The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc.
, a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation) and Aspen Leaf Yogurt, LLC (“ALY”), its 39%-owned subsidiary, U-Swirl, Inc. (“SWRL”), and U-Swirl International, Inc. (“U-Swirl”), a wholly-owned subsidiary as of February 29, 2016 (collectively, the “Company”).
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.
Effective March 1, 2015, the Company was
reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03 per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001, of Newco. The new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), the Company
entered into two agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to SWRL, in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of February 29, 2016 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. As of February 28, 2017, the Company held a 39% interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving as the Company’s Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of s
elf-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc. becoming a wholly-owned subsidiary of the Company as of February 29, 2016. As of February 29, 2016 U-Swirl, Inc. had no assets.
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”.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2017:
|
|
Sold, Not Yet
Open
|
|
|
Open
|
|
|
Total
|
|
Rocky Mountain Chocolate Factory
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned stores
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
Franchise stores
– Domestic stores and kiosks
|
|
|
6
|
|
|
|
189
|
|
|
|
195
|
|
International
License Stores
|
|
|
-
|
|
|
|
94
|
|
|
|
94
|
|
Cold Stone Creamery
– co-branded
|
|
|
5
|
|
|
|
83
|
|
|
|
88
|
|
U-Swirl
cafés (Including all associated brands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
cafés
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Company-owned
cafés – co-branded
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
Franchise stores
– North American
cafés
|
|
|
*
|
|
|
|
129
|
|
|
|
129
|
|
Franchise stores
– North American – co-branded
|
|
|
*
|
|
|
|
16
|
|
|
|
16
|
|
International License
cafés
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
|
11
|
|
|
|
522
|
|
|
|
533
|
|
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Consolidation
M
anagement accounts for the activities of the Company and its subsidiaries, and
the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As described above, on January 14, 2013, the Company acquired a controlling interest in SWRL. Prior to January 14, 2013, the Company’s consolidated financial statements exclude the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets and liabilities of SWRL have been included in these consolidated financial statements.
The Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February 29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was
approximately $5.3 million at February 28, 2017.
Accounts
and Notes
Receivable
In the normal course of business,
we extend credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At February 28, 2017, the Company has $655,028 of notes receivable outstanding and an allowance for doubtful accounts of $48,647 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through September, 2022 and approximately $579,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or
net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company
’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.
Income Taxes
We provide 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 bases 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. Due to historical
U-Swirl losses, prior to FY 2016 we established a full valuation allowance on our deferred tax assets. During FY 2016 we took possession of the outstanding equity in U-Swirl International, Inc. As a result of our ownership increasing to 100%, we began filing consolidated income tax returns in FY 2017. Because of this change, we have recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 we further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The correction of this immaterial error to our balance sheet is further described in Note 17. The Company's temporary differences are listed in Note 6.
Gift
C
ard
B
reakage
The Company and our franchisees sell gift cards that are redeemable for product in our
stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on our gift cards, and we do not charge any service fees. While our franchisees continue to honor all gift cards presented for payment, we may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage estimates related to unredeemed gift cards. This breakage rate is based on a percentage of sales when the likelihood of the redemption of the gift card becomes remote.
When the Company has sufficient historical redemption patterns to calculate breakage estimates, the gift card breakage will be recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. As the Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage estimates, the Company did not recognize gift card breakage during the year ended February 28 or 29, 2017 or 2016. Accrued gift card liability was $2,921,585 and $2,835,943 at February 28 or 29, 2017 and 2016, respectively.
