | | | | | | |
Net income (loss) | | $ | (1,822,730 | ) | | $ | (3,756,127 | ) |
Less: Net Income (loss) from discontinued operations, net of tax | | | 703,834 | | | | (317,869 | ) |
Net Loss from continuing operations | | | (2,526,564 | ) | | | (3,438,258 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | | | 416,454 | | | | 378,416 | |
Provision for obsolete inventory | | | 47,504 | | | | 32,862 | |
Provision for loss on accounts and notes receivable | | | - | | | | (127,000 | ) |
Loss (gain) on sale or disposal of property and equipment | | | (40,221 | ) | | | 3,571 | |
Expense recorded for stock compensation | | | 324,583 | | | | 280,637 | |
Deferred income taxes | | | - | | | | 722,163 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | 54,206 | | | | 160,770 | |
Refundable income taxes | | | 29,898 | | | | 304,779 | |
Inventories | | | 375,045 | | | | (2,078,673 | ) |
Contract Liabilities | | | (42,916 | ) | | | 6,245 | |
Other current assets | | | (92,355 | ) | | | (148,661 | ) |
Accounts payable | | | (16,097 | ) | | | 2,165,022 | |
Accrued liabilities | | | 543,167 | | | | (389,800 | ) |
Net cash used in operating activities of continuing operations | | | (927,296 | ) | | | (2,127,927 | ) |
Net cash (used in) provided by operating activities of discontinued operations | | | (39,242 | ) | | | 543,234 | |
Net cash used in operating activities | | | (966,538 | ) | | | (1,584,693 | ) |
| | | | | | | | |
Cash Flows From Investing Activities | | | | | | | | |
Addition to notes receivable | | | (49,476 | ) | | | (54,543 | ) |
Proceeds received on notes receivable | | | 35,949 | | | | 31,015 | |
Proceeds from sale or distribution of assets | | | 112,131 | | | | 1,529 | |
Purchases of property and equipment | | | (1,251,728 | ) | | | (554,332 | ) |
Decrease (increase) in other assets | | | (30,537 | ) | | | 10,000 | |
Net cash used in by investing activities of continuing operations | | | (1,183,661 | ) | | | (566,331 | ) |
Net cash provided by (used in) investing activities of discontinued operations | | | 1,417,738 | | | | (32,547 | ) |
Net cash provided by (used in) investing activities | | | 234,077 | | | | (598,878 | ) |
| | | | | | | | |
Net Decrease in Cash and Cash Equivalents | | | (732,461 | ) | | | (2,183,571 | ) |
| | | | | | | | |
Cash and Cash Equivalents, Beginning of Period | | | 4,717,068 | | | | 7,587,374 | |
| | | | | | | | |
Cash and Cash Equivalents, End of Period | | $ | 3,984,607 | | | $ | 5,403,803 | |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Total |
|
Balance as of May 31, 2022 |
|
|
6,213,681 |
|
|
$ |
6,214 |
|
|
$ |
8,938,499 |
|
|
$ |
10,471,869 |
|
|
$ |
19,416,582 |
|
Consolidated net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,641,186 |
) |
|
|
(3,641,186 |
) |
Issuance of common stock, vesting of restricted stock units and other |
|
|
9,553 |
|
|
|
9 |
|
|
|
(10 |
) |
|
|
|
|
|
|
(1 |
) |
Equity compensation, restricted stock units and stock options |
|
|
|
|
|
|
|
|
|
|
149,041 |
|
|
|
|
|
|
|
149,041 |
|
Balance as of August 31, 2022 |
|
|
6,223,234 |
|
|
$ |
6,223 |
|
|
$ |
9,087,530 |
|
|
$ |
6,830,683 |
|
|
$ |
15,924,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of February 28, 2022 |
|
|
6,186,356 |
|
|
|
6,186 |
|
|
$ |
8,806,930 |
|
|
$ |
10,586,810 |
|
|
$ |
19,399,926 |
|
Consolidated net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,756,127 |
) |
|
|
(3,756,127 |
) |
Issuance of common stock, vesting of restricted stock units and other |
|
|
36,878 |
|
|
|
37 |
|
|
|
(37 |
) |
|
|
|
|
|
|
- |
|
Equity compensation, restricted stock units and stock options |
|
|
|
|
|
|
|
|
|
|
280,637 |
|
|
|
|
|
|
|
280,637 |
|
Balance as of August 31, 2022 |
|
|
6,223,234 |
|
|
$ |
6,223 |
|
|
$ |
9,087,530 |
|
|
$ |
6,830,683 |
|
|
$ |
