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Rocky Mountain Chocolate Factory, Inc. - Quarter Report: 2021 May (Form 10-Q)

rmcfd20210614_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 May 31, 2021

 

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

 

For the transition period from ________to________

 

Commission file number: 001-36865

a01.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

Preferred Stock Purchase Rights

RMCF

Nasdaq Global Market

 

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

 

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

 

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

 

 

Large accelerated filer

Accelerated filer

         
 

Non-accelerated filer

Smaller reporting company

         
     

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

On June 25, 2021, the registrant had outstanding 6,124,288 shares of its common stock, $0.001 par value.

 

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

PART I.     FINANCIAL INFORMATION

 
       

Item 1.

Financial Statements

3

CONSOLIDATED STATEMENTS OF OPERATIONS

3

CONSOLIDATED BALANCE SHEETS

4

CONSOLIDATED STATEMENTS OF CASH FLOWS

5

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

6

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

7

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

Controls and Procedures

21

     

PART II.     OTHER INFORMATION

22

   

Item 1.

Legal Proceedings

22

Item 1A.

Risk Factors

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.

Defaults Upon Senior Securities

22

Item 4.

Mine Safety Disclosures

22

Item 5.

Other Information

22

Item 6.

Exhibits

23

       

Signatures

24

 

 

 

 

PART I.       FINANCIAL INFORMATION

 

Item 1.         Financial Statements

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   

Three Months Ended May 31,

 
   

2021

   

2020

 

Revenues

               

Sales

  $ 5,830,198     $ 2,322,211  

Franchise and royalty fees

    1,763,513       380,226  

Total Revenue

    7,593,711       2,702,437  
                 

Costs and Expenses

               

Cost of sales

    4,546,597       2,883,216  

Franchise costs

    551,650       421,245  

Sales and marketing

    412,657       474,090  

General and administrative

    844,821       3,179,475  

Retail operating

    444,067       319,211  

Depreciation and amortization, exclusive of depreciation and amortization expense of $151,899, $157,510, respectively, included in cost of sales

    148,015       185,605  

Costs associated with Company-owned store closures

    -       68,558  

Total costs and expenses

    6,947,807       7,531,400  
                 

Income (Loss) from Operations

    645,904       (4,828,963 )
                 

Other Income (Expense)

               

Interest Expense

    -       (23,562 )

Interest Income

    4,571       5,800  

Gain on insurance recovery

    167,123       -  

Other income (expense), net

    171,694       (17,762 )
                 

Income (Loss) Before Income Taxes

    817,598       (4,846,725 )
                 

Income Tax Provision (Benefit)

    237,793       (1,179,328 )
                 

Consolidated Net Income (Loss)

  $ 579,805     $ (3,667,397 )
                 

Basic Earnings (Loss) per Common Share

  $ 0.09     $ (0.61 )

Diluted Earnings (Loss) per Common Share

  $ 0.09     $ (0.61 )
                 

Weighted Average Common Shares

               

Outstanding - Basic

    6,118,433       6,058,851  

Dilutive Effect of Employee

               

Stock Awards

    171,277       -  

Weighted Average Common Shares

               

Outstanding - Diluted

    6,289,710       6,058,851  

 

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

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   

May 31,

   

February 28,

 
   

2021

   

2021

 

Assets

 

(unaudited)

         

Current Assets

               

Cash and cash equivalents

  $ 5,789,625     $ 5,633,279  

Accounts receivable, less allowance for doubtful accounts of $1,401,294 and $1,341,853, respectively

    2,122,378       2,007,502  

Notes receivable, current portion, less current portion of the valuation allowance of $32,586 and $32,571, respectively

    76,137       84,819  

Refundable income taxes

    518,553       774,527  

Inventories

    4,399,030       4,062,885  

Other

    361,722       213,811  

Total current assets

    13,267,445       12,776,823  
                 

Property and Equipment, Net

    5,593,453       5,152,015  
                 

Other Assets

               

Notes receivable, less current portion and valuation allowance of $79,701 and $79,716, respectively

    29,573       42,525  

Goodwill, net

    729,701       729,701  

Franchise rights, net

    2,409,341       2,519,764  

Intangible assets, net

    385,030       395,946  

Deferred income taxes

    1,121,688       1,144,764  

Lease right of use asset

    2,214,248       1,925,591  

Other

    52,148       264,023  

Total other assets

    6,941,729       7,022,314  
                 

Total Assets

  $ 25,802,627     $ 24,951,152  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Accounts payable

