UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or the quarterly period ended
OR
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:
(Exact Name of Registrant as Specified in its Charter)
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices, including zip code) |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 provided 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 July 11, 2024, the registrant had
Table of Contents
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3 |
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Item 1. |
3 |
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3 |
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4 |
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5 |
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Condensed Consolidated Statements of Changes in Stockholders' Equity |
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8 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
22 |
Item 3. |
28 |
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Item 4. |
28 |
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30 |
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Item 1. |
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Item 1A. |
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Item 2. |
30 |
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Item 3. |
30 |
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Item 4. |
31 |
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Item 5. |
31 |
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Item 6. |
32 |
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33 |
1
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains 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 (the "Securities Act"), 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. These statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as “will,” “intend,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “potential,” or similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future including statements expressing general views about future operating results are forward-looking statements. Management believes these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to: inflationary impacts, the outcome of legal proceedings, changes in the confectionery business environment, seasonality, consumer interest in our products, consumer and retail trends, costs and availability of raw materials, competition, and the success of our co-branding strategy and the effect of government regulations. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see Part II, Item 1A. “Risk Factors” and the risks described elsewhere in this Quarterly Report and the section entitled “Risk Factors” contained in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 29, 2024, filed with the Securities and Exchange Commission (“SEC”) on June 13, 2024, as updated by this Quarterly Report.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended May 31, |
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2024 |
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2023 |
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Revenues |
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Sales |
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$ |
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$ |
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Franchise and royalty fees |
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Total Revenue |
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Costs and Expenses |
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Cost of sales |
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Franchise costs |
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Sales and marketing |
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General and administrative |
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Retail operating |
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Depreciation and amortization, exclusive of depreciation |
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Total costs and expenses |
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Loss from Operations |
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Other Income (Expense) |
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Interest expense |
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( |
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( |
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Interest income |
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Other income (expense), net |
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( |
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Loss Before Income Taxes |
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( |
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( |
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Income Tax Provision (Benefit) |
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Loss from Continuing Operations |
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( |
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Earnings from discontinued operations, net of tax |
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Net Loss |
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$ |
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$ |
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Basic Loss per Common Share |
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Loss from continuing operations |
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$ |
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$ |
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Earnings from discontinued operations |
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Net loss |
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$ |
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$ |
( |
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Diluted Loss per Common Share |
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Loss from continuing operations |
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$ |
( |
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$ |
( |
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Earnings from discontinued operations |
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Net loss |
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$ |
( |
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$ |
( |
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Weighted Average Common Shares Outstanding - Basic |
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Dilutive Effect of Employee Stock Awards |
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Weighted Average Common Shares Outstanding - Diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
3
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
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May 31, 2024 |
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February 29, 2024 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, less allowance for credit losses |
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Notes receivable, current portion, less current portion of the |
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Refundable income taxes |
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Inventories |
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Other |
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Current assets held for sale |
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Total current assets |
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Property and Equipment, Net |
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Other Assets |
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Notes receivable, less current portion and allowance for credit losses |
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Goodwill |
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Intangible assets, net |
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Lease right of use asset |
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Other |
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Total other assets |
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Total Assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts payable |
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$ |
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$ |
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Line of credit |
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Accrued salaries and wages |
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Gift card liabilities |
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Other accrued expenses |
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Contract liabilities |
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Lease liability |
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Deposit Liability |
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Total current liabilities |
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Lease Liability, Less Current Portion |
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Contract Liabilities, Less Current Portion |
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Total Liabilities |
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Stockholders' Equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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( |
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Total stockholders' equity |
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Total Liabilities and Stockholders' Equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
4
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Three Months Ended |
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2024 |
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2023 |
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Cash Flows From Operating Activities |
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Net Loss |
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$ |
( |
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$ |
( |
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Less: Earnings from discontinued operations, net of tax |
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Loss from continuing operations |
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( |
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( |
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Adjustments to reconcile net loss to net cash |
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Depreciation and amortization |
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Provision for obsolete inventory |
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Loss (gain) on sale or disposal of property and equipment |
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( |
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Expense recorded for stock compensation |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
) |
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Refundable income taxes |
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( |
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Inventories |
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Other current assets |
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( |
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Accounts payable |
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( |
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( |
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Accrued liabilities |
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( |
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Contract liabilities |
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( |
) |
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( |
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Net cash used in operating activities |
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( |
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( |
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Net cash used in operating activities |
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( |
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Net cash used in operating activities |
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( |
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( |
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Cash Flows from Investing Activities |
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Addition to notes receivable |
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( |
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Proceeds received on notes receivable |
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Proceeds from the sale of assets |
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Purchases of property and equipment |
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( |
) |
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( |
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Net cash used in investing activities |
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( |
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( |
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Net cash provided by investing activities |
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Net cash provided by (used in) investing activities |
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( |
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Cash Flows from Financing Activities |
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Proceeds from line of credit |
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Net cash provided by financing |
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Net cash provided by financing activities |
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Net Increase (Decrease) in Cash and Cash Equivalents |
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( |
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Cash and Cash Equivalents, Beginning of Period |
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Cash and Cash Equivalents, End of Period |
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$ |
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$ |
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||
The accompanying notes are an integral part of these consolidated financial statements.