Goodwill
Goodwill arose from
three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated
through comparison of the fair value of each of our reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the Loan Agreement with SWRL. This was the result of SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016 U-Swirl had $1,930,529 of goodwill recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the financial statements.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise Rights
Franchise rights arose from the entry into
agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers
’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under the acquisition method, the purchase price of the acquisition is allocated to the underlying tangible and intangible assets acquired based on their respective fair values. Fair values are derived from various observable and unobservable inputs and assumptions. The Company utilizes third-party valuation specialists to assist in the allocation. Initial purchase price allocations are preliminary and are subject to revision within the measurement period, not to exceed one year from the date of acquisition. The costs of the business acquisitions are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Moreover, unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Sales
Sales of products to franchisees and other customers are recognized at the time of
delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company
’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
Franchise fee revenue is recognized upon
opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with Rocky Mountain Chocolate Factory franchise store openings in the third quarter of FY 2004, the Company modified its royalty structure. Under the current structure, the Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 the Company recognizes a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
In certain instances we are required to pay a portion of franchise fee revenue, or royalty
fees to parties we’ve contracted with to assist in developing and growing a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the ongoing royalty fees, or both. When such agreements exist, we report franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of the Company
’s Manufacturing segment represented approximately $4.1 million or 11% of the Company’s revenues during the year ended February 28, 2017. The Company’s future results may be adversely impacted by a change in the purchases of this customer.
Stock-Based Compensation
At February 2
8, 2017, the Company had stock-based compensation plans, which currently consists solely of the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $
584,893, $763,094, and $865,240 related equity-based compensation expense during the years ended February 28 or 29, 2017, 2016 and 2015, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
Tax benefits
or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the accompanying Statements of Cash Flows. The excess tax benefit or (expense) included in net cash provided by financing activities for the years ended February 28 or 29, 2017, 2016 and 2015 was $(34,128), $19,868 and $200,544, respectively.
During FY 201
7 and 2016, the Company granted no restricted stock units. There were no stock options granted to employees during FY 2017 or FY 2016. The restricted stock unit grants generally vest 17-20% annually over a period of five to six years. The Company recognized $564,473 of consolidated stock-based compensation expense related to these grants during FY 2017 compared with $602,554 in FY 2016. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 2017 was $1,179,492, which is expected to be recognized over the weighted average period of 2.2 years.
During FY
2017, the Company issued 2,000 fully-vested, unrestricted shares to non-employee directors compared with 4,000 fully-vested, unrestricted shares of stock to non-employee directors in FY 2016. In connection with these non-employee director stock issuances, the Company recognized $20,420 and $61,040 of stock-based compensation expense during FY 2017 and FY 2016, respectively.
Earnings
P
er Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options
and restricted stock units. During FY 2017, FY 2016 and FY 2015, 0, 12,936, and 12,936, respectively, of stock options were excluded from diluted shares as their effect was anti-dilutive.
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense
for RMCF amounted to $279,698, $215,314, and $244,946 for the fiscal years ended February 28 or 29, 2017, 2016 and 2015, respectively. Total advertising expense for U-Swirl and its brands amounted to $335,771, $460,034, and $399,414 for the fiscal years ended February 28 or 29, 2017, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The Company
’s financial instruments consist of cash and cash equivalents, trade receivables, payables, and notes receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit
’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduce the current diversity in practice. ASU No. 2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2018. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016- 13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation
— Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU No. 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2017. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the process of assessing the impact of the adoption of ASU No. 2016-09 on its consolidated financial statements. During the fiscal years ended February 28, 2017 and February 29, 2016 the Company would have realized additional expense of $34,000 and additional income of $20,000, respectively, if this guidance had been applied.
In February 2016,
the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. The Company expects that substantially all of its operating lease commitments (see note 5) will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016,
the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in Topic 605, Revenue Recognition. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early application of the guidance is permitted for annual reporting periods beginning after December 31, 2016. This guidance is applicable to the Company's fiscal year beginning March 1, 2018.