15,924,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2023 |
|
|
6,290,164 |
|
|
$ |
6,290 |
|
|
$ |
9,659,476 |
|
|
$ |
4,082,599 |
|
|
$ |
13,748,365 |
|
Consolidated net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(999,297 |
) |
|
|
(999,297 |
) |
Issuance of common stock, vesting of restricted stock units and other |
|
|
9,661 |
|
|
|
10 |
|
|
|
(10 |
) |
|
|
|
|
|
|
- |
|
Equity compensation, restricted stock units and stock options |
|
|
|
|
|
|
|
|
|
|
122,949 |
|
|
|
|
|
|
|
122,949 |
|
Balance as of August 31, 2023 |
|
|
6,299,825 |
|
|
$ |
6,300 |
|
|
$ |
9,782,415 |
|
|
$ |
3,083,302 |
|
|
$ |
12,872,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of February 28, 2023 |
|
|
6,257,137 |
|
|
|
6,257 |
|
|
$ |
9,457,875 |
|
|
$ |
4,906,032 |
|
|
$ |
14,370,164 |
|
Consolidated net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,822,730 |
) |
|
|
(1,822,730 |
) |
Issuance of common stock, vesting of restricted stock units and other |
|
|
42,688 |
|
|
|
43 |
|
|
|
(43 |
) |
|
|
|
|
|
|
- |
|
Equity compensation, restricted stock units and stock options |
|
|
|
|
|
|
|
|
|
|
324,583 |
|
|
|
|
|
|
|
324,583 |
|
Balance as of August 31, 2023 |
|
|
6,299,825 |
|
|
$ |
6,300 |
|
|
$ |
9,782,415 |
|
|
$ |
3,083,302 |
|
|
$ |
12,872,017 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
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”), U-Swirl International, Inc. (“U-Swirl”), and U-Swirl, Inc. (“SWRL”) (collectively, the “Company,” “we,” “us” or “our”).
The Company is an international franchisor, confectionery producer, and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and produces an extensive line of premium chocolates and other confectionery products (“Durango Products”). The Company also sells its candy in select locations outside of its franchised/licensed network 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, after the 2023 fiscal year end, the Company entered into an agreement to sell its franchise rights and intangible assets related to U-Swirl and associated brands. As a result, the activities of the Company’s U-Swirl subsidiary that have historically been reported in the U-Swirl segment have been reported as discontinued operations. See Note 16 –Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding the Company's discontinued operations, including net sales, operating earnings, and total assets by segment. The Company’s financial statements reflect continuing operations only, unless otherwise noted.
The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of premium 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 premium chocolates and other confectionery products including gourmet caramel apples.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate brand at August 31, 2023:
| | Stores Open at 2/28/2023 | | | Opened | | | Closed | | | Sold | | | Stores Open at 8/31/2023 | | | Sold, Not Yet Open | | | Total | |
Rocky Mountain Chocolate Factory | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company-owned stores | | | 1 | | | | 1 | | | | - | | | | - | | | | 2 | | | | - | | | | 2 | |
Franchise stores - Domestic stores and kiosks | | | 153 | | | | 3 | | | | (5 | ) | | | (1 | ) | | | 150 | | | | 4 | | | | 154 | |
International license stores | | | 4 | | | | - | | | | - | | | | - | | | | 4 | | | | - | | | | 4 | |
Co-branded stores | | | 111 | | | | 3 | | | | (1 | ) | | | - | | | | 113 | | | | - | | | | 113 | |
Total | | | 269 | | | | | | | | | | | | | | | | 269 | | | | 4 | | | | 273 | |
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 (“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 and six months ended August 31, 2023 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, 2023, filed with the SEC on May 30, 2023. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.
