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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 November 30, 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

 

logo01.jpg

 

Rocky Mountain Chocolate Factory, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

47-1535633

(State or other jurisdiction of

Incorporation or organization)

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

 

265 Turner Drive, Durango, CO 81303

(Address of principal executive offices, including zip code)

 

(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 filerAccelerated filer 
     
Non-accelerated filerSmaller 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 January 15, 2024, the registrant had outstanding 6,315259 shares of its common stock, $0.001 par value per share.

 

1

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

PART I.

FINANCIAL INFORMATION

4

     

Item 1.

Financial Statements

4

CONSOLIDATED STATEMENTS OF OPERATIONS

4

CONSOLIDATED BALANCE SHEETS

5

CONSOLIDATED STATEMENTS OF CASH FLOWS

6

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

7

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

8

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

     

PART II.

OTHER INFORMATION

32

     

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

33

   

Signatures

34

 

2

 

 

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.

 

3

 

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

  

Three Months Ended November 30,

  

Nine Months Ended November 30,

 
  

2023

  

2022

  

2023

  

2022

 

Revenues

                

Sales

 $6,421,701  $7,586,534  $16,453,741  $18,065,947 

Franchise and royalty fees

  1,275,700   1,238,559   4,237,524   4,218,700 

Total Revenue

  7,697,401   8,825,093   20,691,265   22,284,647 
                 

Costs and Expenses

                

Cost of sales

  5,768,598   5,727,348   15,159,483   14,143,256 

Franchise costs

  576,833   476,566   1,869,815   1,344,382 

Sales and marketing

  571,910   572,961   1,487,046   1,481,870 

General and administrative

  1,333,216   2,080,611   4,952,261   7,723,266 

Retail operating

  186,248   137,835   451,012   447,254 

Depreciation and amortization, exclusive of depreciation and amortization expense of $187,523, $160,006, $541,110 and $480,479, respectively, included in cost of sales

  35,954   28,991   98,821   86,935 

Total costs and expenses

  8,472,759   9,024,312   24,018,438   25,226,963 
                 

Loss from Operations

  (775,358)  (199,219)  (3,327,173)  (2,942,316)
                 

Other Income

                

Interest Expense

  (11,386)  (4,172)  (23,903)  (4,172)

Interest Income

  30,026   7,234   67,794   13,732 

Other income, net

  18,640   3,062   43,891   9,560 
                 

Loss Before Income Taxes

  (756,718)  (196,157)  (3,283,282)  (2,932,756)
                 

Income Tax Provision

  -   -   -   701,659 
                 

Net Income (Loss) from Continuing Operations

 $(756,718) $(196,157) $(3,283,282) $(3,634,415)
                 

Discontinued Operations

                

Earnings (loss) from discontinued operations, net of tax

  -   (15,822)  69,044   (333,691)

Gain on disposal of discontinued operations, net of tax

  -   -   634,790   - 

Earnings (loss) from discontinued operations, net of tax

  -   (15,822)  703,834   (333,691)
                 

Consolidated Net Loss

 $(756,718) $(211,979) $(2,579,448) $(3,968,106)
                 

Basic Earnings (Loss) per Common Share

                

Loss from continuing operations

 $(0.12) $(0.03) $(0.51) $(0.58)

Earnings (loss) from discontinued operations

  -   (0.00)  0.11   (0.05)

Net loss

 $(0.12) $(0.03) $(0.40) $(0.63)

Diluted Earnings (Loss) per Common Share

                

Loss from continuing operations

 $(0.12) $(0.03) $(0.51) $(0.57)

Earnings (loss) from discontinued operations

  -   (0.00)  0.11   (0.05)

Net loss

 $(0.12) $(0.03) $(0.40) $(0.62)
                 

Weighted Average Common Shares

                

Outstanding - Basic

  6,302,159   6,227,002   6,290,575   6,219,362 

Dilutive Effect of Employee

                

Stock Awards

  -   -   -    

Weighted Average Common Shares

                

Outstanding - Diluted

  6,302,159   6,227,002   6,290,575   6,219,362 

 

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

 

4

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

  

November 30,

  

February 28,

 
  