The Company expects the adoption of the new guidance to change the timing of recognition of initial franchise fees, including master license and territory fees for our international business, and renewal fees. Currently, these fees are generally recognized upfront upon either opening of the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognized over the term of the related agreement, which we expect will result in a material impact to revenue recognized for franchise fees, license fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
Inventories consist of
the following at February 28 or 29:
|
|
2017
|
|
|
2016
|
|
Ingredients and supplies
|
|
$
|
3,021,220
|
|
|
$
|
2,868,157
|
|
Finished candy
|
|
|
2,137,609
|
|
|
|
2,138,952
|
|
U-Swirl food and packaging
|
|
|
66,001
|
|
|
|
94,345
|
|
Reserve for slow moving inventory
|
|
|
(249,051
|
)
|
|
|
(261,346
|
)
|
Total inventories
|
|
$
|
4,975,779
|
|
|
$
|
4,840,108
|
|
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February
28 or 29:
|
|
201
7
|
|
|
201
6
|
|
Land
|
|
$
|
513,618
|
|
|
$
|
513,618
|
|
Building
|
|
|
4,787,855
|
|
|
|
4,784,272
|
|
Machinery and equipment
|
|
|
10,598,355
|
|
|
|
9,987,906
|
|
Furniture and fixtures
|
|
|
1,047,319
|
|
|
|
1,169,475
|
|
Leasehold improvements
|
|
|
1,531,112
|
|
|
|
1,862,603
|
|
Transportation equipment
|
|
|
418,402
|
|
|
|
438,601
|
|
Asset i
mpairment
|
|
|
(47,891
|
)
|
|
|
(568,803
|
)
|
|
|
|
18,848,770
|
|
|
|
18,187,672
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
12,390,839
|
|
|
|
12,177,369
|
|
Property and equipment, net
|
|
$
|
6,457,931
|
|
|
$
|
6,010,303
|
|
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 2
8, 2017, the Company had a $5 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (3.0% at February 28, 2017). At February 28, 2017, $5 million was available for borrowings under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2017, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2017 and we believe it is likely to be renewed on terms similar to current terms.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million
long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets, including the SWRL Loan Agreement. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. The Wells Fargo Loan Agreement also contains customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
Long-term debt consists of the following at February 28
or 29:
|
|
20
17
|
|
|
20
16
|
|
Note
payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by substantially all business assets.
|
|
$
|
3,831,741
|
|
|
$
|
5,085,133
|
|
Less current maturities
|
|
|
1,302,501
|
|
|
|
1,254,007
|
|
Long-term obligations
|
|
$
|
2,529,240
|
|
|
$
|
3,831,126
|
|
The following is a schedule by year of
maturities of long-term debt for the years ending February 28 or 29:
2018
|
|
$
|
1,302,501
|
|
2019
|
|
|
1,352,900
|
|
2020
|
|
|
1,176,340
|
|
Total
|
|
$
|
3,831,741
|
|
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5
– COMMITMENTS AND CONTINGENCIES
Operating
Leases
The Company conducts its retail operations in facilities leased under five to ten-year non
-cancelable operating leases. 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 following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018
|
|
$
|
603,000
|
|
2019
|
|
|
561,000
|
|
2020
|
|
|
272,000
|
|
2021
|
|
|
49,000
|
|
2022
|
|
|
49,000
|
|
Thereafter
|
|
|
194,000
|
|
Total
|
|
$
|
1,728,000
|
|
We act as primary lessee of some franchised store premises, which we then sublease to franchisees, but the majority of existing locations are leased by
the franchisee directly. Our current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we were the primary lessee at five of our 332 franchised stores and 1 former office space.