5
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except per-share amounts)
(Unaudited)
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Three Months Ended May 31, 2024 |
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Convertible Preferred Stock |
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Common Stock |
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Additional Paid-In |
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Retained |
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Total Stockholders' |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Equity |
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Balances as of February 29, 2024 |
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— |
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$ |
- |
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$ |
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$ |
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$ |
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$ |
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Equity compensation, restricted stock units, net of shares withheld |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balances as of May 31, 2024 |
|
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— |
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$ |
- |
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$ |
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$ |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
6
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity (Continued)
(In thousands, except per-share amounts)
(Unaudited)
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Three Months Ended May 31, 2023 |
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Convertible Preferred Stock |
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Common Stock |
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Additional Paid-In |
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Retained |
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Total Stockholders' |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Equity |
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Balances as of February 28, 2023 |
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— |
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$ |
- |
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$ |
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$ |
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$ |
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$ |
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Equity compensation, restricted stock units, net of shares withheld |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balances as of May 31, 2023 |
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— |
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$ |
- |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
7
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying condensed 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 (dissolved in November 2023), U-Swirl International, Inc. (dissolved in October 2023) (“U-Swirl”), and U-Swirl, Inc., a Nevada corporation (“SWRL”) (collectively, the “Company”, “we”, or “RMCF”).
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 (“Durango Products”). The Company also sells its candy in select locations outside of its system of retail stores.
On February 24, 2023, the Company entered into an agreement to sell its three Company-owned U-Swirl locations. Separately, on May 1, 2023, the Company entered into an agreement to sell its franchise rights and intangible assets related to U-Swirl and associated brands. As a result, the activities of the Company’s U-Swirl subsidiary that have historically been reported in the U-Swirl segment have been reported as discontinued operations. See Note 15 – Discontinued Operations in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Company's discontinued operations, including net sales, operating earnings and total assets by segment. The Company’s financial statements reflect continuing operations only, unless otherwise noted.
The Company’s revenues are currently derived from four 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; sales at Company-owned stores of chocolates and other confectionery products including gourmet caramel apples; and marketing fees.
The Company does not have a material amount of financial assets or liabilities that are required under accounting principles generally accepted in the United States of America (“GAAP”) to be measured on a recurring basis at fair value. The Company is not a party to any material derivative financial instruments. The Company does not have a material amount of non-financial assets or non-financial liabilities that are required under GAAP to be measured at fair value on a recurring basis. The Company has not elected to use the fair value measurement option, as permitted under GAAP, for any assets or liabilities for which fair value measurement is not presently required. The Company believes the fair values of cash equivalents, accounts and notes receivable, accounts payable and line of credit approximate their carrying amounts due to their short duration.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand at May 31, 2024:
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Stores |
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Opened |
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Closed |
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Sold |
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Stores |
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Rocky Mountain Chocolate Factory |
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Company-owned stores |
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Franchise stores - Domestic stores |
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( |
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International license stores |
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Cold Stone Creamery - co-branded |
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( |
) |
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U-Swirl - co-branded |
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Total |
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8
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Liquidity and Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. In accordance with ASC 205-40, Going Concern, the Company’s management has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying financial statements were issued. During the three months ended May 31, 2024, the Company incurred a net loss of $
The Company’s ability to continue as a going concern is dependent on its ability to continue to implement its business plan. The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or, amending its Credit Line facility. The Company is also exploring supplemental debt facilities for other operational activities. During the next twelve months the Company intends to sell its held for sale assets including an unused parcel of land near its headquarters and unused manufacturing equipment, cut overhead for manufacturing, and increase profits and gross margins through increasing chocolate price sales to its franchising system and Specialty Market customers. In addition, the Company intends to benefit from busy season of holiday product sales and add a chief financial officer to its management teams during the next twelve months. There are no assurances that the Company will be successful in implementing its business plan.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements, which include the accounts of the Company and its subsidiaries, 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 condensed consolidated financial statements have been prepared in accordance GAAP for interim financial reporting and Securities and Exchange Commission ("SEC") regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three months ended May 31, 2024 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 28, 2025. All intercompany balances and transactions have been eliminated in consolidation.