Subsequent Events
On September 28, 2023, the Company renewed its Line of Credit with Wells Fargo Bank, NA under comparable terms to the Line of Credit that was set to expire on September 30, 2023, however, the maximum amount available for borrowing under the credit line was reduced from $5 million to $4 million. See Note 8 to these financial statements for a description of the Line of Credit.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
Management evaluated all activity of the Company through the issue date of these consolidated financial statements and concluded that no subsequent events have occurred that would require recognition or disclosure in the financial statements.
Recent Accounting Pronouncements
Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on our condensed consolidated financial statements.
In 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. The Company adopted ASU 2016-13 effective March 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements.
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.
Related Party Transactions
On December 14, 2022 the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”), by and among the Company, Bradley L. Radoff, an individual (“Radoff”), Andrew T. Berger, an individual, AB Value Partners, LP (“AB Value Partners”), AB Value Management LLC (“AB Value Management” and, together with AB Value Partners, “AB Value” and, together with Radoff, “ABV-Radoff”), and Mary Bradley, an individual, pertaining to, among other things, the dismissal of all pending lawsuits between the parties.
Pursuant to the Settlement Agreement, the Company and ABV-Radoff agreed to a “Standstill Period” commencing on the effective date of the agreement and ending on the date that is forty-five (45) days prior to the beginning of the Company’s advance notice period for the nomination of directors at the Company’s 2025 annual meeting of stockholders. During the Standstill Period, ABV-Radoff agreed, subject to certain exceptions, other than in Rule 144 open market broker sale transactions where the identity of the purchaser is not known and in underwritten widely dispersed public offerings, not to sell, offer, or agree to sell directly or indirectly, through swap or hedging transactions or otherwise, the securities of the Company or any rights decoupled from the underlying securities of the Company held by ABV-Radoff to any person or entity other than the Company or an affiliate of ABV-Radoff (a “Third Party”) that, to the ABV-Radoff’s knowledge would result in such Third Party, together with its Affiliates and Associates (as such terms are defined in the Settlement Agreement), owning, controlling, or otherwise having beneficial ownership or other ownership interest in the aggregate of more than 4.9% of the Company’s common stock outstanding at such time, or would increase the beneficial ownership or other ownership interest of any Third Party who, together with its Affiliates and Associates, has a beneficial ownership or other ownership interest in the aggregate of more than 4.9% of the shares Common Stock outstanding at such time (such restrictions collectively, the “Lock-Up Restriction”).
On August 3, 2023, the Board of Directors of the Company authorized and approved the Company to issue a limited waiver (the “Limited Waiver”) of the Lock-Up Restriction with regard to a sale by ABV-Radoff of up to 200,000 shares of Common Stock to Global Value Investment Corp. (“GVIC”) to be consummated by August 7, 2023. Jeffrey Geygan, the Company’s Chairman of the Board, is the chief executive officer and a principal of GVIC. Other than as waived by the Limited Waiver, the Settlement Agreement remains in full force and effect and the rights and obligations under the Settlement Agreement of each of the parties remain unchanged.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION
| | Six Months Ended | |
| | August 31, | |
| | 2023 | | | 2022 | |
Cash paid (received) for: | | | | | | | | |
Interest | | $ | - | | | $ | - | |
Income taxes | | | (29,988 | ) | | | (304,779 | ) |
Supplemental disclosure of non‑cash investing activities | | | | | | | | |
Sale of assets in exchange for note receivable | | $ | 1,000,000 | | | $ | - | |
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 determined are not 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.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes contract liabilities as of August 31, 2023 and August 31, 2022:
| | Six Months Ended | |
| | August 31: | |
| | 2023 | | | 2022 | |
Contract liabilities at the beginning of the year: | | $ | 943,415 | | | $ | 962,572 | |
Revenue recognized | | | (85,915 | ) | | | (98,755 | ) |
Contract fees received | | | 42,999 | | | | 104,999 | |
Contract liabilities at the end of the period: | | $ | 900,499 | | | $ | 968,816 | |
At August 31, 2023, 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:
FYE 24 | | $ | 81,642 | |
FYE 25 | | | 149,494 | |
FYE 26 | | | 136,776 | |
FYE 27 | | | 123,657 | |
FYE 28 | | | 96,139 | |
Thereafter | | | 312,791 | |
Total | | $ | 900,499 | |
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. Under the guidance of ASC 606 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.
