Company Quick10K Filing
Rocky Mountain Chocolate
Price9.00 EPS0
Shares6 P/E24
MCap56 P/FCF13
Net Debt-5 EBIT3
TEV51 TEV/EBIT16
TTM 2019-05-31, in MM, except price, ratios
10-Q 2019-11-30 Filed 2020-01-14
10-Q 2019-08-31 Filed 2019-10-11
10-Q 2019-05-31 Filed 2019-07-15
10-K 2019-02-28 Filed 2019-05-29
10-Q 2018-11-30 Filed 2019-01-14
10-Q 2018-08-31 Filed 2018-10-15
10-Q 2018-05-31 Filed 2018-07-13
10-K 2018-02-28 Filed 2018-05-15
10-Q 2017-11-30 Filed 2018-01-12
10-Q 2017-08-31 Filed 2017-10-10
10-Q 2017-05-31 Filed 2017-07-07
10-K 2017-02-28 Filed 2017-05-23
10-Q 2016-11-30 Filed 2017-01-13
10-Q 2016-08-31 Filed 2016-10-12
10-Q 2016-05-31 Filed 2016-07-14
10-K 2016-02-29 Filed 2016-05-23
10-Q 2015-11-30 Filed 2016-01-14
10-Q 2015-08-31 Filed 2015-10-15
10-Q 2015-05-31 Filed 2015-07-15
10-K 2015-02-28 Filed 2015-05-27
8-K 2020-05-11 Regulation FD, Exhibits
8-K 2020-04-20 Other Events
8-K 2020-04-13 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2020-03-17 Enter Agreement, Regulation FD, Exhibits
8-K 2020-03-16 Off-BS Arrangement, Other Events
8-K 2020-02-18 Regulation FD, Exhibits
8-K 2020-01-13 Earnings, Exhibits
8-K 2020-01-09 Shareholder Vote
8-K 2019-12-30 Officers
8-K 2019-12-20 Enter Agreement, Sale of Shares, Shareholder Rights, Regulation FD, Exhibits
8-K 2019-12-06 Amend Bylaw, Exhibits
8-K 2019-12-03 Enter Agreement, Exhibits
8-K 2019-11-14 Regulation FD, Exhibits
8-K 2019-10-10 Earnings, Exhibits
8-K 2019-09-30 Enter Agreement, Off-BS Arrangement
8-K 2019-08-23
8-K 2019-08-16 Regulation FD, Exhibits
8-K 2019-07-12 Earnings, Exhibits
8-K 2019-05-29 Earnings, Exhibits
8-K 2019-05-28 Regulation FD, Exhibits
8-K 2019-02-26 Officers
8-K 2019-02-14 Regulation FD, Exhibits
8-K 2019-01-11 Earnings, Exhibits
8-K 2018-11-14
8-K 2018-11-13 Regulation FD, Exhibits
8-K 2018-10-11 Earnings, Exhibits
8-K 2018-10-03 Accountant, Exhibits
8-K 2018-08-17 Shareholder Vote
8-K 2018-08-16 Regulation FD, Exhibits
8-K 2018-07-12 Earnings, Exhibits
8-K 2018-05-10 Earnings, Regulation FD, Exhibits
8-K 2018-02-15 Regulation FD, Exhibits
8-K 2018-01-12 Earnings, Exhibits

RMCF 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1 - Nature of Operations and Basis of Presentation
Note 2 - Earnings per Share
Note 3 - Inventories
Note 4 - Property and Equipment, Net
Note 5 - Stockholders' Equity
Note 6 - Supplemental Cash Flow Information
Note 7 - Operating Segments
Note 8 - Goodwill and Intangible Assets
Note 9 - Costs Associated with Company - Owned Store Closures
Note 10 - Note Payable
Note 11 - Leasing Arrangements
Note 12 - Revenue From Contracts with Customers
Note 13 - Disaggregation of Revenue
Note 14 - Loss Contingency
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 ex_169364.htm
EX-31.1 ex_168788.htm
EX-32.1 ex_168789.htm

Rocky Mountain Chocolate Earnings 2019-11-30

Balance SheetIncome StatementCash Flow
35282114702013201520172020
Assets, Equity
151296302013201520172020
Rev, G Profit, Net Income
3.42.31.20.1-1.0-2.12013201520172020
Ops, Inv, Fin

10-Q 1 rmcfd20191130_10q.htm FORM 10-Q rmcfd20191130_10q.htm
 

 

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, 2019

 

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

 

For the transition period from ________to________

 

Commission file number: 001-36865

 

 

Rocky Mountain Chocolate Factory, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

47-1535633

(State or other jurisdiction of

Incorporation or organization)

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

 

265 Turner Drive, Durango, CO 81303

(Address of principal executive offices, including zip code)

 

(970) 259-0554

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

RMCF

Nasdaq Global Market

Preferred Stock Purchase Rights

RMCF

Nasdaq Global Market

 

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

 

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

 

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

 

  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 January 1, 2020, the registrant had outstanding 5,999,932 shares of its common stock, $0.001 par value per share.

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

PART I.

FINANCIAL INFORMATION

3
       
  Item 1. Financial Statements 3
 

CONSOLIDATED STATEMENTS OF OPERATIONS

3
  CONSOLIDATED BALANCE SHEETS 4
  CONSOLIDATED STATEMENTS OF CASH FLOWS 5
  CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY 6
  NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS 7

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
  Item 4. Controls and Procedures 27
         
PART II. OTHER INFORMATION 27
       
  Item 1. Legal Proceedings 27

 

Item 1A. Risk Factors 27
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
  Item 3. Defaults Upon Senior Securities 27
  Item 4. Mine Safety Disclosures 27
  Item 5. Other Information 27
  Item 6. Exhibits 28
         
SIGNATURES 29
       

 

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,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues

                               

Sales

  $ 6,490,601     $ 7,583,327     $ 18,335,252     $ 19,901,695  

Franchise and royalty fees

    1,422,651       1,366,420       5,389,269       5,214,225  

Total Revenue

    7,913,252       8,949,747       23,724,521       25,115,920  
                                 

Costs and Expenses

                               