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 29, 2024, filed with the SEC on June 13, 2024. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.
9
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the estimate of the reserve for uncollectible accounts and the reserve for inventory obsolescence. The Company bases its estimates on historical experience and assumptions that the Company believes are reasonable. The Company assesses these estimates on a regular basis; however, actual results could materially differ from these estimates.
Assets Held for Sale
The Company classifies an asset as held for sale when management, having the authority to approve the action, commits to a plan to sell the asset, the sale is probable within one year and the asset is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the asset is marketed actively for sale at a price that is reasonable in relation to its current fair value and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures an asset that is classified as held for sale at the lower of its carrying amount or fair value less costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized until the date of sale. The Company assesses the fair value of an asset less costs to sell each reporting period it remains classified as held for sale and reports any subsequent changes as an adjustment to the carrying amount of the asset, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Assets are not depreciated or amortized while they are classified as held for sale.
In the first quarter of fiscal 2025, the Company commenced its plan to sell an unused parcel land in Durango, Colorado where the Company is headquartered. As of May 31, 2024, the land had a carrying value of approximately $
In the first quarter of fiscal 2025, the Company commenced its plan to sell a piece of factory machinery. As of May 31, 2024, the machinery had a carrying value of approximately $
New Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 enhances the disclosures required for operating segments in the Company’s annual and interim consolidated financial statements. The disclosures required under ASU 2023-07 are also required for public entities with a single reportable segment. The updates in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires disaggregated information about a reporting entity’s effective
10
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
tax rate reconciliation as well as information on income taxes paid. The updates in this ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
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.
On July 10, 2024, the Company sold its parcel of land in Durango, Colorado, which was classified as held for sale as of May 31, 2024 for a purchase price of approximately $
Accounts and Notes Receivable, Net
Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Notes receivable generally reflect the sale of assets. Accounts and notes receivables are stated at the net amount expected to be collected, using an estimate of current expected credit losses to determine the allowance for expected credit losses. The Company evaluates the collectability of its accounts and notes receivable and determines the appropriate allowance for expected credit losses based on a combination of factors, including the aging of the receivables and historical collection trends. When the Company is aware of a customer’s inability to meet its financial obligation, the Company may individually evaluate the related receivable to determine the allowance for expected credit losses. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due.
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
($'s in thousands) |
|
Three Months Ended |
|
|||||
Cash paid (received) for: |
|
2024 |
|
|
2023 |
|
||
Interest |
|
$ |
|
|
|
|||
Income taxes |
|
|
|
|
|
( |
) |
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
||
Sale of assets in exchange for note receivable |
|
$ |
|
|
$ |
|
||
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue from contracts with its customers in accordance with Accounting Standards Codification® (“ASC”) 606, which provides that revenues are recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. The Company generally receives a fee associated with the franchise agreement or license agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These Customer Contracts have a term of up to
11
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
The initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and are treated as a single performance obligation. Initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally
The following table summarizes contract liabilities as of May 31, 2024 and May 31, 2023:
|
|
Three Months Ended |
|
|||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
||
Contract liabilities at the beginning of the period: |
|
$ |
|
|
$ |
|
||
Revenue recognized |
|
|
( |
) |
|
|
( |
) |
Contract fees received |
|
|
|
|
|
|
||
Contract liabilities at the end of the period: |
|
$ |
|
|
$ |
|
||
At May 31, 2024, 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 (amounts in thousands):
|
$ |
|
||
|
|
|
||
|
|
|
||
|
|
|
||
|
|
|
||
|
|
|
||
Total |
|
$ |
|
Gift Cards
The Company’s franchisees sell gift cards, which do not have expiration dates or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. ASC 606 requires the use of the “proportionate” method for recognizing breakage. The Company recognizes breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
12
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Durango Product Sales of Confectionary Items, Retail Sales and Royalty and Marketing Fees
Confectionary items sold to the Company’s franchisees, others and its Company-owned stores’ sales are recognized at the time of the underlying sale, based on the terms of the sale and when ownership of the inventory is transferred, and are presented net of sales taxes and discounts. Royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales are recognized at the time the sales occur.