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 our franchisees’ sales, are recognized at the time the sales occur.
NOTE 4 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by method of recognition and segment:
Three Months Ended August 31, 2023
Revenues recognized over time under ASC 606:
| | Franchising | | | Production | | | Retail | | | Total | |
| | | | | | | | | | | | | | | | |
Franchise fees | | $ | 40,959 | | | $ | - | | | $ | - | | | $ | 40,959 | |
Revenues recognized at a point in time:
| | Franchising | | | Production | | | Retail | | | Total | |
Durango Product sales | | | - | | | | 4,707,149 | | | | - | | | | 4,707,149 | |
Retail sales | | | - | | | | - | | | | 308,844 | | | | 308,844 | |
Royalty and marketing fees | | | 1,500,927 | | | | - | | | | - | | | | 1,500,927 | |
Total | | $ | 1,541,886 | | | $ | 4,707,149 | | | $ | 308,844 | | | $ | 6,557,879 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended August 31, 2022
Revenues recognized over time under ASC 606:
| | Franchising | | | Production | | | Retail | | | Total | |
| | | | | | | | | | | | | | | | |
Franchise fees | | $ | 44,902 | | | $ | - | | | $ | - | | | $ | 44,902 | |
Revenues recognized at a point in time:
| | Franchising | | | Production | | | Retail | | | Total | |
Factory sales | | | - | | | | 4,808,200 | | | | - | | | | 4,808,200 | |
Retail sales | | | - | | | | - | | | | 263,193 | | | | 263,193 | |
Royalty and marketing fees | | | 1,441,061 | | | | - | | | | - | | | | 1,441,061 | |
Total | | $ | 1,485,963 | | | $ | 4,808,200 | | | $ | 263,193 | | | $ | 6,557,356 | |
Six Months Ended August 31, 2023
Revenues recognized over time under ASC 606:
| | Franchising | | | Production | | | Retail | | | Total | |
| | | | | | | | | | | | | | | | |
Franchise fees | | $ | 85,915 | | | $ | - | | | $ | - | | | $ | 85,915 | |
Revenues recognized at a point in time:
| | Franchising | | | Production | | | Retail | | | Total | |
Durango Product sales | | | - | | | | 9,531,224 | | | | - | | | | 9,531,224 | |
Retail sales | | | - | | | | - | | | | 500,816 | | | | 500,816 | |
Royalty and marketing fees | | | 2,875,909 | | | | - | | | | - | | | | 2,875,909 | |
Total | | $ | 2,961,824 | | | $ | 9,531,224 | | | $ | 500,816 | | | $ | 12,993,864 | |
Six Months Ended August 31, 2022
Revenues recognized over time under ASC 606:
| | Franchising | | | Production | | | Retail | | | Total | |
| | | | | | | | | | | | | | | | |
Franchise fees | | $ | 98,755 | | | $ | - | | | $ | - | | | $ | 98,755 | |
Revenues recognized at a point in time:
| | Franchising | | | Production | | | Retail | | | Total | |
Factory sales | | | - | | | | 9,965,810 | | | | - | | | | 9,965,810 | |
Retail sales | | | - | | | | - | | | | 513,603 | | | | 513,603 | |
Royalty and marketing fees | | | 2,881,386 | | | | - | | | | - | | | | 2,881,386 | |
Total | | $ | 2,980,141 | | | $ | 9,965,810 | | | $ | 513,603 | | | $ | 13,459,554 | |
NOTE 5 – INVENTORIES
Inventories consist of the following:
| | August 31, 2023 | | | February 28, 2023 | |
Ingredients and supplies | | $ | 2,151,108 | | | $ | 2,481,510 | |
Finished candy | | | 1,365,409 | | | | 1,567,887 | |
Reserve for slow moving inventory | | | (283,930 | ) | | | (409,617 | ) |
Total inventories | | $ | 3,232,587 | | | $ | 3,639,780 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
| | August 31, 2023 | | | February 28, 2023 | |
Land | | $ | 513,618 | | | $ | 513,618 | |
Building | | | 5,108,950 | | | | 5,151,886 | |
Machinery and equipment | | | 10,884,260 | | | | 10,152,211 | |
Furniture and fixtures | | | 506,587 | | | | 512,172 | |
Leasehold improvements | | | 132,027 | | | | 134,010 | |
Transportation equipment | | | 319,145 | | | | 476,376 | |
| | | 17,464,587 | | | | 16,940,273 | |
| | | | | | | | |
Less accumulated depreciation | | | (10,976,157 | ) | | | (11,229,534 | ) |
Property and equipment, net | | $ | 6,488,430 | | | $ | 5,710,739 | |
Depreciation expense related to property and equipment totaled $207,268 and $402,127 during the three and six months ended August 31, 2023 compared to $182,298 and $363,964 during the three and six months ended August 31, 2022, respectively.