Cost of sales

    4,956,177       5,700,352       13,309,356       14,249,478  

Franchise costs

    428,236       463,056       1,352,887       1,539,104  

Sales and marketing

    434,989       519,176       1,426,422       1,672,638  

General and administrative

    1,529,271       860,916       3,504,453       2,588,751  

Retail operating

    445,899       446,058       1,364,105       1,507,386  

Depreciation and amortization, exclusive of depreciation and amortization expense of $147,338, $139,971, $440,452 and $414,689, respectively, included in cost of sales

    216,854       281,815       674,226       879,552  

Costs associated with Company-owned store closures

    -       -       -       176,981  

Total costs and expenses

    8,011,426       8,271,373       21,631,449       22,613,890  
                                 

Income (Loss) from Operations

    (98,174 )     678,374       2,093,072       2,502,030  
                                 

Other Income (Expense)

                               

Interest Expense

    (2,890 )     (16,032 )     (18,775 )     (58,089 )

Interest Income

    7,205       4,758       23,391       13,962  

Other income (expense), net

    4,315       (11,274 )     4,616       (44,127 )
                                 

Income (Loss) Before Income Taxes

    (93,859 )     667,100       2,097,688       2,457,903  
                                 

Income Tax Provision

    (22,222 )     141,739       539,628       604,783  
                                 

Consolidated Net Income (Loss)

  $ (71,637 )   $ 525,361     $ 1,558,060     $ 1,853,120  
                                 

Basic Earnings (Loss) per Common Share

  $ (0.01 )   $ 0.09     $ 0.26     $ 0.31  

Diluted Earnings (Loss) per Common Share

  $ (0.01 )   $ 0.09     $ 0.25     $ 0.31  
                                 

Weighted Average Common Shares

                               

Outstanding - Basic

    5,994,955       5,948,660       5,978,270       5,925,725  

Dilutive Effect of Employee

                               

Stock Awards

    -       34,170       271,667       57,165  

Weighted Average Common Shares

                               

Outstanding - Diluted

    5,994,955       5,982,830       6,249,937       5,982,890  

 

 

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

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   

November 30,

   

February 28,

 
   

2019

   

2019

 

 

 

(unaudited)

         
Assets              

Current Assets

               

Cash and cash equivalents

  $ 5,462,678     $ 5,384,027  

Accounts receivable, less allowance for doubtful accounts of $599,292 and $489,502, respectively

    4,642,027       3,993,262  

Notes receivable, current portion

    158,825       110,162  

Refundable income taxes

    322,241       190,201  

Inventories, less reserve for slow moving inventory of $355,078 and $371,147, respectively

    3,680,730       4,270,357  

Other

    363,946       318,126  

Total current assets

    14,630,447       14,266,135  
                 

Property and Equipment, Net

    6,040,845       5,786,139  
                 

Other Assets

               

Notes receivable, less current portion

    328,503       281,669  

Goodwill, net

    1,046,944       1,046,944  

Franchise rights, net

    3,205,497       3,678,920  

Intangible assets, net

    442,128       498,337  

Deferred income taxes

    549,628       607,421  

Lease right of use asset

    2,877,280       -  

Other

    56,263       56,576  

Total other assets

    8,506,243       6,169,867  
                 

Total Assets

  $ 29,177,535     $ 26,222,141  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Current maturities of long term debt

  $ 127,576     $ 1,176,488  

Accounts payable

    2,115,998       897,074  

Accrued salaries and wages

    842,698       655,853  

Gift card liabilities

    645,054       742,289  

Other accrued expenses

    386,109       293,094  

Dividend payable

    719,400       714,939  

Contract liabilities

    199,454       256,094  

Lease liability

    601,508       -  

Total current liabilities

    5,637,797       4,735,831  
                 

Lease Liability, Less Current Portion

    2,275,772       -  

Contract Liabilities, Less Current Portion

    967,802       1,096,478  
                 

Commitments and Contingencies

               
                 

Stockholders' Equity

               

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

    -       -  

Series A Junior Participating Preferred Stock, authorized 50,000 shares

    -       -  

Undesignated series, authorized 200,000 shares

    -       -  

Common stock, $.001 par value, 46,000,000 shares authorized, 5,994,997 shares and 5,957,827 shares issued and outstanding, respectively

    5,995       5,958  

Additional paid-in capital

    7,154,037       6,650,864  

Retained earnings

    13,136,132       13,733,010  
                 

Total stockholders' equity

    20,296,164       20,389,832  
                 

Total Liabilities and Stockholders' Equity

  $ 29,177,535     $ 26,222,141  

 

 

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)

 

   

Nine Months Ended

 
   

November 30,

 
   

2019

   

2018

 

Cash Flows From Operating Activities

               

Net Income

  $ 1,558,060     $ 1,853,120  

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

         

Depreciation and amortization

    1,114,678       1,294,241  

Provision for obsolete inventory

    307,836       85,207  

Provision for loss on accounts and notes receivable

    134,783       88,200  

Asset impairment and store closure losses

    -       67,822  

Loss on sale or disposal of property and equipment

    8,307       28,813  

Expense recorded for stock compensation

    503,210       383,655  

Deferred income taxes

    57,793       (94,328 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (982,237 )     (1,136,471 )

Refundable income taxes

    (132,040 )     317,793  

Inventories

    294,361       (1,471,361 )

Other current assets

    (45,820 )     (110,645 )

Accounts payable

    1,206,354       407,012  

Accrued liabilities

    182,625       58,079  

Contract liabilities

    (175,918 )     (72,084 )

Net cash provided by operating activities

    4,031,992       1,699,053  
                 

Cash Flows from Investing Activities

               

Proceeds received on notes receivable

    109,342       73,880  

Proceeds from sale or distribution of assets

    763       13,498  

Purchases of property and equipment

    (864,370 )     (498,252 )

(Increase) decrease in other assets

    313       (8,140 )

Net cash used in investing activities

    (753,952 )     (419,014 )
                 

Cash Flows from Financing Activities

               

Payments on long-term debt

    (1,048,912 )     (1,009,940 )

Dividends paid

    (2,150,477 )     (2,131,144 )

Net cash used in financing activities

    (3,199,389 )     (3,141,084 )
                 

Net Decrease in Cash and Cash Equivalents

    78,651       (1,861,045 )
                 

Cash and Cash Equivalents, Beginning of Period

    5,384,027       6,072,984  
                 

Cash and Cash Equivalents, End of Period

  $ 5,462,678     $ 4,211,939  

 