  $ 1,152,572     $ 1,297,211  

Accrued salaries and wages

    653,697       735,241  

Gift card liabilities

    553,373       617,438  

Other accrued expenses

    388,416       253,345  

Contract liabilities

    195,442       194,737  

Lease liability

    673,899       682,348  

Total current liabilities

    3,617,399       3,780,320  
                 

Lease Liability, Less Current Portion

    1,576,839       1,278,354  

Contract Liabilities, Less Current Portion

    914,858       924,909  
                 

Commitments and Contingencies

               
                 

Stockholders' Equity

               

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

    -       -  

Series A Junior Participating Preferred Stock, 50,000 authorized; -0- shares issued and outstanding

    -       -  

Undesignated series, 200,000 shares authorized; -0- shares issued and outstanding

    -       -  

Common stock, $.001 par value, 46,000,000 shares authorized, 6,118,995 shares and 6,074,293 shares issued and outstanding, respectively

    6,119       6,074  

Additional paid-in capital

    8,117,824       7,971,712  

Retained earnings

    11,569,588       10,989,783  
                 

Total stockholders' equity

    19,693,531       18,967,569  
                 

Total Liabilities and Stockholders' Equity

  $ 25,802,627     $ 24,951,152  

 

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)

 

   

Three Months Ended

 
   

May 31,

 
   

2021

   

2020

 

Cash Flows From Operating Activities

               

Net income (loss)

  $ 579,805     $ (3,667,397 )

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

         

Depreciation and amortization

    299,914       343,115  

Provision for obsolete inventory

    33,285       18,285  

Provision for loss on accounts and notes receivable

    -       1,468,815  

Asset impairment and store closure losses

    -       544,060  

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

    (164,286 )     4,956  

Expense recorded for stock compensation

    146,157       143,718  

Deferred income taxes

    23,076       (1,179,329 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (114,876 )     476,533  

Refundable income taxes

    255,974       340  

Inventories

    (386,868 )     (452,217 )

Contract Liabilities

    (6,213 )     (27,515 )

Other current assets

    (147,911 )     12,393  

Accounts payable

    (123,087 )     680,748  

Accrued liabilities

    (9,159 )     35,453  

Net cash (used in) provided by operating activities

    385,811       (1,598,042 )
                 

Cash Flows from Investing Activities

               

Proceeds received on notes receivable

    21,634       17,825  

Purchase of intangible assets

    -       (41,464 )

Proceeds from insurance recovery

    206,336       -  

Purchases of property and equipment

    (457,435 )     (22,488 )

Net cash used in investing activities

    (229,465 )     (46,127 )
                 

Cash Flows from Financing Activities

               

Proceeds from long-term debt

    -       1,537,200  

Proceeds from the line of credit

    -       3,448,165  

Dividends paid

    -       (722,344 )

Net cash provided by (used in) financing activities

    -       4,263,021  
                 

Net Increase in Cash and Cash Equivalents

    156,346       2,618,852  
                 

Cash and Cash Equivalents, Beginning of Period

    5,633,279       4,822,071  
                 

Cash and Cash Equivalents, End of Period

  $ 5,789,625     $ 7,440,923  

 

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

 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

   

Three Months Ended

 
   

May 31,

 
   

2021

   

2020

 

Common Stock

               

Balance at February 28 or 29:

  $ 6,074     $ 6,020  

Issuance of common stock

    7       -  

Equity compensation, restricted stock units

    38       41  

Balance at May 31:

    6,119       6,061  
                 

Additional Paid-in Capital

               

Balance at February 28 or 29:

    7,971,712       7,459,931  

Issuance of common stock

    34,643       -  

Equity compensation, restricted stock units

    111,469       143,677  

Balance at May 31:

    8,117,824       7,603,608  
                 

Retained Earnings

               

Balance at February 28 or 29:

    10,989,783       11,889,560  

Consolidated net income (loss)

    579,805       (3,667,397 )

Balance at May 31:

    11,569,588       8,222,163  
                 

Total Stockholders' Equity

  $ 19,693,531     $ 15,831,832  
                 

Common Shares

               

Balance at February 28 or 29:

    6,074,293       6,019,532  

Issuance of common stock

    7,000       -  

Equity compensation, restricted stock units

    37,702       41,131  

Balance at May 31:

    6,118,995       6,060,663  

 

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

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Nature of Operations

 

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

 

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

 

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

 

The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.