I
n 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's liability as primary lessee on sublet franchise outlets, all of which is fully offset by sublease rentals, is as follows for the years ending February 28 or 29:
2018
|
|
$
|
189,000
|
|
2019
|
|
|
90,000
|
|
2020
|
|
|
81,000
|
|
2021
|
|
|
83,000
|
|
2022
|
|
|
29,000
|
|
Total
|
|
$
|
472,000
|
|
The following is a schedule of lease expense for all retail operating leases for the three years ended
February 28 or 29:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Minimum rentals
|
|
$
|
944,938
|
|
|
$
|
1,187,003
|
|
|
$
|
1,282,363
|
|
Less sublease rentals
|
|
|
(318,000
|
)
|
|
|
(479,000
|
)
|
|
|
(468,000
|
)
|
Contingent rentals
|
|
|
25,200
|
|
|
|
22,200
|
|
|
|
22,200
|
|
|
|
$
|
652,138
|
|
|
$
|
730,203
|
|
|
$
|
836,563
|
|
In FY 2013, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule, by year, of future minimum rental payments required under such lease for the years ending February 28:
201
8
|
|
$
|
28,000
|
|
Total
|
|
$
|
28,000
|
|
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018
|
|
$
|
185,700
|
|
2019
|
|
|
84,300
|
|
2020
|
|
|
62,100
|
|
2021
|
|
|
62,100
|
|
2022
|
|
|
15,500
|
|
Total
|
|
$
|
409,700
|
|
The following is a schedule of lease expense for trucking equipment operating leases for the
three years ended February 28 or 29:
201
7
|
|
|
2016
|
|
|
2015
|
|
220,791
|
|
|
|
182,006
|
|
|
|
185,703
|
|
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 February 28, 2017 the Company was contracted for approximately $2,595,000 of raw materials under such agreements.
Contingencies
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 significant adverse effect on the Company
’s financial position, results of operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (collectively, the “CherryBerry Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB Shares, they must first offer such shares to SWRL and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on
February 28, 2017, the shortfall payment would have been approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL
’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint in the Colorado District Court, and thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry Selling Parties
’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion). On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May 9, 2016, the Oklahoma Court granted that application and we filed an answer to this action on June 6, 2016. All parties are currently involved in discovery proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this lawsuit.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income tax expense
(benefit) is comprised of the following for the years ended February 28 or 29:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,411,126
|
|
|
$
|
1,420,811
|
|
|
$
|
1,846,365
|
|
State
|
|
|
272,214
|
|
|
|
195,993
|
|
|
|
246,398
|
|
Total Current
|
|
|
1,683,340
|
|
|
|
1,616,804
|
|
|
|
2,092,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
240,234
|
|
|
|
(1,725,918
|
)
|
|
|
(50,603
|
)
|
State
|
|
|
22,015
|
|
|
|
(152,286
|
)
|
|
|
(4,465
|
)
|
Total Deferred
|
|
|
262,249
|
|
|
|
(1,878,204
|
)
|
|
|
(55,068
|
)
|
Total
|
|
$
|
1,945,589
|
|
|
$
|
(261,400
|
)
|
|
$
|
2,037,695
|
|
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years end
ed February 28 or 29:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
3.6
|
%
|
|
|
0.8
|
%
|
|
|
2.8
|
%
|
Domestic production deduction
|
|
|
(1.1
|
%)
|
|
|
(3.0
|
%)
|
|
|
(1.6
|
%)
|
Work opportunity tax credits
|
|
|
(0.4
|
%)
|
|
|
-
|
|
|
|
-
|
|
Statutory rate change
|
|
|
-
|
|
|
|
(1.6
|
%)
|
|
|
-
|
%
|
Other
|
|
|
0.0
|
%
|
|
|
0.5
|
%
|
|
|
0.1
|
%
|
U-Swirl loss carryforward recognized
|
|
|
-
|
|
|
|
(1.8
|
%)
|
|
|
(3.0
|
%)
|
Valuation allowance, U-Swirl Consolidated loss
|
|
|
-
|
|
|
|
(36.3
|
%)
|
|
|
3.0
|
%
|
Effective
rate – provision (benefit)
|
|
|
36.1
|
%
|
|
|
(7.4
|
%)
|
|
|
35.3
|
%
|
The components of deferred income taxes at February 28
or 29 are as follows:
Deferred Tax Assets
|
|
201
7
|
|
|
201
6
|
|