 

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 August 31, 2018

    5,948,660     $ 5,949     $ 6,411,829     $ 14,250,749     $ 20,668,527  

Net income

                            525,361       525,361  

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

                                    -  

Share-based compensation expense

                    102,927               102,927  

Common stock dividends

                            (713,839 )     (713,839 )

Balance as of November 30, 2018

    5,948,660     $ 5,949     $ 6,514,756     $ 14,062,271     $ 20,582,976  
                                         

Balance as of February 28, 2018

    5,903,436     $ 5,903     $ 6,131,147     $ 13,419,553     $ 19,556,603  

Net income

                            1,853,120       1,853,120  

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

    45,224       46       (46 )             -  

Share-based compensation expense

                    383,655               383,655  

Common stock dividends

                            (2,136,331 )     (2,136,331 )

Adoption of ASC 606

                            925,929       925,929  

Balance as of November 30, 2018

    5,948,660     $ 5,949     $ 6,514,756     $ 14,062,271     $ 20,582,976  
                                         

Balance as of August 31, 2019

    5,991,162     $ 5,991     $ 7,037,501     $ 13,927,209     $ 20,970,701  

Net income (loss)

                            (71,637 )     (71,637 )

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

    3,835       4       (4 )             -  

Share-based compensation expense

                    116,540               116,540  

Common stock dividends

                            (719,440 )     (719,440 )

Balance as of November 30, 2019

    5,994,997     $ 5,995     $ 7,154,037     $ 13,136,132     $ 20,296,164  
                                         

Balance as of February 28, 2019

    5,957,827       5,958     $ 6,650,864     $ 13,733,010     $ 20,389,832  

Net income

                            1,558,060       1,558,060  

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

    37,170       37       (37 )             -  

Share-based compensation expense

                    503,210               503,210  

Common stock dividends

                            (2,154,938 )     (2,154,938 )

Balance as of November 30, 2019

    5,994,997     $ 5,995     $ 7,154,037     $ 13,136,132     $ 20,296,164  

 

 

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 (“RMCF”), Aspen Leaf Yogurt, LLC, a Colorado limited liability company (“ALY”), U-Swirl International, Inc., a Nevada corporation (“U-Swirl”), and its 46%-owned subsidiary, U-Swirl, Inc., a Nevada corporation (“SWRL”) of which, RMCF had financial control until February 29, 2016 (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

 

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

 

The Company’s revenues are currently derived from three principal sources, which are similar for its wholly owned subsidiaries RMCF and U-Swirl: (i) sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; (ii) sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products (including products manufactured by the Company); (iii) the collection of initial franchise fees and royalties from franchisees’ sales of both confectionary products and frozen yogurt.

 

The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés as of November 30, 2019:

 

   

Sold, Not Yet

Open

   

Open

   

Total

 

Rocky Mountain Chocolate Factory

                       

Company-owned stores

    -       2       2  

Franchise stores - Domestic stores and kiosks

    1       179       180  

International license stores

    1       63       64  

Cold Stone Creamery - co-branded

    5       97       102  

U-Swirl (Including all associated brands)

                    -  

Company-owned stores

    -       1       1  

Company-owned stores - co-branded

    -       3       3  

Franchise stores - Domestic stores

    1       79       80  

Franchise stores - Domestic - co-branded

    -       7       7  

International license stores

    -       2       2  

Total

    8       433       441  

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and Securities and Exchange Commission (the “SEC”) regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. 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, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year, or any other future period.

 

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, 2019.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Subsequent Events

 

On December 3, 2019, the Company entered into a cooperation agreement (the “Agreement”) with AB Value Management LLC (“AB Value”) related to AB Value’s contested solicitation of proxies. As part of the Agreement, the Company agreed to reimburse AB Value for all reasonable, documented out-of-pocket fees and expenses in the preparation and execution of the Agreement and the related matters preceding or reasonably following its execution, provided that such reimbursement shall not exceed two hundred and ninety thousand dollars ($290,000.00) in the aggregate.  As of November 30, 2019 the Company had recorded a liability of $290,000 in consideration of this Agreement.

 

On December 20, 2019, the Company entered into a strategic alliance (the “Strategic Alliance”) with Edible Arrangements, LLC (“EA”) and Farids & Co. LLC (“Farids,” and together with EA and any permitted transferees, “Edible Arrangements”), pursuant to which, among other things, the Company will become the exclusive provider of certain branded chocolate products to EA, its affiliates and its franchisees. In connection with the Strategic Alliance, the Company entered into a strategic alliance agreement, an exclusive supplier operating agreement and a warrant agreement with EA and Farids.

 

Exclusive Supplier Agreement

 

On December 20, 2019, the Company entered into an Exclusive Supplier Operating Agreement (the “Exclusive Supplier Agreement”) with EA, pursuant to which the Company will be EA’s exclusive supplier for chocolates, candies and/or other confectionery products. In addition, the Company granted to EA a non-exclusive, worldwide right to market, offer for sale, sell and distribute such products, including through (i) retail stores and (ii) on-line distribution channels such as Internet websites and applications for personal computing devices, as an authorized and independent distributor of such products.

 

Strategic Alliance Agreement

 

On December 20, 2019, the Company entered into a Strategic Alliance Agreement (the “Strategic Alliance Agreement”) with EA and Farids, pursuant to which, among other things, the Company will issue and sell 126,839 shares (the “Purchased Shares”) of the Company’s common stock to Farids at a price of $7.884 per share. The issuance and sale of the Purchased Shares is required to close within 90 days, subject to the satisfaction of certain customary closing conditions. The Purchased Shares may not be transferred within the first two years following the date of the Strategic Alliance Agreement, subject to certain limited exceptions. In addition, the Company has certain rights of first offer and rights of first refusal with respect to the Purchased Shares or the Warrants Shares (as defined below), and the Company also granted certain registration rights to Edible Arrangements with respect to the Purchased Shares and the Warrants Shares. Subject to certain limited exceptions, Edible Arrangements is also prohibited from beneficially owning 19.99% or more of the fully diluted number of shares of Common Stock outstanding at any time.