 

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

 

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

 

   

Sold, Not Yet

Open

   

Open

   

Total

 

Rocky Mountain Chocolate Factory

                       

Company-owned stores

    -       2       2  

Franchise stores - Domestic stores and kiosks

    4       158       162  

International license stores

    1       5       6  

Cold Stone Creamery - co-branded

    5       95       100  

U-Swirl (Including all associated brands)

                    -  

Company-owned stores - co-branded

    -       3       3  

Franchise stores - Domestic stores

    -       63       63  

Franchise stores - Domestic - co-branded

    1       6       7  

International license stores

    -       1       1  

Total

    11       333       344  

 

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

 

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

 

 

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

 

Basis of Presentation

 

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

 

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2021, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2021. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Subsequent Events

 

Management evaluated all activity of the Company through the issue date of the financial statements and concluded that no subsequent events have occurred that would require recognition or disclosure in the financial statements.

 

COVID-19 Update

 

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

 

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

 

Recent Accounting Pronouncements

 

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

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2023 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.

 

 

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

 

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

 

 

NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION

 

   

Three Months Ended

 
   

May 31,

 

Cash paid (received) for:

 

2021

   

2020

 

Interest

  $ -     $ 13,362  

Income taxes

    (49,952 )     (340 )

Non-cash Operating Activities

               

Accrued Inventory

    130,816       158,834  

 

 

NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

The Company recognizes revenue from contracts with its customer in accordance with ASC 606, which provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This new standard does not impact the Company's recognition of revenue from sales of confectionery items to the Company’s franchisees and others, or in its Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percentage of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement. The Company generally receives a fee associated with the Franchise Agreement or License Agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These Customer Contracts have a term of up to 20 years, however the majority of Customer Contracts have a term of 10 years. During the term of the Customer Contract the Company is obligated to many performance obligations that the Company has not determined are distinct. The resulting treatment of revenue from Customer Contracts is that the revenue is recognized proportionately over the life of the Customer Contract.

 

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

 

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

 

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

 

   

Three Months Ended

 
   

May 31:

 
   

2021

   

2020

 

Contract liabilities at the beginning of the year:

  $ 1,119,646     $ 1,155,809  

Revenue recognized

    (56,213 )     (55,016 )

Contract fees received

    50,000       27,500  

Amortized gain on the financed sale of equipment

    (3,133 )     (1,043 )

Contract liabilities at the end of the period:

  $ 1,110,300     $ 1,127,250  

 

On May 31, 2021, annual revenue expected to be recognized in the future, related to performance obligations that are not yet fully satisfied, are estimated to be the following:

 

FYE 22

  $ 147,079  

FYE 23

    187,974  

FYE 24

    155,606  

FYE 25

    140,530  

FYE 26

    128,239  

Thereafter

    350,872  

Total

  $ 1,110,300  

 

 

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

 

Gift Cards

 

The Company’s franchisees sell gift cards which do not have either expiration dates, or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.

 

 

NOTE 4 – DISAGGREGATION OF REVENUE         

 

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

 

Three Months Ended May 31, 2021

 

Revenues recognized over time under ASC 606:

 

   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 
                                         

Franchise fees

  $ 41,245     $ -     $ -     $ 14,968     $ 56,213  

 

Revenues recognized at a point in time:

   

 

   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 

Factory sales

    -       5,040,723       -       -       5,040,723  

Retail sales

    -       -       282,978       506,497       789,475  

Royalty and marketing fees

    1,392,482       -       -       314,818       1,707,300  

Total

  $ 1,433,727     $ 5,040,723     $ 282,978     $ 836,283     $ 7,593,711  

 

Three Months Ended May 31, 2020

 

Revenues recognized over time under ASC 606:

 

   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 
                                         

Franchise fees

  $ 41,702     $ -     $ -     $ 13,314     $ 55,016  

 

Revenues recognized at a point in time:

   

 

   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 

Factory sales

    -       2,134,615       -       -       2,134,615  

Retail sales

    -       -       59,981       127,615       187,596  

Royalty and marketing fees

    212,092       -       -       113,118       325,210  

Total

  $ 253,794     $ 2,134,615     $ 59,981     $ 254,047     $ 2,702,437  

 

 

 

NOTE 5 – INVENTORIES

 

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

 

   

May 31, 2021

   

February 28, 2021

 

Ingredients and supplies

  $ 2,541,283     $ 2,464,123  

Finished candy

    2,168,502       1,888,818  

U-Swirl food and packaging

    47,129       39,518  

Reserve for slow moving inventory

    (357,884 )     (329,574 )

Total inventories

  $ 4,399,030     $ 4,062,885  

 

 

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

 

 

NOTE 6 - PROPERTY AND EQUIPMENT, NET

 

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

 

   

May 31, 2021

   

February 28, 2021

 