2023

  

2023

 
  

(unaudited)

     
Assets        

Current Assets

        

Cash and cash equivalents

 $2,082,128  $4,717,068 

Accounts receivable, less allowance for doubtful accounts of $598,704 and $666,315, respectively

  3,355,044   2,055,694 

Notes receivable, current portion, less current portion of the valuation allowance of $43,158 and $35,173, respectively

  298,700   23,698 

Refundable income taxes

  45,990   344,885 

Inventories

  3,670,076   3,639,780 

Other

  628,040   340,847 

Current assets held for sale

  -   83,004 

Total current assets

  10,079,978   11,204,976 
         

Property and Equipment, Net

  7,634,552   5,710,739 
         

Other Assets

        

Notes receivable, less current portion and valuation allowance of $30,793 and $38,778, respectively

  862,827   94,076 

Goodwill, net

  575,608   575,608 

Intangible assets, net

  244,748   265,927 

Lease right of use asset

  1,868,664   2,355,601 

Other

  14,006   14,054 

Long-term assets held for sale

  -   1,765,846 

Total other assets

  3,565,853   5,071,112 
         

Total Assets

 $21,280,383  $21,986,827 
         

Liabilities and Stockholders' Equity

        

Current Liabilities

        

Line of credit

 $1,000,000  $- 

Accounts payable

  3,287,366   2,189,760 

Accrued salaries and wages

  1,057,057   978,606 

Gift card liabilities

  380,145   592,932 

Other accrued expenses

  541,774   162,346 

Contract liabilities

  154,830   161,137 

Lease liability

  658,265   746,506 

Current liabilities held for sale

  -   178,939 

Total current liabilities

  7,079,437   5,010,226 
         

Lease Liability, Less Current Portion

  1,212,291   1,640,017 

Contract Liabilities, Less Current Portion

  707,137   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, 6,303,769 shares and 6,257,137 shares issued and outstanding, respectively

  6,304   6,257 

Additional paid-in capital

  9,948,630   9,457,875 

Retained earnings

  2,326,584   4,906,032 
         

Total stockholders' equity

  12,281,518   14,370,164 
         

Total Liabilities and Stockholders' Equity

 $21,280,383  $21,986,827 

 

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

 

5

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   

Nine Months Ended

 
   

November 30,

 
   

2023

   

2022

 

Cash Flows From Operating Activities

               

Net income (loss)

    (2,579,448 )     (3,968,106 )

Less: Net Income (loss) from discontinued operations, net of tax

    703,834       (333,691 )

Net Loss from continuing operations

    (3,283,282 )     (3,634,415 )

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

    639,932       567,414  

Provision for obsolete inventory

    62,678       166,255  

Provision for loss on accounts and notes receivable

    -       (127,000 )

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

    (37,671 )     (14,403 )

Expense recorded for stock compensation

    490,802       471,530  

Deferred income taxes

    -       722,163  

Changes in operating assets and liabilities:

               

Accounts receivable

    (1,338,521 )     (1,176,382 )

Refundable income taxes

    298,895       303,779  

Inventories

    230,135       (2,102,468 )

Contract Liabilities

    (81,448 )     5,281  

Other current assets

    (286,170 )     (111,521 )

Accounts payable

    557,770       1,952,220  

Accrued liabilities

    221,757       (1,245,973 )

Net cash used in operating activities of continuing operations

    (2,525,123 )     (4,223,520 )

Net cash (used in) provided by operating activities of discontinued operations

    (39,242 )     640,102  

Net cash used in operating activities

    (2,564,365 )     (3,583,418 )
                 

Cash Flows From Investing Activities

               

Addition to notes receivable

    (49,476 )     (58,635 )

Proceeds received on notes receivable

    56,595       49,254  

Proceeds from sale or distribution of assets

    112,131       22,289  

Purchases of property and equipment

    (2,617,026 )     (778,185 )

Decrease (increase) in other assets

    9,463       10,000  

Net cash used in by investing activities of continuing operations

    (2,488,313 )     (755,277 )

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

    1,417,738       (32,547 )

Net cash provided by (used in) investing activities

    (1,070,575 )     (787,824 )
                 