 

Warrant

 

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

 

Recent Accounting Pronouncements

 

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in Quarterly Reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. The Company adopted these amendments in its Quarterly Report on Form 10-Q for the quarter ended May 31, 2019.

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. The Company adopted ASU 2016-02 as of March 1, 2019, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company recorded a Right of Use Asset and Lease Liability on the Consolidated Balance Sheet of $3.3 million upon adoption. The impact of the new standard did not affect the Company’s cash flows or results of operations. The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the lease term, which includes options that are likely to be exercised, discounted using an incremental borrowing rate or implicit rate. See Note 11 - Leasing Arrangements for additional information.

 

 

NOTE 2 – EARNINGS PER SHARE

 

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

 

The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include outstanding common shares issuable if their effect would be anti-dilutive. During the three months ended November 30, 2019 263,038 shares of issuable common stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

 

 

NOTE 3 – INVENTORIES

 

Inventories consist of the following:

 

   

November 30, 2019

   

February 28, 2019

 

Ingredients and supplies

  $ 2,328,446     $ 2,612,954  

Finished candy

    1,652,919       1,983,854  

U-Swirl food and packaging

    54,443       44,696  

Reserve for slow moving inventory

    (355,078 )     (371,147 )

Total inventories

  $ 3,680,730     $ 4,270,357  

 

 

NOTE 4 – PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following:

 

   

November 30, 2019

   

February 28, 2019

 

Land

  $ 513,618     $ 513,618  

Building

    5,031,395       5,031,395  

Machinery and equipment

    10,565,626       10,233,119  

Furniture and fixtures

    852,557       864,944  

Leasehold improvements

    1,154,395       1,131,659  

Transportation equipment

    440,989       422,458  
      18,558,580       18,197,193  
                 

Less accumulated depreciation

    (12,517,735 )     (12,411,054 )

Property and equipment, net

  $ 6,040,845     $ 5,786,139  

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 5 – STOCKHOLDERS’ EQUITY

 

Cash Dividend

 

The Company paid a quarterly cash dividend of $0.12 per common share on March 15, 2019 to stockholders of record on March 5, 2019. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 14, 2019 to stockholders of record on June 4, 2019. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 13, 2019 to stockholders of record on September 4, 2019. The Company declared a quarterly cash dividend of $0.12 per share of common stock on November 14, 2019, which was paid on December 6, 2019 to stockholders of record on November 22, 2019.

 

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

 

Stock Repurchases

 

On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. The Company did not repurchase any shares during the three and nine months ended November 30, 2019. As of November 30, 2019, approximately $638,000 remained available under the repurchase plan for further stock repurchases.

 

Stock-Based Compensation

 

The Company’s 2007 Equity Incentive Plan (as amended and restated on August 8, 2013) authorizes the granting of stock awards to employees, non-employee directors, consultants and other participants, including stock options, restricted stock and restricted stock units.

 

The Company recognized $116,540 and $503,210 of stock-based compensation expense during the three- and nine-month periods ended November 30, 2019, respectively, compared to $102,927 and $383,655 during the three- and nine-month periods ended November 30, 2018, 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 November 30, 2019 and 2018:

 

   

Nine Months Ended

 
   

November 30,

 
   

2019

   

2018

 

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

    25,002       77,594  

Granted

    270,000       -  

Vested

    (32,002 )     (43,224 )

Cancelled/forfeited

    -       (200 )

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

    263,000       34,170  
                 

Weighted average grant date fair value

  $ 9.40     $ 12.05  

Weighted average remaining vesting period (in years)

    4.9       0.6  

 

The Company issued an aggregate of 5,168 fully vested, unrestricted shares of common stock to non-employee directors during the nine months ended November 30, 2019 compared to an aggregate of 2,000 shares issued during the nine months ended November 30, 2018. In connection with these non-employee director stock issuances, the Company recognized $48,774 and $24,480 of stock-based compensation expense during the nine months ended November 30, 2019 and 2018, respectively.

 

During the three- and nine-month periods ended November 30, 2019, the Company recognized $113,418 and $454,436, respectively, of stock-based compensation expense related to restricted stock unit grants. The restricted stock unit grants generally vest in equal annual or quarterly installments over a period of five to six years. During the nine-month periods ended November 30, 2019 and 2018, 32,002 and 43,224 restricted stock units vested and were issued as common stock, respectively. Total unrecognized compensation expense of non-vested, non-forfeited restricted stock units granted as of November 30, 2019 was $2,195,848, which is expected to be recognized over the weighted-average period of 4.9 years.

 

The Company has no outstanding stock options as of November 30, 2019.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 6 – SUPPLEMENTAL CASH FLOW INFORMATION

 

   

Nine Months Ended

 
   

November 30,

 

 

 

2019

   

2018

 
Cash paid for:            

Interest

  $ 20,169     $ 59,140  

Income taxes

    613,876       381,318  

Non-cash Operating Activities

               

Accrued Inventory

    65,488       292,435  

Non-cash Financing Activities

               

Dividend payable

  $ 719,400     $ 713,839  

 

 

NOTE 7 – OPERATING SEGMENTS

 

The Company classifies its business interests into five reportable segments: Franchising, Manufacturing, Retail Stores, U-Swirl operations 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 and Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019. 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 difference in products and services:

 

Three Months Ended

November 30, 2019

 

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Other

   

Total

 

Total revenues

  $ 1,110,143     $ 6,100,755     $ 260,002     $ 757,475     $ -     $ 8,228,375  

Intersegment revenues

    (671 )     (314,452 )     -       -       -       (315,123 )

Revenue from external customers

    1,109,472       5,786,303       260,002       757,475       -       7,913,252  

Segment profit (loss)

    427,705       1,001,264       (4,649 )     455       (1,518,634 )     (93,859 )

Total assets

    1,189,288       12,346,000       1,046,795       5,540,055       9,055,397       29,177,535  

Capital expenditures

    16,223       347,310       (7,837 )     2,324       25,330       383,350  

Total depreciation & amortization

  $ 11,909     $ 151,771     $ 2,572     $ 175,359     $ 22,581     $ 364,192  

 

Three Months Ended

November 30, 2018

 

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Other

   

Total

 

Total revenues

  $ 1,062,942     $ 7,193,761     $ 282,023     $ 743,647     $ -     $ 9,282,373  

Intersegment revenues

    (865 )     (331,761 )     -       -       -       (332,626 )