Allowance for doubtful accounts and notes
|
|
$
|
198,354
|
|
|
$
|
248,537
|
|
Inventories
|
|
|
90,027
|
|
|
|
96,698
|
|
Accrued compensation
|
|
|
188,002
|
|
|
|
183,898
|
|
Loss provisions and deferred income
|
|
|
1,175,351
|
|
|
|
1,299,191
|
|
Self-insurance accrual
|
|
|
37,000
|
|
|
|
28,923
|
|
Amortization
|
|
|
782,683
|
|
|
|
861,594
|
|
Restructuring charges
|
|
|
148,494
|
|
|
|
148,494
|
|
U-Swirl accumulated net loss
|
|
|
164,035
|
|
|
|
346,605
|
|
Valuation allowance
|
|
|
(148,494
|
)
|
|
|
(148,494
|
)
|
Net deferred tax assets
|
|
|
2,635,452
|
|
|
|
3,065,446
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(1,683,778
|
)
|
|
|
(1,537,653
|
)
|
Prepaid expenses
|
|
|
(92,800
|
)
|
|
|
(106,138
|
)
|
D
eferred tax liabilities
|
|
$
|
(1,776,578
|
)
|
|
$
|
(1,643,791
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
858,874
|
|
|
$
|
1,421,655
|
|
The following table summarizes deferred income tax valuation allowances as of February 28 or 29:
|
|
201
7
|
|
|
201
6
|
|
Valuation allowance at beginning of period
|
|
$
|
148,494
|
|
|
$
|
349,010
|
|
Tax expense (benefits) realized by valuation allowance
|
|
|
-
|
|
|
|
81,340
|
|
Tax benefits released from valuation allowance
|
|
|
-
|
|
|
|
(281,856
|
)
|
Valuation allowance at end of period
|
|
$
|
148,494
|
|
|
$
|
148,494
|
|
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
tax benefit realized for the year ended February 29, 2016, compared to the tax expense in the prior years, is primarily due to the tax consequences of a change in the controlling interest in U-Swirl and foreclosure upon the stock of U-Swirl International, Inc. In FY 2014 we did not realize a tax benefit from the SWRL taxable loss causing our effective rate to increase for the year. During FY 2015 the taxable loss at SWRL was lower, resulting in a decrease to our effective rate. During FY 2016 an income tax benefit of approximately $2,149,000 was recognized as a result of the company foreclosing upon the interest in U-Swirl and recognizing deferred tax assets and loss carry forwards that previously had full valuation allowances when RMCF had less than an 80% ownership interest. Resulting from this foreclosure, RMCF will consolidate U-Swirl International, Inc. resulting in realization of U-Swirl International, Inc. deferred tax assets that previously had a full valuation allowance when filed with SWRL income tax returns. U-Swirl International, Inc. and RMCF will file consolidated income tax returns beginning with FY 2017. SWRL will continue to file separate tax returns.
For the year ended February 29, 2016 and prior periods, the financial statements presented represent the consolidated statements of two separate consolidated groups for income tax purposes. RMCF has filed income tax returns consolidating the results of Rocky Mountain Chocolate Factory and its wholly owned subsidiary, Aspen Leaf Yogurt, LLC. U-Swirl Inc. has filed a separate consolidated income tax return for the results of U-Swirl, Inc. and its wholly owned subsidiary, U-Swirl International, Inc. RMCF and SWRL have filed separate income tax returns because RMCF owned only 39% of SWRL. Beginning on March 1, 2016 the results of U-Swirl International, Inc. will be included in RMCF
’s consolidated income tax return, and on the same date, will be removed from U-Swirl, Inc.’s consolidated tax return. This is a result of the foreclosure of RMCF on the outstanding stock of U-Swirl in satisfaction of debt between RMCF and SWRL. The consolidated tax return for RMCF for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before
FY 2012. The Company’s federal income tax returns have been examined for the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years.
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. Management believes that it is more likely than not that
RMCF will realize the benefits of its deferred tax assets as of February 28, 2017.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the
consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28 or 29, 2016 or 2015. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28 or 29, 2017 and 2016.