NOTE 4 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
Three Months Ended May 31, 2024
Revenues recognized over time:
($'s in thousands) |
|
Franchising |
|
|
Manufacturing |
|
Retail |
|
Total |
|
||
Franchise fees |
|
$ |
|
|
|
|
|
|
$ |
|
||
Revenues recognized at a point in time:
($'s in thousands) |
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Total |
|
||||
Durango Product sales |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Retail sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Royalty and marketing fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues recognized over time and point in time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Three Months Ended May 31, 2023
Revenues recognized over time:
($'s in thousands) |
|
Franchising |
|
|
Manufacturing |
|
Retail |
|
Total |
|
||
Franchise fees |
|
$ |
|
|
|
|
$ |
|
||||
Revenues recognized at a point in time:
($'s in thousands) |
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Total |
|
||||
Durango Product sales |
|
|
|
$ |
|
|
|
|
$ |
|
||||||
Retail sales |
|
|
|
|
|
|
|
|
|
|
||||||
Royalty and marketing fees |
|
|
|
|
|
|
|
|
|
|
||||||
Total revenues recognized over time and point in time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
13
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 5 - INVENTORIES
Inventories consist of the following at May 31, 2024 and February 29, 2024:
($'s in thousands) |
|
May 31, 2024 |
|
|
February 29, 2024 |
|
||
Ingredients and supplies |
|
$ |
|
|
$ |
|
||
Finished candy |
|
|
|
|
|
|
||
Reserve for slow moving inventory |
|
|
( |
) |
|
|
( |
) |
Total inventories |
|
$ |
|
|
$ |
|
||
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment at May 31, 2024 and February 29, 2024 consisted of the following:
($'s in thousands) |
|
May 31, 2024 |
|
|
February 29, 2024 |
|
||
Land |
|
$ |
|
|
$ |
|
||
Building |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Transportation equipment |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation expense related to property and equipment totaled $
14
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following at May 31, 2024 and February 29, 2024:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2024 |
|
|
February 29, 2024 |
|
|||||||||||||
($'s in thousands) |
|
Amortization Period (in Years) |
|
|
Gross |
|
|
Accumulated |
|
|
Gross |
|
|
Accumulated |
|
|||||||||||||
Intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Store design |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||||
Trademark/Non-competition agreements |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Goodwill and intangible assets not subject to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Retail |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|||||||
Franchising |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Trademark |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Goodwill and Intangible Assets |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||||
Amortization expense related to intangible assets totaled approximately $
At May 31, 2024, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following (amounts in thousands):
2025 |
|
$ |
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
NOTE 8 – NOTES PAYABLE AND REVOLVING CREDIT LINE
Revolving Credit Line
As of May 31, 2024, the Company had a $
15
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Financing Rate plus
As of May 31, 2024, the Company was not in compliance with the requirement under the Credit Agreement to maintain a ratio of total assets to total current liabilities of at least
NOTE 9 – STOCK COMPENSATION PLANS
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 $
The following table summarizes non-vested restricted stock unit transactions for common stock during the three months ended May 31, 2024:
|
|
Three Months Ended |
|
|
|
|
2024 |
|
|
Outstanding non-vested restricted stock units at beginning |
|
|
|
|
Granted |
|
|
|
|
Vested |
|
|
( |
) |
Cancelled/forfeited |
|
|
( |
) |
Outstanding non-vested restricted stock units as of |
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value |
|
$ |
|
|
Weighted average remaining vesting period (in years) |
|
|
|
|
The following table summarizes stock option activity during the three months ended May 31, 2024:
|
|
Three Months Ended |
|
|
|
|
2024 |
|
|
Outstanding stock options as of February 28 or 29: |
|
|
|
|
Granted |
|
|
|
|
Exercised |
|
|
|
|
Cancelled/forfeited |
|
|
( |
) |
Outstanding stock options as of May 31: |
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
$ |
|
|
Weighted average remaining contractual term (in years) |
|
|
|
|
16
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the three months ended May 31, 2024, the Company issued
NOTE 10 - EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through the settlement of restricted stock units. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.
The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include outstanding common shares issuable if their effect would be anti-dilutive. During the three months ended May 31, 2024,
NOTE 11 – LEASING ARRANGEMENTS
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.
The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing franchised locations are leased by the franchisee directly.
In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.
The Company also leases trucking equipment and warehouse space in support of its production operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.
The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. As of May 31, 2024 and 2023, lease expense recognized in the consolidated statements of operations was $
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
17
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
as of May 31, 2024.