Cash Flows from Financing Activities

               

Proceeds from the line of credit

    1,000,000       -  

Net cash provided by financing activities

    1,000,000       -  
                 

Net Decrease in Cash and Cash Equivalents

    (2,634,940 )     (4,371,242 )
                 

Cash and Cash Equivalents, Beginning of Period

    4,717,068       7,587,374  
                 

Cash and Cash Equivalents, End of Period

    2,082,128       3,216,132  

 

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

 

6

 

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 August 31, 2022

    6,223,234     $ 6,223     $ 9,087,530     $ 6,830,683     $ 15,924,436  

Consolidated net loss

   

-

      -       -       (211,979 )     (211,979 )

Issuance of common stock, vesting of restricted stock units and other

    15,542       16       (16 )     -       -  

Equity compensation, restricted stock units and stock options

    -       -       190,893       -       190,893  

Balance as of November 30, 2022

    6,238,776     $ 6,239     $ 9,278,407     $ 6,618,704     $ 15,903,350  
                                         

Balance as of February 28, 2022

    6,186,356       6,186     $ 8,806,930     $ 10,586,810     $ 19,399,926  

Consolidated net loss

    -       -       -       (3,968,106 )     (3,968,106 )

Issuance of common stock, vesting of restricted stock units and other

    52,420       53       (53 )     -       -  

Equity compensation, restricted stock units and stock options

    -       -       471,530       -       471,530  

Balance as of November 30, 2022

    6,238,776     $ 6,239     $ 9,278,407     $ 6,618,704     $ 15,903,350  
                                         

Balance as of August 31, 2023

    6,299,825     $ 6,300     $ 9,782,415     $ 3,083,302     $ 12,872,017  

Consolidated net loss

    -       -       -       (756,718 )     (756,718 )

Issuance of common stock, vesting of restricted stock units and other

    3,944       4       (4 )     -       -  

Equity compensation, restricted stock units and stock options

    -       -       166,219       -       166,219  

Balance as of November 30, 2023

    6,303,769     $ 6,304     $ 9,948,630     $ 2,326,584     $ 12,281,518  
                                         

Balance as of February 28, 2023

    6,257,137       6,257     $ 9,457,875     $ 4,906,032     $ 14,370,164  

Consolidated net loss

    -       -       -       (2,579,448 )     (2,579,448 )

Issuance of common stock, vesting of restricted stock units and other

    46,632       47       (47 )     -       -  

Equity compensation, restricted stock units and stock options

    -       -       490,802       -       490,802  

Balance as of November 30, 2023

    6,303,769     $ 6,304     $ 9,948,630     $ 2,326,584     $ 12,281,518  

 

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

 

7

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

NOTE 1 – NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation), Aspen Leaf Yogurt, LLC (“ALY”), U-Swirl International, Inc. (dissolved in October 2023) (“U-Swirl”), and U-Swirl, Inc. (“SWRL”) (collectively, the “Company,” “we,” “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 Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be measured on a recurring basis at fair value. The Company is not a party to any material derivative financial instruments. The Company does not have a material amount of non-financial assets or non-financial liabilities that are required under U.S. GAAP to be measured at fair value on a recurring basis. The Company has not elected to use the fair value measurement option, as permitted under U.S. GAAP, for any assets or liabilities for which fair value measurement is not presently required. The Company believes the fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short duration.

 

The following table summarizes the number of stores operating under the Rocky Mountain Chocolate brand at November 30, 2023:

 

  

Stores Open at 2/28/2023

  

Opened

  

Closed

  

Sold

  

Stores Open

at 11/30/2023

  

Sold, Not

Yet Open

  

Total

 

Rocky Mountain Chocolate Factory

                            

Company-owned stores

  1   1   -   -   2   -   2 

Franchise stores - Domestic stores and kiosks

  153   5   (7)  (1)  150   3   152 

International license stores

  4   -   -   -   4   -   4 

Co-branded stores

  111   3   (1)  -   113   -   113 
                             

Total

  269              269   3   271 

 

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 nine months ended November 30, 2023 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

8

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

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

 

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 consolidated 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 interim 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 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 receivable are stated at the net amount expected to be collected, using an estimate of current expected credit losses to determine the allowance for expected credit losses. The Company evaluates the collectability of its accounts and notes receivable and determines the appropriate allowance for expected credit losses based on a combination of factors, 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.