Revenue from external customers

    1,062,077       6,862,000       282,023       743,647       -       8,949,747  

Segment profit (loss)

    344,945       1,324,220       (13,732 )     (174,089 )     (814,244 )     667,100  

Total assets

    1,067,265       14,713,087       1,029,203       5,463,340       5,294,264       27,567,159  

Capital expenditures

    -       243,043       3,796       1,631       3,327       251,797  

Total depreciation & amortization

  $ 11,617     $ 144,436     $ 5,631     $ 235,446     $ 24,656     $ 421,786  

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

Nine Months Ended

November 30, 2019

 

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Other

   

Total

 

Total revenues

  $ 4,054,989     $ 16,681,908     $ 758,083     $ 3,040,031     $ -     $ 24,535,011  

Intersegment revenues

    (3,278 )     (807,212 )     -       -       -       (810,490 )

Revenue from external customers

    4,051,711       15,874,696       758,083       3,040,031       -       23,724,521  

Segment profit (loss)

    1,874,593       3,125,311       (11,683 )     576,499       (3,467,032 )     2,097,688  

Total assets

    1,189,288       12,346,000       1,046,795       5,540,055       9,055,397       29,177,535  

Capital expenditures

    24,723       732,989       24,787       3,997       77,874       864,370  

Total depreciation & amortization

  $ 33,093     $ 453,751     $ 7,715     $ 551,336     $ 68,783     $ 1,114,678  

 

Nine Months Ended

November 30, 2018

 

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Other

   

Total

 

Total revenues

  $ 3,846,633     $ 18,097,063     $ 941,817     $ 3,127,806     $ -     $ 26,013,319  

Intersegment revenues

    (3,632 )     (893,767 )     -       -       -       (897,399 )

Revenue from external customers

    3,843,001       17,203,296       941,817       3,127,806       -       25,115,920  

Segment profit (loss)

    1,527,599       3,564,168       (117,488 )     190,884       (2,707,260 )     2,457,903  

Total assets

    1,067,265       14,713,087       1,029,203       5,463,340       5,294,264       27,567,159  

Capital expenditures

    3,535       415,960       7,601       14,935       56,221       498,252  

Total depreciation & amortization

  $ 35,173     $ 428,161     $ 29,485     $ 720,530     $ 80,892     $ 1,294,241  

 

Revenue from one customer of the Company’s Manufacturing segment represented approximately $1.5 million, or 6.3 percent, of the Company’s revenues from external customers during the nine months ended November 30, 2019, compared to $1.8 million, or 7.1 percent, of the Company’s revenues from external customers during the nine months ended November 30, 2018.

 

 

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

             

November 30, 2019

   

February 28, 2019

 
   

Amortization Period

(in years)

   

Gross Carrying

Value

   

Accumulated

Amortization

   

Gross Carrying

Value

   

Accumulated

Amortization

 

Intangible assets subject to amortization

                                         

Store design

    10       $ 220,778     $ 215,278     $ 220,778     $ 214,152  

Packaging licenses

  - 5       120,830       120,830       120,830       120,830  

Packaging design

    10         430,973       430,973       430,973       430,973  

Trademark/Non-competition agreements

  5 - 20       715,339       278,711       715,339       223,628  

Franchise rights

    20         5,979,637       2,774,140       5,979,637       2,300,717  

Total

      7,467,557       3,819,932     $ 7,467,557     $ 3,290,300  

Intangible assets not subject to amortization

                                 

Franchising segment-

                                         

Company stores goodwill

    $ 832,308             $ 832,308          

Franchising goodwill

      97,318               97,318          

Manufacturing segment-goodwill

      97,318               97,318          

Trademark

      20,000               20,000          

Total goodwill

      1,046,944               1,046,944          
                                           

Total Intangible Assets

    $ 8,514,501     $ 3,819,932     $ 8,514,501     $ 3,290,300  

 

Amortization expense related to intangible assets totaled $529,632 and $634,131 during the nine months ended November 30, 2019 and 2018, respectively.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

At November 30, 2019, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:

 

2020

  $ 176,544  

2021

    594,229  

2022

    490,060  

2023

    411,607  

2024

    345,642  

Thereafter

    1,629,543  

Total

  $ 3,647,625  

 

 

NOTE 9 – COSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES

 

Costs associated with Company-owned store closures were the result of closing certain underperforming Company-owned locations during the nine months ended November 30, 2018. Costs associated with Company-owned store closures of $0 and $176,981 were incurred during the three and the nine months ended November 30, 2018, respectively.

 

There were no comparable costs incurred during the three and nine months ended November 30, 2019.

 

 

NOTE 10 – NOTE PAYABLE

 

The Company’s long-term debt is comprised of a promissory note, the proceeds of which were loaned to SWRL and used to finance SWRL’s business acquisitions. The promissory note matures on January 15, 2020.

 

As of November 30, 2019 and February 28, 2019, notes payable consisted of the following:

 

   

November 30, 2019

   

February 28, 2019

 

Promissory note

  $ 127,576     $ 1,176,488  

Less: current maturities

    (127,576 )     (1,176,488 )

Long-term obligations

  $ -     $ -  

 

 

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 manufacturing operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of income.

 

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

 

The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. Lease expense recognized for the nine months ended November 30, 2019 and 2018 in the Consolidated Statements of Income was $702,872 and $757,885, respectively.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

The amount of the ‘Right of Use Asset’ and ‘Lease Liability’ recorded in the Consolidated Balance Sheets upon the adoption of ASU 2016-02 was $3.3 million. 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 ‘Right of Use Asset’ and ‘Lease 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 ‘Right of Use Asset’ and ‘Lease 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 November 30, 2019. The total estimated future minimum lease payments is $3.2 million.

 

As of November 30, 2019, maturities of lease liabilities for the Company’s operating leases were as follows:

 

FY 20

  $ 202,645  

FY 21

    819,005  

FY 22

    694,755  

FY 23

    437,445  

FY 24

    315,962  

Thereafter

    717,040  

Total

  $ 3,186,852  
         

Less: imputed interest

    (309,572 )

Present value of lease liabilities:

  $ 2,877,280  
         

Weighted average lease term (in years)

    6.7  

 

During the nine months ended November 30, 2019 the Company entered into a lease amendment to extend the term of a lease for a Company-owned location. This lease amendment resulted in the Company recognizing a present value of future lease liability of $476,611 based upon a total lease liability of $532,811.