Land

  $ 513,618     $ 513,618  

Building

    5,167,023       4,827,807  

Machinery and equipment

    10,241,098       10,129,508  

Furniture and fixtures

    797,698       797,303  

Leasehold improvements

    985,407       985,407  

Transportation equipment

    516,278       429,789  
      18,221,122       17,683,432  
                 

Less accumulated depreciation

    (12,627,669 )     (12,531,417 )

Property and equipment, net

  $ 5,593,453     $ 5,152,015  

 

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

 

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

 

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

 

             

May 31, 2021

   

February 28, 2021

 
   

Amortization

Period (in years)

   

Gross Carrying

Value

   

Accumulated

Amortization

   

Gross Carrying

Value

   

Accumulated

Amortization

 

Intangible assets subject to amortization

                                         

Store design

    10       $ 394,826     $ 226,230     $ 394,826     $ 221,504  

Packaging licenses

   3 - 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       556,339       339,905       556,339       333,715  

Franchise rights

    20         5,979,637       3,570,296       5,979,637       3,459,873  

Total

              7,482,605       4,688,234       7,482,605       4,566,895  

Intangible assets not subject to amortization

                                   

Franchising segment-

                                         

Company stores goodwill

            $ 515,065             $ 515,065          

Franchising goodwill

              97,318               97,318          

Manufacturing segment-goodwill

              97,318               97,318          

Trademark

              20,000               20,000          

Total goodwill

              729,701               729,701          
                                           

Total Intangible Assets

            $ 8,212,306     $ 4,688,234     $ 8,212,306     $ 4,566,895  

 

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

 

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

 

FYE 22

  $ 362,619  

FYE 23

    409,393  

FYE 24

    346,672  

FYE 25

    294,427  

FYE 26

    251,342  

Thereafter

    1,129,918  

Total

  $ 2,794,371  

 

 

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

 

 

NOTE 8 – IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS

 

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

 

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

 

 

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

 

Forecasted future royalty revenue, marketing revenue and associated expenses.

 

Projected rate of royalty savings on trademarks.

 

Our cost of capital.

 

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

 

Company store goodwill impairment

  $ 317,243  

Trademark intangible asset impairment

    159,000  

Company-owned store impairment of long-lived assets and inventory

    68,558  
         

Total

  $ 544,801  

 

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

 

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

 

 

NOTE 9 – NOTES PAYABLE

 

Paycheck Protection Program

 

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

 

Revolving Credit Line

 

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

 

 

NOTE 10 - STOCKHOLDERS’ EQUITY

 

Cash Dividend

 

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

 

 

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

 

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

 

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

 

Stock Repurchases

 

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

 

Warrants

 

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

 

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

 

Stock-Based Compensation

 

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

 

The Company recognized $146,157 of stock-based compensation expense during the three months ended May 31, 2021 compared with $143,718 during the three months ended May 31, 2020. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.

 

The following table summarizes non-vested restricted stock unit transactions for common stock during the three months ended May 31, 2021 and 2020:

 

   

Three Months Ended

 
   

May 31,

 
   

2021

   

2020

 

Outstanding non-vested restricted stock units as of February 28 or 29:

    209,450       265,555  

Granted

    -       -  

Vested

    (37,702 )     (41,131 )

Cancelled/forfeited

    (900 )     -  

Outstanding non-vested restricted stock units as of May 31:

    170,848       224,424  
                 

Weighted average grant date fair value

  $ 9.40     $ 9.39  

Weighted average remaining vesting period (in years)

    3.41       4.33  

 

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

 

 

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

 

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

 

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

 

 

 

NOTE 11 - EARNINGS PER SHARE

 

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

 

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

 

 

NOTE 12 – LEASING ARRANGEMENTS

 

The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.

 

The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing locations are leased by the franchisee directly. Currently, there are not indications that the Company will be required to make any payments on behalf of franchisees.

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

FYE 22

  $ 551,974  

FYE 23

    536,712  

FYE 24

    417,930  

FYE 25

    268,966  

FYE 26

    171,324  

Thereafter

    521,138  

Total

  $ 2,468,044  
         

Less: imputed interest

    (217,306 )

Present value of lease liabilities:

  $ 2,250,738  
         

Weighted average lease term

    6.6  

 

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

 

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

Purchase contracts

 

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

 

 

NOTE 14 - OPERATING SEGMENTS

 

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

 

Three Months Ended May 31, 2021

 

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Other

   

Total

 

Total revenues

  $ 1,435,366     $ 5,285,106     $ 282,978     $ 836,283     $ -     $ 7,839,733  

Intersegment revenues

    (1,639 )     (244,383 )     -       -       -       (246,022 )