 

 

Liquidity

 

As of November 30, 2023, we were not in compliance with the requirement under a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”) to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was 1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all other aspects of the Credit Agreement.

 

As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of November 30.2023 and as of the date of this Quarterly Report, we had enough cash on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the future, however, we may not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement.

 

In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.

 

The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or, amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities.

 

 

 

 

9

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

NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION

 

  

Nine Months Ended

 
  

November 30,

 
  

2023

  

2022

 
Cash paid (received) for:        

Interest

 $25,127  $25,000 

Income taxes

  (298,895)  (303,777)

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.

 

The following table summarizes contract liabilities as of November 30, 2023 and November 30, 2022:

 

  

Nine Months Ended

 
  

November 30:

 
  

2023

  

2022

 

Contract liabilities at the beginning of the year:

 $943,415  $962,571 

Revenue recognized

  (126,948)  (147,720)

Contract fees received

  45,500   153,000 

Contract liabilities at the end of the period:

 $861,967  $967,851 

 

At November 30, 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

 $81,725 

FYE 25

  149,744 

FYE 26

  137,026 

FYE 27

  123,907 

FYE 28

  96,390 

Thereafter

  273,175 

Total

 $861,967 

 

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.

 

10

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

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 November 30, 2023

             
                 

Revenues recognized over time under ASC 606:

     
  

Franchising

  

Production

  

Retail

  

Total

 
                 

Franchise fees

 $41,033  $-  $-  $41,033 

 

Revenues recognized at a point in time:

     
  

Franchising

  

Production

  

Retail

  

Total

 

Durango Product sales

  -   6,058,117   -   6,058,117 

Retail sales

  -   -   363,584   363,584 

Royalty and marketing fees

  1,234,667   -   -   1,234,667 

Total

 $1,275,700  $6,058,117  $363,584  $7,697,401 

 

Three Months Ended November 30, 2022

             
                 

Revenues recognized over time under ASC 606:

     
  

Franchising

  

Production

  

Retail

  

Total

 
                 

Franchise fees

 $48,965  $-  $-  $48,965 

 

Revenues recognized at a point in time:

     
  

Franchising

  

Production

  

Retail

  

Total

 

Durango Product sales

  -   7,284,940   -   7,284,940 

Retail sales

  -   -   301,594   301,594 

Royalty and marketing fees

  1,189,594   -   -   1,189,594 

Total

 $1,238,559  $7,284,940  $301,594  $8,825,093 

 

Nine Months Ended November 30, 2023

             
                 

Revenues recognized over time under ASC 606:

     
  

Franchising

  

Production

  

Retail

  

Total

 
                 

Franchise fees

 $126,948  $-  $-  $126,948 

 

Revenues recognized at a point in time:

     
  

Franchising

  

Production

  

Retail

  

Total

 

Durango Product sales

  -   15,589,341   -   15,589,341 

Retail sales

  -   -   864,400   864,400 

Royalty and marketing fees

  4,110,576   -   -   4,110,576 

Total

 $4,237,524  $15,589,341  $864,400  $20,691,265 

 

11

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

Nine Months Ended November 30, 2022

             
                 

Revenues recognized over time under ASC 606:

     
  

Franchising

  

Production

  

Retail

  

Total

 
                 

Franchise fees

 $147,720  $-  $-  $147,720 

 

Revenues recognized at a point in time:

     
  

Franchising

  

Production

  

Retail

  

Total

 

Durango Product sales

  -   17,250,750   -   17,250,750 

Retail sales

  -   -   815,197   815,197 

Royalty and marketing fees

  4,070,980   -   -   4,070,980 

Total

 $4,218,700  $17,250,750  $815,197  $22,284,647 

 

 

NOTE 5 – INVENTORIES

 

Inventories consist of the following:

 

  

November 30, 2023

  

February 28, 2023

 