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
| | | | | | | | August 31, 2023 | | | February 28, 2023 | |
| | Amortization Period (in years) | | | Gross Carrying Value | | | Accumulated Amortization | | | Gross Carrying Value | | | Accumulated Amortization | |
Intangible assets subject to amortization | | | | | | | | | | | | | | | | | | | | | | |
Store design | | | | 10 | | | | $ | 394,826 | | | $ | 268,641 | | | $ | 394,826 | | | $ | 259,314 | |
Trademark/Non-competition agreements | | | 5 | - | 20 | | | | 259,339 | | | | 133,924 | | | | 259,339 | | | | 128,924 | |
Total | | | | | | | | | 654,165 | | | | 402,565 | | | | 654,165 | | | | 388,238 | |
Goodwill and intangible assets not subject to amortization | | | | | | | | | | | | | | | | | | | | | | |
Franchising segment- | | | | | | | | | | | | | | | | | | | | | | |
Company stores goodwill | | | | | $ | 360,972 | | | | | | | $ | 360,972 | | | | | |
Franchising goodwill | | | | | | 97,318 | | | | | | | | 97,318 | | | | | |
Manufacturing segment-goodwill | | | | | | 97,318 | | | | | | | | 97,318 | | | | | |
Trademark | | | | | | 20,000 | | | | | | | | 20,000 | | | | | |
Total | | | | | | 575,608 | | | | | | | | 575,608 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total Goodwill and Intangible Assets | | | | | $ | 1,229,773 | | | $ | 402,565 | | | $ | 1,229,773 | | | $ | 388,238 | |
Amortization expense related to intangible assets totaled $7,101 and $14,327 during the three and six months ended August 31, 2023 compared to $7,226 and $14,452 during the three and six months ended August 31, 2022, respectively.
At August 31, 2023, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:
FYE 24 | | $ | 13,702 | |
FYE 25 | | | 27,405 | |
FYE 26 | | | 27,405 | |
FYE 27 | | | 27,405 | |
FYE 28 | | | 27,405 | |
Thereafter | | | 128,278 | |
Total | | $ | 251,600 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – LINE OF CREDIT
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-based limitations) as of August 31, 2023 (the “Credit Line”). The Credit Line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.68% at August 31, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants. At August 31, 2023, the Company was in compliance with all such covenants. Subsequent to the date of these financial statements, on September 28, 2023, the Company renewed the Credit Line under comparable terms, however, the maximum amount available for borrowing under the credit line was reduced from $5 million to $4 million.
NOTE 9 – STOCKHOLDERS’ EQUITY
Warrants
In connection with a terminated supplier agreement with a former customer of the Company, the Company issued a warrant (the “Warrant”) to purchase up to 960,677 shares of the Company’s common stock (the “Warrant Shares”) at an exercise price of $8.76 per share. The Warrant Shares were to vest in annual tranches in varying amounts following each contract year under the terminated supplier agreement, and was subject to, and only upon, achievement of certain revenue thresholds on an annual or cumulative five-year basis in connection with its performance under the terminated supplier agreement. The Warrant was to expire 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.