Revenue from external customers

    1,433,727       5,040,723       282,978       836,283       -       7,593,711  

Segment profit (loss)

    644,866       668,024       18,265       145,542       (659,099 )     817,598  

Total assets

    1,430,823       10,075,833       638,670       5,379,850       8,277,451       25,802,627  

Capital expenditures

    1,182       432,411       1,068       1,399       21,375       457,435  

Total depreciation & amortization

  $ 9,498     $ 153,620     $ 1,401     $ 116,730     $ 18,665     $ 299,914  

 

Three Months Ended May 31, 2020

 

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Other

   

Total

 

Total revenues

  $ 254,477     $ 2,293,093     $ 59,981     $ 254,047     $ -     $ 2,861,598  

Intersegment revenues

    (683 )     (158,478 )     -       -       -       (159,161 )

Revenue from external customers

    253,794       2,134,615       59,981       254,047       -       2,702,437  

Segment profit (loss)

    (451,319 )     (783,469 )     (477,825 )     (457,718 )     (2,676,394 )     (4,846,725 )

Total assets

    1,090,475       10,430,680       604,386       5,565,436       11,417,149       29,108,126  

Capital expenditures

    -       13,854       -       1,712       6,922       22,488  

Total depreciation & amortization

  $ 10,138     $ 161,830     $ 3,403     $ 146,949     $ 20,795     $ 343,115  

 

 

 
 

Item 2.

Managements 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: the impact of the novel coronavirus (COVID-19) on our business, including, among other things, online sales, factory sales, retail sales and royalty and marketing fees, our liquidity, our cost cutting and capital preservation measures, achievement of the anticipated potential benefits of the strategic alliance with Edible (as defined herein), our ability to provide products to Edible under the strategic alliance, the ability to increase our online sales through the agreements with Edible, the outcome of the legal proceedings initiated against Immaculate Confections, the operator of RMCF locations in Canada, 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 and licensees 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, licensing, 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 section entitled Risk Factors contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 28, 2021, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2021. Additional factors that might cause such differences include, but are not limited to: the length and severity of the current COVID-19 pandemic and its effect on among other things, factory sales, retail sales, royalty and marketing fees and operations, the effect of any governmental action or mandated employer-paid benefits in response to the COVID-19 pandemic, our ability to manage costs and reduce expenditures in the current economic environment and the availability of additional financing if and when required. 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 (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (RMCF)).

 

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 wholly-owned 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 confectionery products. We also sell our candy in select locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of May 31, 2021, there were two Company-owned, 95 licensee-owned and 163 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, South Korea, the republic of Panama, and the Philippines. As of May 31, 2021, U-Swirl operated three Company-owned cafés and 70 franchised cafés located in 22 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”.

 

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

 

 

COVID-19

 

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

 

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

 

Results of Operations

 

Three Months Ended May 31, 2021 Compared to the Three Months Ended May 31, 2020

 

Results Summary

 

Basic earnings per share increased from a net loss of $(0.61) per share for the three months ended May 31, 2020 to $0.09 per share for the three months ended May 31, 2021. Revenues increased 181% from $2.7 million for the three months ended May 31, 2020 to $7.6 million for the three months ended May 31, 2021. Operating income increased from an operating loss of $(4.83) million for the three months ended May 31, 2020 to operating income of $646,000 for the three months ended May 31, 2021. Net income increased from a loss of $(3.67) million for the three months ended May 31, 2020 to net income of $580,000 for the three months ended May 31, 2021. The increase in revenue, operating income and net income was due primarily to the impacts from the COVID-19 pandemic during the three months ended May 31, 2020, including its impact on our operation and the operations of our franchised, licensed and Company-owned locations. During the three months ended May 31, 2021 many of the disruptions experienced as a result of the COVID-19 pandemic were no longer impacting our network of franchised and licensed retail stores and many of our locations had returned to, or exceeded, pre-pandemic levels.

 

Revenues

 

   

Three Months Ended

                 
   

May 31,

    $    

%

 

($'s in thousands)

 

2021

   

2020

   

Change

   

Change

 

Factory sales

  $ 5,040.7     $ 2,134.6     $ 2,906.1       136.1 %

Retail sales

    789.5       187.6       601.9       320.8 %

Franchise fees

    56.2       55.0       1.2       2.2 %

Royalty and marketing fees

    1,707.3       325.2       1,382.1       425.0 %

Total

  $ 7,593.7     $ 2,702.4     $ 4,891.3       181.0 %

 

Factory Sales

 