Ingredients and supplies

 $2,330,450  $2,481,510 

Finished candy

  1,627,302   1,567,887 

Reserve for slow moving inventory

  (287,676)  (409,617)

Total inventories

 $3,670,076  $3,639,780 

 

 

NOTE 6 – PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

  

November 30, 2023

  

February 28, 2023

 

Land

 $513,618  $513,618 

Building

  5,108,950   5,151,886 

Machinery and equipment

  12,160,469   10,152,211 

Furniture and fixtures

  590,204   512,172 

Leasehold improvements

  132,027   134,010 

Transportation equipment

  322,067   476,376 
   18,827,335   16,940,273 
         

Less accumulated depreciation

  (11,192,783)  (11,229,534)

Property and equipment, net

 $7,634,552  $5,710,739 

 

Depreciation expense related to property and equipment totaled $223,477 and $639,931 during the three and nine months ended November 30, 2023 compared to $188,997 and $567,414 during the three and nine months ended November 30, 2022, respectively.

 

12

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

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

 

Goodwill and intangible assets consist of the following:

 

   

November 30, 2023

  

February 28, 2023

 
 

Amortization

Period (Years)

 

Gross Carrying

Value

  

Accumulated

Amortization

  

Gross Carrying

Value

  

Accumulated

Amortization

 
Intangible assets subject to amortization                  

Store design 

10

 $394,826  $272,993  $394,826  $259,314 

Trademarks

5-20

  259,339   136,424   259,339   128,924 
Total   654,165   409,417   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     

Trademarks

  20,000       20,000     
Total    575,608       575,608     
                  
Total Goodwill and Intangible Assets   $1,229,773  $409,417  $1,229,773  $388,238 

 

Amortization expense related to intangible assets totaled $6,852 and $21,179 during the three and nine months ended November 30, 2023 compared to $7,226 and $21,678 during the three and nine months ended November 30, 2022, respectively.

 

At November 30, 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

 $6,850 

FYE 25

  27,405 

FYE 26

  27,405 

FYE 27

  27,405 

FYE 28

  27,405 

Thereafter

  128,278 

Total

 $244,748 

 

 

NOTE 8 – LINE OF CREDIT

 

Revolving Credit Line

 

Pursuant to the Credit Agreement, we have a $4.0 million credit line for general corporate and working capital purposes, of which $3.0 million was available for borrowing (subject to certain borrowing-based limitations) as of November 30, 2023 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.68% at November 30, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.

 

As of November 30, 2023 we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of November 30, 2023 was 1.42 to 1. We have requested a waiver from the Lender, but we have not yet received approval. We were in compliance, however, with all other aspects of the Credit Agreement. Refer to note 1 for further information.

 

 

 

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.

 

13

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

On November 1, 2022, the Company sent a formal notice to the customer terminating the agreement. As of November 30, 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 $166,219 and $490,802 of stock-based compensation expense during the three and nine months ended November 30, 2023 compared with $190,892 and $471,530 during the three and nine months ended November 30, 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 nine months ended November 30, 2023 and 2022:

 

  

Nine Months Ended

 
  

November 30,

 
  

2023

  

2022

 

Outstanding non-vested restricted stock units as of February 28:

  154,131   105,978 

Granted

  157,145   94,892 

Vested

  (46,632)  (52,421)

Cancelled/forfeited

  (1,762)  (1,232)

Outstanding non-vested restricted stock units as of November 30:

  262,882   147,217 
         

Weighted average grant date fair value

 $4.92  $5.28 

Weighted average remaining vesting period (in years)

  1.88   2.05 

 

The following table summarizes stock option activity during the nine months ended November 30, 2023 and 2022:

 

  

Nine Months Ended

 
  

November 30,

 
  

2023

  

2022

 

Outstanding stock options as of February 28:

  36,144   - 

Granted

  -   36,144 

Exercised

  -   - 

Cancelled/forfeited

  -   - 

Outstanding stock options as of November 30:

  36,144   36,144 
         

Weighted average exercise price

  6.49   6.49 

Weighted average remaining contractual term (in years)

  8.51   9.51 

 

During the nine months ended November 30, 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, 2024.

 

During the nine months ended November 30, 2023, the Company issued 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 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.