 

 

NOTE 12 –REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to the Company’s franchisees and others, or in its Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.

 

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

 

The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018 was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

At November 30, 2019, 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:

 

FY 20

  $ 57,066  

FY 21

    190,218  

FY 22

    177,019  

FY 23

    164,050  

FY 24

    133,507  

Thereafter

    445,396  

Total

  $ 1,167,256  

 

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. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.

 

 

NOTE 13 – DISAGGREGATION OF REVENUE

 

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

 

Three Months Ended November 30, 2019

 

Revenues recognized over time under ASC 606:

                 
   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 
                                         

Franchise fees

  $ 43,331     $ -     $ -     $ 38,961     $ 82,292  

 

Revenues recognized at a point in time:

                 
   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 

Factory sales

    -       5,786,303       -       -       5,786,303  

Retail sales

    -       -       260,002       444,296       704,298  

Royalty and marketing fees

    1,066,141       -       -       274,218       1,340,359  

Total

  $ 1,109,472     $ 5,786,303     $ 260,002     $ 757,475     $ 7,913,252  

 

Three Months Ended November 30, 2018

                         
                                         

Revenues recognized over time under ASC 606:

                 
   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 
                                         

Franchise fees

  $ 44,172     $ -     $ -     $ 17,490     $ 61,662  

 

Revenues recognized at a point in time:

                 
   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 

Factory sales

    -       6,862,000       -       -       6,862,000  

Retail sales

    -       -       282,023       439,304       721,327  

Royalty and marketing fees

    1,017,905       -       -       286,853       1,304,758  

Total

  $ 1,062,077     $ 6,862,000     $ 282,023     $ 743,647     $ 8,949,747  

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

Nine Months Ended November 30, 2019

                         
                                         

Revenues recognized over time under ASC 606:

                 
   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 
                                         

Franchise fees

  $ 188,677     $ -     $ -     $ 81,824     $ 270,501  

 

Revenues recognized at a point in time:

                 
   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 

Factory sales

    -       15,874,696       -       -       15,874,696  

Retail sales

    -       -       758,083       1,702,473       2,460,556  

Royalty and marketing fees

    3,863,034       -       -       1,255,734       5,118,768  

Total

  $ 4,051,711     $ 15,874,696     $ 758,083     $ 3,040,031     $ 23,724,521  

 

Nine Months Ended November 30, 2018

                         
                                         

Revenues recognized over time under ASC 606:

                 
   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 
                                         

Franchise fees

  $ 154,693     $ -     $ -     $ 107,642     $ 262,335  

 

Revenues recognized at a point in time:

                 
   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 

Factory sales

    -       17,203,296       -       -       17,203,296  

Retail sales

    -       -       941,817       1,756,582       2,698,399  

Royalty and marketing fees

    3,688,308       -       -       1,263,582       4,951,890  

Total

  $ 3,843,001     $ 17,203,296     $ 941,817     $ 3,127,806     $ 25,115,920  

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 14 – LOSS CONTINGENCY

 

In June 2019, the Company’s largest customer, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11 bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including the divisions that the Company has historically sold product to, were sold through an auction to multiple buyers.

 

The Company has historically conducted business with FTD under a Gourmet Foods Supplier Agreement (the “Supplier Agreement”), that among other provisions, provided assurance that custom inventory purchased by the Company and developed specifically for FTD would be purchased by FTD upon termination of the Supplier Agreement. On September 23, 2019, the Company received notice that the bankruptcy court had approved FTD to reject and not enforce the Supplier Agreement as part of the proceedings.

 

As a result of FTD’s bankruptcy, the sale of certain assets, and the court’s approval to reject and not enforce the terms of the Supplier Agreement, the Company is uncertain if accounts receivable and inventory balances associated with FTD at November 30, 2019 will be realized at their full value, or if any revenue will be received from FTD in the future. During the three months ended November 30, 2019, the Company recognized an estimated loss of $230,384 associated with inventory specific to FTD as the Company determined that it was probable that a loss on certain inventory would be realized. A potential loss associated with the remaining balances is not probable and/or is not able to be estimated as of the date of these consolidated financial statements.

 

As of November 30, 2019, balances associated with FTD consist of the following:

 

   

November 30, 2019

 

Ingredients and supplies

  $ 377,044  

Finished candy

    75,070  

Accounts receivable

    79,744  

Reserve for estimated losses

    (230,384 )

Total potential loss, contingent upon the bankruptcy proceedings

  $ 301,474  

 

FTD represented approximately $1.5 million, or 6.3%, of the Company’s revenues during the nine months ended November 30, 2019, compared to $1.8 million, or 7.1%, of the Company’s revenues during the nine months ended November 30, 2018. FTD represented approximately $3.1 million or 9% of the Company’s total revenues during the year ended February 28, 2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. The Company’s future results may be adversely impacted by decreases in the purchases of this customer or the loss of this customer entirely.

 

 

 

Item 2.

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

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (“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 nature of our operations and the environment in which we operate subject us to changing economic, competitive, regulatory and technological conditions, 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. Factors which could cause results to differ include, but are not limited to: achievement of the anticipated potential benefits of the strategic alliance with Edible Arrangements (as defined below), the Company's ability to provide products to EA (as defined below) under the strategic alliance, relationships and changes in our customers, changes in the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding strategy, the success of international expansion efforts and the effect of government regulations. Government regulations which we and our franchisees either are or may be subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, employment, manufacturing, packaging and distribution of food products and motor carriers. 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 the “Risk Factors” contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 28, 2019. These forward-looking statements apply only as of the date of this Quarterly Report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, we undertake no obligation to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this Quarterly Report or those that might reflect the occurrence of unanticipated events.

 

Unless otherwise specified, the “Company,” “we,” “us” or “our” refers to Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its consolidated subsidiaries.

 

Overview

 

We are an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates soft-serve frozen yogurt cafés. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products. We also sell our candy outside of our system of retail stores and license the use of our brand with certain consumer products. As of November 30, 2019, there were two Company-owned, 97 licensee-owned and 242 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, Canada, South Korea, Panama, and the Philippines. As of November 30, 2019, U-Swirl operated four Company-owned cafés and 88 franchised cafés located in 24 states and Qatar. U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.