On November 1, 2022, the Company sent a formal notice to the customer terminating the agreement. As of August 31, 2023, no Warrant Shares had vested and, subsequent to the termination by the Company of supplier agreement, the Company has no remaining material obligations under the Warrant.
The Company determined that the grant date fair value of the Warrant was de minimis and did not record any amount in consideration of the warrants. The Company utilized a Monte Carlo model for purposes of determining the grant date fair value.
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 $122,949 and $324,583 of stock-based compensation expense during the three and six months ended August 31, 2023 compared with $149,040 and $280,637 during the three and six months ended August 31, 2022, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.
The following table summarizes restricted stock unit activity during the six months ended August 31, 2023 and 2022:
| | Six Months Ended | |
| | August 31, | |
| | 2023 | | | 2022 | |
Outstanding non-vested restricted stock units as of February 28: | | | 154,131 | | | | 105,978 | |
Granted | | | 137,554 | | | | 94,892 | |
Vested | | | (42,688 | ) | | | (36,879 | ) |
Cancelled/forfeited | | | (1,558 | ) | | | (800 | ) |
Outstanding non-vested restricted stock units as of August 31: | | | 247,439 | | | | 163,191 | |
| | | | | | | | |
Weighted average grant date fair value | | $ | 4.98 | | | $ | 5.69 | |
Weighted average remaining vesting period (in years) | | | 2.06 | | | | 2.30 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity during the six months ended August 31, 2023 and 2022:
| | Six Months Ended | |
| | August 31, | |
| | 2023 | | | 2022 | |
Outstanding stock options as of February 28: | | | 36,144 | | | | - | |
Granted | | | - | | | | 36,144 | |
Exercised | | | - | | | | - | |
Cancelled/forfeited | | | - | | | | - | |
Outstanding stock options as of August 31: | | | 36,144 | | | | 36,144 | |
| | | | | | | | |
Weighted average exercise price | | | 6.49 | | | | 6.49 | |
Weighted average remaining contractual term (in years) | | | 8.76 | | | | 9.76 | |
During the six months ended August 31, 2023, the Company issued 6,338 restricted stock units to Starlette Johnson, a non-employee director, with a grant date fair value of $32,070. This restricted stock unit award vests 25% on the grant date and 25% each quarter thereafter until November 30, 2023.
During the six months ended August 31, 2023, the Company issued up to 82,953 restricted stock units subject to vesting based on the achievement of company performance goals and 48,263 restricted stock units that vest over time. These issuances were made to the Robert Sarlls, the Company’s Chief Executive Officer, Allen Arroyo, the Company’s Chief Financial Officer, and Andrew Ford, the Company’s Vice President – Sales and Marketing. These restricted stock units were issued with an aggregate grant date fair value of $750,556, or $5.72 per share, based upon a maximum issuance of 131,216 shares. The performance-based restricted stock units will vest following the end of the Company’s fiscal year ending February 2026 with respect to the target number of performance-based restricted stock units if the Company achieves metrics related to return on equity, omni-channel gross margin, average unit volume, and social media engagement lifetime value during the performance period, subject to continued service through the end of the performance period. The performance-based restricted stock units may vest from 75% to 110% of target units based upon actual performance. The time-based restricted stock units vest 33% annually on the anniversary date of the award until August 11, 2026.