The increase in factory sales for the three months ended May 31, 2021 compared to the three months ended May 31, 2020 was primarily due to a 281% increase in sales of product to our network of franchised and licensed retail stores partially offset by an 11.7% decrease in shipments of product to customers outside our network of franchised retail stores. Purchases by the Company’s largest customer, Edible Arrangements LLC (“Edible”), during the three months ended May 31, 2021 were approximately $484,000, or 6.4% of the Company’s revenues, compared to $335,000, or 12.4% of the Company’s revenues during the three months ended May 31, 2020. The increase in sales of product to our network of franchised and licensed retail stores was primarily the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended May 31, 2020, which significantly reduced traffic in our stores. During the three months ended May 31, 2021 many of the disruptions experienced as a result of the COVID-19 pandemic were no longer impacting our network of franchised and licensed retail stores and many of our locations had returned to, or exceeded, pre-pandemic levels. During the three months ended May 31, 2021, certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable.  There can be no assurance historical revenue levels will be indicative of future revenues. Same store pounds purchased by domestic franchise and licensed locations increased 11.3% during the three months ended May 31, 2021 when compared to the three months ended May 31, 2019 (the most recent comparable period prior to the business disruptions of COVID-19).

 

 

Retail Sales

 

Retail sales at Company-owned stores increased 321% during the three months ended May 31, 2021 compared to the three months ended May 31, 2020 as a result of all of our Company-owned stores being open during the three months ended May 31, 2021 compared to the closure of all of our Company-owned stores for much of the three months ended May 31, 2020. The closure of our Company-owned stores in the prior year period was the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended May 31, 2020. As of May 31, 2021 all Company-owned stores had resumed operations following COVID-19 related closure.

 

Royalty, Marketing Fees and Franchise Fees

 

The increase in royalty and marketing fees for the three months ended May 31, 2021 compared to the three months ended May 31, 2020 was primarily due to the majority of our franchise locations having resumed normal operations during the three months ended May 31, 2021, due to the relaxing of restrictions related to the COVID-19 pandemic and the associated public health measures in place during the three months ended May 31, 2020 as well as the rollout of vaccines. Nearly all of our franchised locations experienced reduced operations and periods of full closure during the three months ended May 31, 2020. Same store sales at domestic franchise locations increased 14.0% during the three months ended May 31, 2021 when compared to the three months ended May 31, 2019 (the most recent comparable period prior to the business disruptions of COVID-19).

 

Franchise fees were approximately unchanged during the three months ended May 31, 2021 compared to the three months ended May 31, 2020.

 

Costs and Expenses

 

Cost of Sales

 

   

Three Months Ended

                 
   

May 31,

    $    

%

 

($'s in thousands)

 

2021

   

2020

   

Change

   

Change

 
                                 

Cost of sales - factory

  $ 4,290.0     $ 2,790.6     $ 1,499.4       53.7 %

Cost of sales - retail

    256.6       92.6       164.0       177.1 %

Franchise costs

    551.7       421.2       130.5       31.0 %

Sales and marketing

    412.7       474.1       (61.4 )     (13.0 )%

General and administrative

    844.8       3,179.5       (2,334.7 )     (73.4 )%

Retail operating

    444.1       319.2       124.9       39.1 %

Total

  $ 6,799.9     $ 7,277.2     $ (477.3 )     (6.6 )%

 

Gross Margin

 

   

Three Months Ended

                 
   

May 31,

    $    

%

 

($'s in thousands)

 

2021

   

2020

   

Change

   

Change

 
                                 

Factory gross margin

  $ 750.7     $ (656.0 )   $ 1,406.7       (214.4 )%

Retail gross margin

    532.9       95.0       437.9       460.9 %

Total

  $ 1,283.6     $ (561.0 )   $ 1,844.6       (328.8 )%

 

 

   

Three Months Ended

                 
   

May 31,

   

%

   

%

 
   

2021

   

2020

   

Change

   

Change

 

(Percent)

                               

Factory gross margin

    14.9 %     -30.7 %     45.6 %     (148.5 )%

Retail gross margin

    67.5 %     50.6 %     16.9 %     33.4 %

Total

    22.0 %     -24.2 %     46.2 %     (190.9 )%

 

Adjusted Gross Margin

 

   

Three Months Ended

                 
   

May 31,

    $    

%

 

($'s in thousands)

 

2021

   

2020

   

Change

   

Change

 
                                 