 

Strategic Alliance with Edible Arrangements

 

On December 20, 2019, the Company entered into a strategic alliance (the “Strategic Alliance”) with Edible Arrangements, LLC (“EA”) and Farids & Co. LLC (“Farids,” and together with EA and any permitted transferees, “Edible Arrangements”), pursuant to which, among other things, the Company will become the exclusive provider of certain branded chocolate products to EA, its affiliates and its franchisees. In connection with the Strategic Alliance, the Company entered into a strategic alliance agreement, an exclusive supplier operating agreement and a warrant agreement with EA and Farids. For more information, please see Note 1 to the financial statements for a summary of the strategic alliance agreement, the exclusive supplier operating agreement and the warrant agreement.

 

Bankruptcy of FTD Companies

 

In June 2019, the Company’s largest customer, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11 bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including the divisions that the Company has historically sold product to, were sold through the auction to multiple buyers. The Company is uncertain if accounts receivable and inventory balances associated with FTD at November 30, 2019 will be realized at their full value, or if any revenue will be received from FTD in the future. See Note 7 and Note 14 to the financial statements contained herein for additional information about the FTD bankruptcy.

 

 

Results of Operations

 

Three Months Ended November 30, 2019 Compared to the Three Months Ended November 30, 2018

 

Results Summary

 

Basic earnings per share decreased from $0.09 in the three months ended November 30, 2018 to a loss of $(0.01) in the three months ended November 30, 2019. Revenues decreased 11.6% from $8.9 million in the three months ended November 30, 2018 to $7.9 million in the three months ended November 30, 2019. Operating income decreased from $678,000 in the three months ended November 30, 2018 to an operating loss of $(98,000) in the three months ended November 30, 2019. Net income decreased from $525,000 in the three months ended November 30, 2018 to a net loss of $(72,000) in the three months ended November 30, 2019. The decreases in operating income and net income were due primarily to costs associated with the Company’s previously announced review of strategic alternatives, which formally concluded upon the Company’s entry into the Strategic Alliance, costs associated with a stockholder’s contested solicitation of proxies, which was terminated in December 2019, and costs associated with the bankruptcy of the Company’s largest customer.

 

Revenues

 

   

Three Months Ended

                 

($'s in thousands)

 

November 30,

    $    

%

 
   

2019

   

2018

   

Change

   

Change

 

Factory sales

  $ 5,786.3     $ 6,862.0     $ (1,075.7 )     (15.7 )%

Retail sales

    704.3       721.3       (17.0 )     (2.4 )%

Franchise fees

    82.3       61.7       20.6       33.4 %

Royalty and marketing fees

    1,340.4       1,304.8       35.6       2.7 %

Total

  $ 7,913.3     $ 8,949.8     $ (1,036.5 )     (11.6 )%

 

Factory Sales

 

The decrease in factory sales for the three months ended November 30, 2019 versus the three months ended November 30, 2018 was primarily due to a 58.0% decrease in shipments of product to customers outside our network of franchise and licensed retail locations, partially offset by a 3.8% increase in purchases by our network of franchised and licensed stores. The decrease in shipments of product to customers outside our network of franchise and licensed retail stores was primarily the result of product rationalization and a decline in revenue associated with products no longer offered for sale. Purchases by the Company’s largest customer, FTD, decreased during the three months ended November 30, 2019, with no revenue from such customer during the three months ended November 30, 2019, compared to $374,000, or 4.2% of the Company’s revenues during the three months ended November 30, 2018. As discussed above, FTD declared Chapter 11 bankruptcy in June 2019. Until the bankruptcy proceedings are complete, it is unclear whether the Company will realize any revenue from FTD in the future, and if so, whether such revenues will return to historic levels.

 

Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 3.6% in the three months ended November 30, 2019, compared with the three months ended November 30, 2018.

 

Retail Sales

 

The decrease in retail sales for the three months ended November 30, 2019 compared to the three months ended November 30, 2018 was primarily due to a decrease in same-store sales at Company-owned locations. Same store sales at all Company-owned stores and cafés decreased 1.6% in the three months ended November 30, 2019 compared to the three months ended November 30, 2018.

 

Royalties, Marketing Fees and Franchise Fees

 

The increase in royalties and marketing fees from the three months ended November 30, 2018 to the three months ended November 30, 2019 was primarily due to an increase in royalty revenue associated with the Company’s purchase-based royalty structure, partially offset by a 6.3% decrease in domestic franchise units in operation. The average number of total domestic franchise stores in operation decreased from 285 in the three months ended November 30, 2018 to 267 during the three months ended November 30, 2019. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at total franchise stores and cafés in operation decreased 1.1% during the three months ended November 30, 2019 compared to the three months ended November 30, 2018.

 

The increase in franchise fee revenue for the three months ended November 30, 2019 compared to the three months ended November 30, 2018 was the result of an increase in revenue resulting from store closures and the reversal of the remaining contract liabilities and corresponding recognition of revenue.

 

 

Costs and Expenses

 

Cost of Sales

 

   

Three Months Ended

                 
   

November 30,

    $    

%

 

($'s in thousands)

 

2019

   

2018

   

Change

   

Change

 
                                 

Cost of sales - factory

  $ 4,689.9     $ 5,419.8     $ (729.9 )     (13.5 )%

Cost of sales - retail

    266.3       280.5       (14.2 )     (5.1 )%

Franchise costs

    428.2       463.1       (34.9 )     (7.5 )%

Sales and marketing

    435.0       519.2       (84.2 )     (16.2 )%

General and administrative

    1,529.3       860.9       668.4       77.6 %

Retail operating

    445.9       446.1       (0.2 )     (0.0 )%

Total

  $ 7,794.6     $ 7,989.6     $ (195.0 )     (2.4 )%

 

Gross Margin

 

   

Three Months Ended

                 
   

November 30,

    $    

%

 

($'s in thousands)

 

2019

   

2018

   

Change

   

Change

 
                                 

Factory gross margin

  $ 1,096.4     $ 1,442.2     $ (345.8 )     (24.0 )%

Retail gross margin

    438.0       440.8       (2.8 )     (0.6 )%

Total

  $ 1,534.4     $ 1,883.0     $ (348.6 )     (18.5 )%

 