During the six months ended August 31, 2022, the Company issued 36,144 stock options and issued up to 94,892 performance-based restricted stock units subject to vesting based on the achievement of performance goals. These issuances were made to the Messrs. Sarlls and Arroyo as a part of each of their incentive compensation structure . The stock options were issued with an aggregate grant date fair value of $77,267 or $2.14 per share. The performance-based restricted stock units were issued with an aggregate grant date fair value of $298,582 or $6.29 per share, based upon a target issuance of 47,446 shares. The stock options granted vest with respect to one-third of the shares on the last day of the Company’s current fiscal year ending February 28, 2023, and vest as to remaining shares in equal quarterly increments on the last day of each quarter until the final vesting on February 28, 2025. The performance-based restricted stock units will vest following the end of the Company’s fiscal year ending February 2025 with respect to the target number of performance-based restricted stock units if the Company achieves an annualized total shareholder return of 12.5% during the performance period, subject to continued service through the end of the performance period. The Compensation Committee of the Board of Directors has discretion to determine the number of performance-based restricted stock units between 0-200% of the target number that will vest based on achievement of performance below or above the target performance goal.
The Company recognized $122,949 and $324,583 of stock-based compensation expense during the three- and six-month periods ended August 31, 2023, respectively, compared to $149,040 and $280,637 during the three and six month periods ended August 31, 2022, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.
Except as noted above, restricted stock units generally vest in equal annual installments over a period of five to six years. During the six-month periods ended August 31, 2023 and 2022, 42,688 and 36,879, respectively, restricted stock units vested and were issued as common stock, respectively. Total unrecognized compensation expense of non-vested, non-forfeited restricted stock units and stock options granted as of August 31, 2023 was $598,138, which is expected to be recognized over the weighted-average period of 1.83 years. Total unrecognized compensation expense of non-forfeited, performance vesting, restricted stock units as of August 31, 2023 was $431,357, which is expected to be recognized over the weighted-average period of 2.50 years.
NOTE 10 – 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.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
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 six months ended August 31, 2023, 960,677 shares of common stock reserved for issuance under warrants and 151,466 shares of common stock reserved for issuance under unvested restricted stock units and stock options were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. During the six months ended August 31, 2022, 960,677 shares of common stock reserved for issuance under warrants and 109,251 shares of common stock underlying unvested restricted stock units and stock options were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
NOTE 11 – LEASING ARRANGEMENTS
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.
The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing franchised locations are leased by the franchisee directly.
In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.
The Company also leases trucking equipment and warehouse space in support of its production operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.
The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. During the six months ended August 31, 2023 and 2022, lease expense recognized in the Consolidated Statements of Income was $310,861 and $276,722, 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 3.4% as of August 31, 2023. The total estimated future minimum lease payments is $2.2 million.
As of August 31, 2023, maturities of lease liabilities for the Company’s operating leases were as follows:
FYE 24 | | $ | 395,099 | |
FYE 25 | | | 611,988 | |
FYE 26 | | | 514,346 | |
FYE 27 | | | 242,558 | |
FYE 28 | | | 71,671 | |
Thereafter | | | 390,450 | |
Total | | $ | 2,226,112 | |
| | | | |
Less: imputed interest | | | (168,456 | ) |
Present value of lease liabilities: | | $ | 2,057,656 | |
| | | | |
Weighted average lease term | | | 5.4 | |
During the six months ended August 31, 2023 and 2022, the Company entered into new lease agreements representing a future lease liability of $46,250 and $1,472,667, respectively.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Employment Agreement Payments upon a Change in Control
The Company has entered into employment agreements with certain of our current executives which contain, among other things, "change in control" severance provisions.
Robert J. Sarlls
The employment agreement of Robert J. Sarlls, the Company’s Chief Executive Officer, provides for the following upon “change in control:” if Mr. Sarlls’ employment is involuntarily terminated without cause or if he resigns for good reason on or within 2 years following consummation of a change in control, a cash severance amount (15 months of base salary) which would otherwise be payable on the regular payroll schedule over a 15-month period following separation (if severance were due outside the change in control context) will be accelerated and paid in a lump sum promptly following separation. Mr. Sarlls’ agreement incorporates by reference the change in control definition set forth in Treasury Regulation Section 1.409A-3(i)(5).
A. Allen Arroyo
The employment agreement of A. Allen Arroyo, the Company’s Chief Financial Officer, provides for the following upon “change in control:” If Mr. Arroyo’s employment is involuntarily terminated without cause or if he resigns for good reason on or within 2 years following consummation of a change in control, a cash severance amount (9 months of base salary) which would otherwise be payable on the regular payroll schedule over a 9-month period following separation (if severance were due outside the change in control context) will be accelerated and paid in a lump sum promptly following separation. Mr. Arroyo’s agreement incorporates by reference the change in control definition set forth in Treasury Regulation Section 1.409A-3(i)(5).