Factory gross margin

  $ 750.7     $ (656.0 )   $ 1,406.7       (214.4 )%

Plus: depreciation and amortization

    151.9       157.5       (5.6 )     (3.6 )%

Factory adjusted gross margin

    902.6       (498.5 )     1,401.1       (281.1 )%

Retail gross margin

    532.9       95.0       437.9       460.9 %

Total Adjusted Gross Margin

  $ 1,435.5     $ (403.5 )   $ 1,839.0       (455.8 )%
                                 

Factory adjusted gross margin

    17.9 %     -23.4 %     41.3 %     (176.5 )%

Retail gross margin

    67.5 %     50.6 %     16.9 %     33.4 %

Total Adjusted Gross Margin

    24.6 %     -17.4 %     42.0 %     (241.4 )%

 

Adjusted gross margin and factory adjusted gross margin are non-GAAP 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 them 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 gross margins increased to 14.9% in the three months ended May 31, 2021 compared to negative gross margin of (30.7)% during the three months ended May 31, 2020, due primarily to lower production volume in the three months ended May 31, 2020 compared to the three months ended May 31, 2021. During the three months ended May 31, 2021, production volume increased 129% in response to a 136% increase in factory sales, primarily due to a resumption of normal factory operations during the three months ended May 31, 2021 compared to significantly reduced operations during the three months ended May 31, 2020. Operations during the three months ended May 31, 2020 were lower than historical levels as a result of the impacts of the COVID-19 pandemic. As a result of the decrease in production volume, factory fixed costs, including idle labor, exceeded revenue during the three months ended May 31, 2020. During the three months ended May 31, 2020 the Company incurred approximately $280,000 of production labor costs associated with paying employees who abided by local stay at home orders related to COVID-19 public health measures. This excess capacity cost, in the form of idle labor, was included in cost of sales.

 

Retail gross margins increased from 50.6% during the three months ended May 31, 2020 to 67.5% during the three months ended May 31, 2021. The increase in retail gross margins was primarily the result of the resumption of normal operations during the three months ended May 31, 2021 compared to the the temporary closure of all of our Company-owned stores for much of the three months ended May 31, 2020 due to the COVID-19 pandemic, and the associated impact on perishable inventory.

 

Franchise Costs

 

The increase in franchise costs in the three months ended May 31, 2021 compared to the three months ended May 31, 2020 was due primarily to an increase in professional fees, the result of litigation with our licensee in Canada. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 31.3% in the three months ended May 31, 2021 from 110.8% in the three months ended May 31, 2020. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of higher royalty revenues during the three months ended May 31, 2021.

 

 

Sales and Marketing

 

The decrease in sales and marketing costs for the three months ended May 31, 2021 compared to the three months ended May 31, 2020 was primarily due to a decrease in online advertising cost.

 

General and Administrative

 

The decrease in general and administrative costs for the three months ended May 31, 2021 compared to the three months ended May 31, 2020 was due primarily to a decrease in bad debt expense, a decrease in the impairment of certain intangible assets, and lower professional fees. As a percentage of total revenues, general and administrative expenses decreased to 11.1% in the three months ended May 31, 2021 compared to 117.7% in the three months ended May 31, 2020. These costs during the three months ended May 31, 2020 were a direct result of public health measures in place due to responses to COVID-19 and the financial burden experienced by the majority of our network of franchised and licensed locations. See Note 8 to the financial statements for a summary of costs associated with the impairment of certain intangible assets during the three months ended May 31, 2020.

 

Retail Operating Expenses

 

The increase in retail operating expenses for the three months ended May 31, 2021 compared to the three months ended May 31, 2020 was a result of the re-opening of all of our Company-owned stores so that all stores were open during the three months ended May 31, 2021 compared to the closure of all of our Company-owned stores for much of the three months ended May 31, 2020. The closure of our Company-owned stores was the result of COVID-19 and the associated public health measures in place during the three months ended May 31, 2020.

 

Depreciation and Amortization

 

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $148,000 in the three months ended May 31, 2021, a decrease of 20.3% from $186,000 incurred in the three months ended May 31, 2020. This decrease was the result of a decrease in frozen yogurt cafés in operation and lower amortization of the associated franchise rights. See Note 7 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 decreased 3.6% from $157,500 in the three months ended May 31, 2020 to $151,900 in the three months ended May 31, 2021. This decrease was the result of certain production assets becoming fully depreciated.

 

Other Income (Expense)

 

Other income was $171,700 in the three months ended May 31, 2021 compared to other expense of $17,800 during the three months ended May 31, 2020. Net interest income was $4,600 in the three months ended May 31, 2021 compared to net interest expense of $17,800 during the three months ended May 31, 2020. This change was primarily the result of the Company’s increased debt as a result of measures taken during the three months ended May 31, 2020 to ensure adequate liquidity during the COVID-19 pandemic. During the three months ended May 31, 2020, the Company borrowed $3.4 million from its line of credit and borrowed $1.5 million of loans under the Paychecks Protection Program.