FYE 25 |
|
$ |
|
|
FYE 26 |
|
|
|
|
FYE 27 |
|
|
|
|
FYE 28 |
|
|
|
|
FYE 29 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
Less: Imputed interest |
|
|
( |
) |
Present value of lease liabilities: |
|
$ |
|
|
The weighted average lease term at May 31, 2024 was
The Company did not have any leases categorized as finance leases as of May 31, 2024 or February 29, 2024.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Purchase contracts
The Company frequently enters into purchase contracts of between to
Litigation
From time to time, the Company is involved in litigation relating to claims arising out of its operations. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. At May 31, 2024, the Company was not a party to any legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition or operating results.
18
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 13 - OPERATING SEGMENTS
The Company classifies its business interests into
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
May 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
($'s in thousands) |
|
Franchising |
|
|
Manufacturing |
|
|
Retail |
|
|
Unallocated |
|
|
Total |
|
|||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Intersegment revenues |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Revenue from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Segment profit (loss) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total depreciation & amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|||||
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
May 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
($'s in thousands) |
|
Franchising |
|
|
|
Manufacturing |
|
|
|
Retail |
|
|
|
Unallocated |
|
|
Total |
|
||||||||
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
$ |
|
||||||||
Intersegment revenues |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|||||||
Revenue from external customers |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
||||||
Segment profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Total depreciation & amortization |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
$ |
|
||||||||
NOTE 14 - INCOME TAXES
The Company provides for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax basis of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward prior to its expiration, is more likely than not.
19
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Realization of the Company's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the appropriate tax jurisdictions, in future years, to obtain benefit from the reversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. A valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable based upon recent past financial performance, tax reporting positions, and expectations of future taxable income. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change.
NOTE 15 – DISCONTINUED OPERATIONS
On February 24, 2023 and May 1, 2023, the Company entered into agreements to sell: 1) all operating assets and inventory associated with the Company’s three U-Swirl Company-owned locations, and 2) all franchise rights and intangible assets associated with the franchise operations of U-Swirl, respectively. The May 1, 2023 sale was completed pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”), dated May 1, 2023, by and among the Company, as guarantor, U Swirl as seller, LLC (“Purchaser”), a related company of Fosters Freeze, Inc., a California corporation. Pursuant to the Asset Purchase Agreement, on the Closing Date, Purchaser paid to U-Swirl $
On October 31, 2023, the Company filed a certificate of dissolution with the Secretary of State of the State of Nevada with respect to U-Swirl. As a result, U-Swirl is effectively fully dissolved and no longer in legal existence.
The following table discloses the results of operations of the businesses reported as discontinued operations for the three months ended May 31, 2024 and 2023:
|
|
For the Three Months |
|
|||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
||
Total Revenue |
|
$ |
|
|
$ |
|
||
Cost of sales |
|
|
|
|
|
|||
Operating Expenses |
|
|
|
|
|
|
||
|
|
|
|
|
( |
) |
||
Other expense, net |
|
|
|
|
|
|||
Earnings from discontinued operations before |
|
|
|
|
|
|
||
Income tax provision |
|
|
|
|
|
|||
Earnings from discontinued operations, net of tax |
|
$ |
|
|
$ |
|
||
There were
20
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the gain recognized during the three months ended May 31, 2023 related to the sale of assets on May 1, 2023, as described above (amounts in thousands):
Cash proceeds from the sale of assets |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Notes receivable |
|
|
|
|
|
|
|
|
|
Total consideration received |
|
|
|
|
|
|
|
|
|
Assets and liabilities transferred |
|
|
|
|
Franchise rights |
|
|
|
|
Inventory |
|
|
|
|
Liabilities |
|
|
( |
) |
|
|
|
|
|
Net assets transferred |
|
|
|
|
|
|
|
|
|
Costs associated with the sale of assets |
|
|
|
|
|
|
|
|
|
|
$ |
|
||
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations is qualified by reference and should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on 10-K, filed with the SEC on June 13, 2024, for the fiscal year ended February 29, 2024.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, the following discussion contains certain forward-looking information. See "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report for certain information concerning forward-looking statements.
Overview
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”) (referred to as the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery producer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolate products and other confectionery products (“Durango Products”). Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionery products including gourmet caramel apples. We also sell our confectionery products 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, 2024, there was 2 Company-owned, 115 licensee-owned and 147 franchised Rocky Mountain Chocolate Factory stores operating in 36 states and the Philippines.
On May 1, 2023, subsequent to the end of ("fiscal year") FY 2023, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiary and frozen yogurt business, U-Swirl International, Inc. The aggregate sale price of U-Swirl was $2.75 million, consisting of (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year secured promissory note. The business divestiture of the U-Swirl segment was preceded by a separate sale of the Company’s three owned U-Swirl locations on February 24, 2023. The consolidated financial statements present the historical financial results of the former U-Swirl segment as discontinued operations for all periods presented. See Note 15 of the Notes to Consolidated Financial Statements included in Part I, Item 1 "Financial Statements", of this Quarterly Report for information on this divestiture.