 

   

Three Months Ended

                 
   

November 30,

   

%

   

%

 
   

2019

   

2018

   

Change

   

Change

 

(Percent)

                               

Factory gross margin

    18.9 %     21.0 %     (2.1 )%     (9.8 )%

Retail gross margin

    62.2 %     61.1 %     1.1 %     1.8 %

Total

    23.6 %     24.8 %     (1.2 )%     (4.8 )%

 

Adjusted Gross Margin

 

   

Three Months Ended

                 
   

November 30,

   

$

   

%

 

($'s in thousands)

 

2019

   

2018

   

Change

   

Change

 
                                 

Factory gross margin

  $ 1,096.4     $ 1,442.2     $ (345.8 )     (24.0 )%

Plus: depreciation and amortization

    147.3       140.0       7.3       5.2 %

Factory adjusted gross margin

    1,243.7       1,582.2       (338.5 )     (21.4 )%

Retail gross margin

    438.0       440.8       (2.8 )     (0.6 )%

Total Adjusted Gross Margin

  $ 1,681.7     $ 2,023.0     $ (341.3 )     (16.9 )%
                                 

Factory adjusted gross margin

    21.5 %     23.1 %     (1.6 )%     (6.8 )%

Retail gross margin

    62.2 %     61.1 %     1.1 %     1.8 %

Total Adjusted Gross Margin

    25.9 %     26.7 %     (0.8 )%     (2.9 )%

 

Adjusted gross margin and factory adjusted gross margin are non-GAAP financial measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.

 

 

Cost of Sales and Gross Margin

 

Factory margins decreased 210 basis points in the three months ended November 30, 2019 compared to the three months ended November 30, 2018, primarily because of charges associated with costs of excess capacity and an estimated loss on inventory associated with the bankruptcy of FTD, the Company’s largest customer. These costs were partially offset by improvements in margins resulting from product rationalization. Excess capacity was the result of a 25.6% decrease in production for the three months ended November 30, 2019 compared to the three months ended November 30, 2018. The increase in retail gross margins was primarily the result of the closure of underperforming Company-owned locations during the prior fiscal year.

 

Franchise Costs

 

The decrease in franchise costs in the three months ended November 30, 2019 versus the three months ended November 30, 2018 is due primarily to a decrease in legal and professional expense in the three months ended November 30, 2019 compared to the three months ended November 30, 2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 30.1% in the three months ended November 30, 2019 from 33.9% in the three months ended November 30, 2018.

 

Sales and Marketing

 

The decrease in sales and marketing costs for the three months ended November 30, 2019 compared to the three months ended November 30, 2018 is primarily due to planned cost reductions as a result of fewer domestic franchise units in operation and lower revenue associated with sales to customers outside of our network of franchised and licensed Rocky Mountain Chocolate Factory locations.     

 

General and Administrative

 

The increase in general and administrative costs for the three months ended November 30, 2019 compared to the three months ended November 30, 2018 is primarily due to higher professional fees associated with the Company’s previously announced process to explore and review strategic alternatives, which formally concluded upon the Company’s entry into the Strategic Alliance, and costs associated with a stockholder’s contested solicitation of proxies, which was terminated in December 2019. During the three months ended November 30, 2019, the Company incurred approximately $771,000 of costs associated with the review of strategic alternatives and the contested solicitation of proxies, compared with no comparable costs incurred in the three months ended November 30, 2018. As a percentage of total revenues, general and administrative expenses increased to 19.3% in the three months ended November 30, 2019 compared to 9.6% in the three months ended November 30, 2018.

 

Retail Operating Expenses

 

The decrease in retail operating expenses for the three months ended November 30, 2019 compared to the three months ended November 30, 2018 was due primarily to changes in units in operation as a result of the closure of certain underperforming Company-owned units in the prior fiscal year. Retail operating expenses, as a percentage of retail sales, increased from 61.8% in the three months ended November 30, 2018 to 63.3% in the three months ended November 30, 2019. This increase is primarily the result of the change in units in operation from the prior fiscal year.

 

Depreciation and Amortization

 

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $217,000 in the three months ended November 30, 2019, a decrease of 23.0% from $282,000 in the three months ended November 30, 2018. This decrease was the result of a decrease in frozen yogurt cafés in operation and lower amortization of the associated franchise rights. See Note 8 to the financial statements for a summary of annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 5.3% from $140,000 in the three months ended November 30, 2018 to $147,000 in the three months ended November 30, 2019. This increase was the result of an increase in production assets in service primarily resulting from the replacement of obsolete equipment or equipment at the end of its operating life.

 

Other Income (Expense)

 

Net interest income was $4,000 in the three months ended November 30, 2019 compared to net interest expense of $11,000 incurred in the three months ended November 30, 2018. This change in interest from net interest expense to net interest income is due to lower average outstanding promissory note balances for the three months ended November 30, 2019 compared to the three months ended November 30, 2018.

 

 

Income Tax Expense

 

Our effective income tax rate for the three months ended November 30, 2019 was 23.7%, compared to 21.2% for the three months ended November 30, 2018. This change was primarily the result of higher deductions realized during the three months ended November 30, 2018, compared to the three months ended November 30, 2019.

 

Nine Months Ended November 30, 2019 Compared to the Nine Months Ended November 30, 2018

 

Results Summary

 

Basic earnings per share decreased 16.1% to $0.26 for the nine months ended November 30, 2019 compared to $0.31 for the nine months ended November 30, 2018. Revenues decreased (5.5)% to $23.7 million for the nine months ended November 30, 2019 compared to $25.1 million in the nine months ended November 30, 2018. Operating income decreased 16.3% from $2.5 million in the nine months ended November 30, 2018 to $2.1 million in the nine months ended November 30, 2019. Net income decreased 15.9% from $1.9 million in the nine months ended November 30, 2018 to $1.6 million in the nine months ended November 30, 2019. The decrease in operating income and net income was due primarily to costs associated with the Company’s previously announced review of strategic alternatives, which formally concluded upon the Company’s entry into the Strategic Alliance, costs associated with a stockholder’s contested solicitation of proxies, which was terminated in December 2019, and costs associated with the bankruptcy of the Company’s largest customer.

 

Revenues