 

The Company recognized a gain on insurance recovery of $167,100 during the three months ended May 31, 2021, compared with no similar amounts recognized during the three months ended May 31, 2020.

 

Income Tax Expense

 

Our effective income tax rate was 29.1% for the three months ended May 31, 2021 and was 24.3% for the three months ended May 31, 2020. This increase was primarily the result of the impact of different values of vested restricted stock units for financial reporting purposes compared to how the same vested restricted stock units are valued for tax purposes.

 

Liquidity and Capital Resources

 

As discussed herein, during the three months ended May 31, 2020 we took several defensive measures to maximize liquidity in response to the COVID-19 pandemic, including the suspension of our cash dividend, reducing expenses, extending payment terms with vendors, reducing production volume and deferring discretionary capital expenditures. Based on these actions, we believe that cash flows from operations and our cash and cash equivalents on hand, will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months. Additional future financing may be necessary to fund our operations, and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, among other factors, could impact our business and liquidity.

 

 

As of May 31, 2021, working capital was $9.7 million, compared to $9.0 million as of February 28, 2021, an increase of $700,000. The increase in working capital was primarily due to improved operating results.

 

Cash and cash equivalent balances increased $200,000 from $5.6 million as of February 28, 2021 to $5.8 million as of May 31, 2021, primarily due to improved operating results. Our current ratio was 3.7 to 1 at May 31, 2021 compared to 3.4 to 1 at February 28, 2021. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

 

During the three months ended May 31, 2021, operating activities provided cash of $385,811, primarily the result of operating results and depreciation and amortization of $299,914, partially offset by an increase of inventory of $386,868. During the three months ended May 31, 2020, operating activities used cash of $1,598,042, primarily the result of operating results, the provision for loss on accounts and notes receivable of $1,468,815, asset impairment and store closure losses of $544,060, depreciation and amortization of $343,115, an increase in accounts payable of $680,748 and expense related to stock-based compensation of $143,718.

 

For the three months ended May 31, 2021, investing activities used cash of $229,465, primarily due to the purchases of property and equipment of $457,435 partially offset by proceeds from insurance recovery of $206,336. In comparison, investing activities used cash of $46,127 during the three months ended May 31, 2020, primarily due to the purchase of property and equipment and intangible assets of $63,952.

 

There were no cash flows from financing activities during the three months ended May 31, 2021. In comparison, financing activities provided cash of $4,236,021 during the three months ended May 31, 2020, primarily as a result of the use of the line of credit and receipt of loans under the Paycheck Protection Program, as described above. There was no amount outstanding related to our line of credit and loans under the Paycheck Protection Program as of May 31, 2021, the result of repayment and forgiveness, respectively.

 

Off-Balance Sheet Arrangements

 

Purchase obligations: As of May 31, 2021, we had purchase obligations of approximately $234,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.

 

Impact of Inflation

 

Inflationary factors such as increases in the costs of ingredients and labor directly affect our operations. Most of our leases provide for cost-of-living adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease costs for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.

 

Depreciation expense is based on the historical cost to us of fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.

 

Seasonality

 

We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of our products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that material information relating to us is made known to the officers who certify as to our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of May 31, 2021.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

Item 1A.

Risk Factors

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2021, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2021. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2021, as amended by Amendment No. 1 on Form 10-K/A.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

None.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

 

Item 6.

Exhibits

 

 

3.1

Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015).

 

 

3.2

Certificate of Designations of Series A Junior Participating Preferred Stock, Par Value $0.001 Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015).

 

 

3.3

Second Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on December 6, 2019).
 

 

 

31.1*

Certification Filed Pursuant To Section 302 Of The Sarbanes-Oxley Act of 2002.

 

 

32.1**

Certification Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002.

 

 

101.INS 

*XBRL Instance Document.

 

 

101.SCH

*XBRL Taxonomy Extension Schema Document.

 

 

101.CAL

*XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

101.DEF

*XBRL Taxonomy Extension Definition Linkbase Document.

 

 

101.LAB

*XBRL Taxonomy Extension Label Linkbase Document.

 

 

101.PRE

*XBRL Taxonomy Extension Presentation Linkbase Document.

 

____________________________

 

* Filed herewith.

** Furnished herewith.

 

 

Signature

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

(Registrant)

 

Date: July 15, 2021

/s/ Bryan J. Merryman

 

 

Bryan J. Merryman, Chief Executive Officer,

Chief Financial Officer, Treasurer and Director

 

 

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