With the sale of U-Swirl, we continue to focus on our confectionery franchise business to further enhance our competitive position and operating margin, simplify our business model, and deliver sustainable value to our stockholders.
Current Trends Affecting Our Business and Outlook
As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs. We have seen labor and logistics challenges, which have contributed to lower factory, retail and e-commerce sales of our products due to the availability of material, labor and freight. In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our production facility, or if we or our franchisees experience delays in stocking our products.
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in high traffic areas such as resorts or tourist locations, and the nature of the products we sell, which are highly seasonal. Historically, the strongest sales of our products have occurred during key holidays and summer vacation seasons. Additionally, 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.
22
The most important factors in continued growth in our earnings are our ability to increase the sales of premium chocolate products produced in our Durango production facility, the ability to produce more efficiently, supporting our franchisees in increasing the frequency and average value of customer transactions, ongoing online revenue growth, and franchise store growth.
Our ability to successfully achieve expansion of our franchise systems depends on many factors not within our control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion.
Efforts to reverse the decline in same store pounds purchased from our production facility by franchised stores and to increase total Durango production depend on many factors, including new store openings, competition, the receptivity of our franchise system to our product introductions and promotional programs.
Results of Continuing Operations
Three Months Ended May 31, 2024 Compared To the Three Months Ended May 31, 2023
Results Summary
Basic loss per share increased from a loss from continuing operations of $(0.24) per share for the three months ended May 31, 2023 to a loss from continuing operations of $(0.26) per share for the three months ended May 31, 2024. Revenues decreased by 0.5% from $6.4 million for the three months ended May 31, 2023 to $6.4 million for the three months ended May 31, 2024. Operating loss was $1.5 million for the three months ended May 31, 2023 compared to an operating loss of $1.6 million for the three months ended May 31, 2024. Loss from continuing operations increased from a loss of $1.5 million for the three months ended May 31, 2023 to a loss of $1.7 million for the three months ended May 31, 2024.
REVENUES
|
|
Three Months Ended |
|
|
$ |
|
|
% |
|
|||||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|
||||
Durango product and retail sales |
|
$ |
5,279 |
|
|
$ |
5,016 |
|
|
|
263 |
|
|
|
5.2 |
% |
Franchise fees |
|
|
70 |
|
|
|
45 |
|
|
|
25 |
|
|
|
55.6 |
% |
Royalty and marketing fees |
|
|
1,058 |
|
|
|
1,375 |
|
|
|
(317 |
) |
|
|
(23.1 |
)% |
Total |
|
$ |
6,407 |
|
|
$ |
6,436 |
|
|
$ |
(29 |
) |
|
|
(0.5 |
)% |
Durango Product and Retail Sales
The increase in Durango product and retail sales of 5.2%, or $0.3 million for the three months ended May 31, 2024 compared to the three months ended May 31, 2023 was primarily due to improved year over year franchisee demand and improved inventory management.
23
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees decreased $0.3 million during the three months ended May 31, 2024 compared to the three months ended May 31, 2023, primarily due to a decrease in stores year over year that are subject to royalty fees. The increase in franchise fee revenue of $25 thousand during the three months ended May 31, 2024 compared to the three months ended May 31, 2023 was primarily the result of store ownership transfer fees received.