Retirement Agreement
Gregory L. Pope, Sr.
On May 8, 2023, the Company announced that Gregory L. Pope, Sr., Senior Vice President – Franchise Development, retired effective as of May 3, 2023 (the “Retirement Date”). In connection with his retirement, the Company and Mr. Pope entered into a retirement agreement and general release (the “Retirement Agreement”) that provides (i) Mr. Pope will provide consulting services to the Company, as an independent contractor, until December 31, 2023, for a monthly consulting fee of $22,000, (ii) a retirement bonus of twenty-six equal bi-weekly payments of $12,500 (less tax withholding) payable beginning November 2023, (iii) for accelerated vesting of 8,332 non-vested restricted stock units as of the Retirement Date, (iv) payment of the cost of Mr. Pope’s COBRA premiums for up to 18 months, and (v) reimbursement of Mr. Pope’s legal fees incurred in connection with the Retirement Agreement (not to exceed $7,500). In addition, the Retirement Agreement includes covenants related to cooperation, non-solicitation, and employment, as well as customary release of claims and non-disparagement provisions in favor of the Company, and a non-disparagement provision in favor of Mr. Pope. As of August 31, 2023, the Company had accrued $345,124 of expense associated with the Retirement Agreement.
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 August 31, 2023, the Company contracted for approximately $309,000 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.
Litigation
From time to time, the Company is involved in litigation relating to claims arising out of its operations. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. At August 31, 2023, the Company was not a party to any legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition or operating results.
17
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – OPERATING SEGMENTS
The Company classifies its business interests into four reportable segments: Franchising, Production, Retail Stores, 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 these consolidated financial statements. 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:
Three Months Ended | | | | | | | | | | | | | | | | | | | | |
August 31, 2023 | | Franchising | | | Production | | | Retail | | | Other | | | Total | |
Total revenues | | $ | 1,541,886 | | | $ | 4,974,229 | | | $ | 308,844 | | | $ | - | | | $ | 6,824,959 | |
Intersegment revenues | | | - | | | | (267,080 | ) | | | - | | | | - | | | | (267,080 | ) |
Revenue from external customers | | | 1,541,886 | | | | 4,707,149 | | | | 308,844 | | | | - | | | | 6,557,879 | |
Segment profit (loss) | | | 586,140 | | | | 87,408 | | | | 24,237 | | | | (1,697,082 | ) | | | (999,297 | ) |
Total assets | | | 1,061,420 | | | | 10,116,842 | | | | 489,840 | | | | 8,866,522 | | | | 20,534,624 | |
Capital expenditures | | | 32,097 | | | | 521,014 | | | | 17,162 | | | | 131,920 | | | | 702,193 | |
Total depreciation & amortization | | $ | 7,633 | | | $ | 183,923 | | | $ | 1,496 | | | $ | 21,317 | | | $ | 214,369 | |
Three Months Ended | | | | | | | | | | | | | | | | | | | | |
August 31, 2022 | | Franchising | | | Production | | | Retail | | | Other | | | Total | |
Total revenues | | $ | 1,487,303 | | | $ | 5,110,439 | | | $ | 263,193 | | | $ | - | | | $ | 6,860,935 | |
Intersegment revenues | | | (1,340 | ) | | | (302,239 | ) | | | - | | | | - | | | | (303,579 | ) |
Revenue from external customers | | | 1,485,963 | | | | 4,808,200 | | | | 263,193 | | | | - | | | | 6,557,356 | |
Segment profit (loss) | | | 203,138 | | | | 576,344 | | | | (11,439 | ) | | | (3,189,689 | ) | | | (2,421,646 | ) |
Total assets | | | 1,217,381 | | | | 12,288,137 | | | | 628,462 | | | | 12,116,246 | | | | 26,250,226 | |
Capital expenditures | | | - | | | | |