 

14

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

During the nine months ended November 30, 2022, the Company issued 36,144 stock options and issued 94,892 performance-based restricted stock units subject to vesting based on the achievement of performance goals. These issuances were made to Messrs. Sarlls and Arroyo as a part of each of their respective incentive compensation structures. 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 of common stock. 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 29, 2024, 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 $166,219 and $490,802 of stock-based compensation expense during the three- and nine-month periods ended November 30, 2023, respectively, compared to $190,893 and $471,530 during the three- and nine-month periods ended November 30, 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 nine-month periods ended November 30, 2023 and 2022, restricted stock units vested and issued as 46,632 and 52,421 shares of common stock, respectively. Total unrecognized compensation expense of non-vested, non-forfeited restricted stock units and stock options granted as of November 30, 2023 was $950,522, which is expected to be recognized over the weighted-average period of 1.88 years. Total unrecognized compensation expense of non-forfeited, performance vesting, restricted stock units as of November 30, 2023 was $429,481, 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.

 

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 nine months ended November 30, 2023, 182,875 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 nine months ended November 30, 2022, 130,367 shares of issuable common stock 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 nine months ended November 30, 2023 and 2022, lease expense recognized in the consolidated statements of operations was $447,498 and $438,011, respectively.

 

15

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

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 3.3% as of November 30, 2023. The total estimated future minimum lease payments is $2.0 million.

 

As of November 30, 2023, maturities of lease liabilities for the Company’s operating leases were as follows:

 

FYE 24

 $191,186 

FYE 25

  611,988 

FYE 26

  514,346 

FYE 27

  242,558 

FYE 28

  71,671 

Thereafter

  390,450 

Total

 $2,022,199 
     

Less: imputed interest

  (151,643)

Present value of lease liabilities:

 $1,870,556 
     

Weighted average lease term

  5.4 

 

During the nine months ended November 30, 2023 and 2022, the Company entered into new lease agreements representing a future lease liability of $46,250 and $636,202, respectively.

 

 

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).

 

16

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

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 26 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 November 30, 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 18 months for chocolate and certain nuts and other ingredients. 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 November 30, 2023, the Company contracted for approximately $229,000 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 November 30, 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 three reportable segments: Franchising, Production, Retail Stores. 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 Chief Operating Decision Maker 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 November 30, 2023

 

Franchising

  

Production

  

Retail

  

Unallocated

  

Total

 

Total revenues

 $1,275,700  $6,394,694  $363,584  $-  $8,033,978 

Intersegment revenues

  -   (336,577)  -   -   (336,577)

Revenue from external customers

  1,275,700   6,058,117   363,584   -   7,697,401 

Segment profit (loss)

  299,677   286,858   30,374   (1,373,627)  (756,718)

Total assets

  1,154,926   12,713,718   493,498   6,918,241   21,280,383 

Capital expenditures

  20,751   1,134,371   249   128,152   1,283,523 

Total depreciation & amortization

 $7,217  $188,708  $2,445  $25,107  $223,477 

 

Three Months Ended November 30, 2022

 

Franchising

  

Production

  

Retail

  

Unallocated

  

Total

 

Total revenues

 $1,239,938  $7,629,146  $301,594  $-  $9,170,678 

Intersegment revenues

  (1,379)  (344,206)  -   -   (345,585)

Revenue from external customers

  1,238,559   7,284,940   301,594   -   8,825,093 

Segment profit (loss)

  337,225   1,534,725   45,035   (2,113,142)  (196,157)

Total assets

  1,010,798   13,639,903   624,705   5,428,786   20,704,192 

Capital expenditures

  15,925   150,735   4,860   -   171,520 

Total depreciation & amortization

 $8,432  $161,515  $1,407  $17,643  $188,997 

 

Nine Months Ended November 30, 2023

 

Franchising

  

Production

  

Retail

  

Unallocated

  

Total

 

Total revenues

 $4,238,017  $16,385,975  $864,400  $-  $21,488,392 

Intersegment revenues

  (493)  (796,634)  -   -   (797,127)

Revenue from external customers

  4,237,524   15,589,341   864,400