COSTS AND EXPENSES
|
|
Three Months Ended |
|
|
$ |
|
|
% |
|
|||||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|
||||
Total cost of sales |
|
$ |
5,586 |
|
|
$ |
4,758 |
|
|
$ |
828 |
|
|
|
17.4 |
% |
Franchise costs |
|
|
541 |
|
|
|
680 |
|
|
|
(139 |
) |
|
|
(20.4 |
)% |
Sales and marketing |
|
|
430 |
|
|
|
473 |
|
|
|
(43 |
) |
|
|
(9.1 |
)% |
General and administrative |
|
|
1,239 |
|
|
|
1,932 |
|
|
|
(693 |
) |
|
|
(35.9 |
)% |
Retail operating |
|
|
199 |
|
|
|
103 |
|
|
|
96 |
|
|
|
93.2 |
% |
Depreciation and amortization, exclusive of depreciation and amortization expense of $196 and $171, respectively, included in cost of sales |
|
|
42 |
|
|
|
31 |
|
|
|
11 |
|
|
|
35.5 |
% |
Total |
|
$ |
8,037 |
|
|
$ |
7,977 |
|
|
$ |
60 |
|
|
|
0.8 |
% |
Gross Margin |
|
Three Months Ended |
|
|
$ |
|
|
% |
|
|||||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|
||||
Total gross margin |
|
|
(307 |
) |
|
|
258 |
|
|
|
(565 |
) |
|
|
(219.0 |
)% |
Gross margin percentage |
|
|
(5.8 |
)% |
|
|
5.1 |
% |
|
|
(11 |
)% |
|
|
(214.0 |
)% |
Adjusted Gross Margin |
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
(a non-GAAP measure) |
|
|
|
|
$ |
|
|
% |
|
|||||||
($'s in thousands) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|
||||
Total gross margin |
|
$ |
(307 |
) |
|
$ |
258 |
|
|
$ |
(565 |
) |
|
|
(219.2 |
)% |
Plus: depreciation and amortization |
|
|
196 |
|
|
|
171 |
|
|
|
25 |
|
|
|
14.6 |
% |
Total Adjusted Gross Margin (non-GAAP measure) |
|
$ |
(111 |
) |
|
$ |
429 |
|
|
$ |
(540 |
) |
|
|
(125.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Adjusted Gross Margin (non-GAAP measure) |
|
|
(2.1 |
)% |
|
|
8.5 |
% |
|
|
(11 |
)% |
|
|
(124.7 |
)% |
Non-GAAP Measures
In addition to the results provided in accordance with GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP. Adjusted gross margin is a non-GAAP measure. Adjusted gross margin is equal to the sum of our total gross margin plus depreciation and amortization calculated in accordance with GAAP. We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin, and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin is 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 rather than gross margin to make incremental pricing decisions. Adjusted gross margin has 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 as measures of performance only in conjunction with GAAP measures of performance such as gross margin.
24
Cost of Sales and Gross Margin
Total gross margin percentage decreased to (5.8)% for the three months ended May 31, 2024 compared to a gross margin of 5.1% during the three months ended May 31, 2023, due primarily to increased raw material and labor costs.
Franchise Costs
The decrease in franchise costs for the three months ended May 31, 2024 compared to the three months ended May 31, 2023 was due primarily to operational efficiencies, but we continue to build our franchise network as we focus on identifying new franchisees. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 48.0% for the three months ended May 31, 2024 from 47.9% for the three months ended May 31, 2023. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of higher royalty fees partially offset by higher costs.
Sales and Marketing
The decrease in sales and marketing costs during the three months ended May 31, 2024 compared to the three months ended May 31, 2023 was due primarily to operational efficiencies and cost cutting measures.
General and Administrative
The decrease in general and administrative costs during the three months ended May 31, 2024 compared to the three months ended May 31, 2023, was due primarily to a decrease in legal fees that were incurred in the prior year related to contested solicitation of proxies. As a percentage of total revenues, general and administrative expenses decreased to 19.3% during the three months ended May 31, 2024, compared to 30.0% during the three months ended May 31, 2023.
Retail Operating Expenses
Retail operating expenses increased 93.2% during the three months ended May 31, 2024 compared to the three months ended May 31, 2023. This increase is primarily the result of two retail stores in the current year with the addition of the Corpus Christi location.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales was $42 thousand during the three months ended May 31, 2024, an increase of 35.5% from $31 thousand during the three months ended May 31, 2023. Depreciation and amortization included in cost of sales increased 14.6% from $0.2 million during the three months ended May 31, 2023 to $0.2 million during the three months ended May 31, 2024. This increase was the result of investment in production equipment.
Other Income (Expense)
Other income (expense) was $(28) thousand during the three months ended May 31, 2024, compared to other income of $14 thousand during for the three months ended May 31, 2023. This represents interest income of $7 thousand for the three months ended May 31, 2024 compared to $20 thousand for the three months ended May 31, 2023, and interest expense of $35 thousand for the three months ended May 31, 2024 compared to $6 thousand during for the three months ended May 31, 2023.
Liquidity and Capital Resources
As of May 31, 2024, working capital was $0.8 million compared with $1.5 million as of February 29, 2024. The decrease in working capital was due primarily to a strategic reduction of inventory on hand, commensurate with the current product assortments actively marketed by us and our franchisees, and continued capital investment in the Durango production facility.
Cash and cash equivalent balances decreased from $2.1 million as of February 29, 2024 to $0.6 million as of May 31, 2024 primarily as a result of cash used by operating activities. Our current ratio was 1.10 to 1.0 on May 31, 2024
25
compared to 1.19 to 1.0 on February 29, 2024. 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, 2024, we had a consolidated net loss of $1.7 million. Operating activities used cash of $2.2 million, with the principal adjustment to reconcile net income to net cash used in operating activities being depreciation and amortization of $0.2 million. Changes in operating assets and liabilities resulted in a net cash outflow of $0.8 million from cash used in the normal course of business. During the three months ended May 31, 2023, we had a consolidated net loss of $0.8 million. Operating activities used cash of $0.4 million, with the principal adjustment to reconcile net income to net cash used in operating activities being depreciation and amortization of $0.2 million, and stock compensation expense of $0.2 million.
During the three months ended May 31, 2024, investing activities used cash of $(38) thousand, primarily due to the purchases of property and equipment of $0.4 million. In comparison, investing activities provided for cash of $0.9 million during the three months ended May 31, 2023, primarily due cash flows from discontinued operations of $1.4 million, partially offset by purchases of property and equipment of $0.6 million.
There were $0.8 million cash flows from financing activities during the three months ended May 31, 2024 compared to no cash flows from financing activities during the prior year. The Company drew down $0.8 million on its revolving line of credit during the three months ended May 31, 2024 as discussed further below.
The conditions above raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial statements. In addition, our independent registered public accounting firm, in their report on the Company’s February 29, 2024, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.
Revolving Line of Credit
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $2.0 million was available for borrowing (subject to certain borrowing-based limitations) as of May 31, 2024 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.71% at May 31, 2024 and 7.69% at February 29, 2024). Additionally, the Credit Line is subject to various financial ratio and leverage covenants. Per the Credit Agreement, the maturity date is September 30, 2024.
As of May 31, 2024 we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of May 31, 2024 was 1.10 to 1. The Company has requested a waiver from the Lender regarding its compliance with this covenant, however no assurance can be given that the Lender will issue a waiver. Except as described above, we were in compliance with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of May 31, 2024 and as of the date of this Quarterly Report, we did not have enough cash on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. Additionally, if the Lender exercises its option and demands repayment at some time in the future, we may not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement.
The Lender also retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek
26
alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities which could give us the ability to repay the Credit Line as needed.
27
Significant Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, “Nature of Operations and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and in the Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024 describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024.
Off Balance Sheet Arrangements
As of May 31, 2024, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
As of May 31, 2024, we had purchase obligations of approximately $0.3 million. 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 the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets and is therefore potentially less than it would be if it were based on the 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
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Disclosure Controls and Procedures — The Company maintains 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 the Company is made known to the officers who certify the Company’s 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 the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
28
information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management, under the supervision and with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the Company’s disclosure controls and procedures. Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of May 31, 2024.
Changes in Internal Control over Financial Reporting — There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarter ended May 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
We may, from time to time, become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially susceptible to litigation, such as asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, 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 29, 2024, filed with the SEC on June 13, 2024. Except as set forth below, 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 29, 2024.
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $2.0 million was available for borrowing (subject to certain borrowing-based limitations) as of May 31, 2024 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.71% at May 31, 2024 and 7.69% at February 29, 2024). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.
As of May 31, 2024, we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of May 31, 2024 was 1.10 to 1. In the past, we have requested, and the Lender has granted, waivers of our compliance with this requirement. There can be no assurance that the Lender will grant us a waiver for our current noncompliance or waivers for future noncompliance.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of the date of this Quarterly Report, we do not have enough cash on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the future, however, we may not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement which would have an adverse effect on our liquidity, financial condition and results of operations.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as we may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
During the three months ended May 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
On July 11, 2024, there were approximately 433 record holders of our common stock. This figure does not include an estimate of the number of beneficial holders whose shares are held of record by banks, broker or other nominees
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Item 6. Exhibits
Exhibit Number |
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Description |
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Incorporated by Reference or |
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10.1 |
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Exhibit 10.1 to the Current Report on Form 8-K filed on March 28, 2024 (File No. 001-36865 |
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10.2 |
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Exhibit 10.1 to the Current Report on Form 8-K filed on June 4, 2024 (File No. 001-36865) |
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31.1 |
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Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
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Filed herewith. |
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32.1 |
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Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 |
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Filed herewith. |
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101.INS |
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Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) (1) |
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Filed herewith. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
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Filed herewith. |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
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Filed herewith. |
* Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.
** Management contract or compensatory plan required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
(1) These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1937, as amended, or otherwise subject to liability under those sections.
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Signature
Pursuant to the requirements of Section 13 or 15(d) 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.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. (Registrant) |
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Date: July 15, 2024 |
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/s/ Jeffrey R. Geygan |
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JEFFREY R. GEYGAN |
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Interim Chief Executive Officer |
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