As of February 2
9, 2016 we had foreclosed on the outstanding equity of U-Swirl International, Inc. and U-Swirl International, Inc. was consolidated for income tax purposes. SWRL, along with U-Swirl International, Inc., has historically filed its own consolidated federal income tax return and reported its own Federal net operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets. This full valuation allowance was eliminated as of February 29, 2016, in recognition of the likelihood that the loss carry forwards would be realized as a result of RMCF and U-Swirl International, Inc. filing a consolidated income tax return.
In accordance with
Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl International, Inc.’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. We have performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest in January 2013. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl International Inc.’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
We estimate that the potential future tax deductions of
U-Swirl International, Inc.’s Federal net operating losses, limited by section 382, to be approximately $443,000 with a resulting deferred tax asset of approximately $164,000. U-Swirl International Inc.’s Federal net operating loss carryovers will expire at various dates beginning in 2026.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7
– STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid quarterly cash dividends of $0.12 per common share on March 11, 2016
, June 17, 2016, September 16, 2016 and December 9, 2016 to stockholders of record on February 26, 2016, June 7, 2016, September 6, 2016 and November 25, 2016, respectively. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 9, 2017 payable on March 10, 2017 to stockholders of record on February 24, 2017.
Future declaration
s 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 stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the nine months ended November 30, 2016, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the three months ended
February 28, 2017. As of February 28, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK
COMPENSATION PLANS
In
FY 2014, stockholders approved an amendment of the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards. The following table summarizes stock awards under the 2007 Plan as of February 28, 2017:
Original
share authorization:
|
|
|
300,000
|
|
Prior plan shares authorized and incorporated in the 2007 P
lan:
|
|
|
85,340
|
|
Additional shares authorized through 2007 Plan amendment:
|
|
|
300,000
|
|
Available for award
:
|
|
|
685,340
|
|
Cancelled/forfeited
:
|
|
|
194,325
|
|
Shares awarded as unrestricted shares, stock options or restricted stock units
:
|
|
|
(547,076
|
)
|
|
|
|
|
|
Shares available for award:
|
|
|
332,589
|
|
Information with respect to
stock option awards outstanding under the 2007 Plan at February 28, 2017, and changes for the three years then ended was as follows:
|
|
Twelve Months Ended
|
|
|
|
February 28
or 29:
|
|
|
|
2017
|
|
|
201
6
|
|
|
201
5
|
|
Outstanding stock options at beginning of year:
|
|
|
12,936
|
|
|
|
12,936
|
|
|
|
155,880
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(142,944
|
)
|
Cancelled/forfeited
|
|
|
(12,936
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding stock options as of February 28
or 29:
|
|
|
-
|
|
|
|
12,936
|
|
|
|
12,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price
|
|
|
n/a
|
|
|
$
|
12.94
|
|
|
$
|
12.94
|
|
Weighted average remaining contractual term (in years)
|
|
|
n/a
|
|
|
|
0.04
|
|
|
|
1.04
|
|
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to restricted stock unit awards outstanding under the
2007 Plan at February 28, 2017, and changes for the three years then ended was as follows:
|
|
Twelve Months Ended
|
|
|
|
February 28
or 29:
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
5
|
|
Outstanding non-vested restricted stock units at beginning of year:
|
|
|
181,742
|
|
|
|
237,641
|
|
|
|
295,040
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(48,084
|
)
|
|
|
(55,899
|
)
|
|
|
(56,199
|
)
|
Cancelled/forfeited
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
|
(1,200
|
)
|
Outstanding non-vested restricted stock units as of February 28
or 29:
|
|
|
123,658
|
|
|
|
181,742
|
|
|
|
237,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
12.21
|
|
|
$
|
12.22
|
|
|
$
|
12.13
|
|
Weighted average remaining vesting period (in years)
|
|
|
2.23
|
|
|
|
3.22
|
|
|
|
4.08
|
|
NOTE 9 - OPERATING SEGMENTS
The Company classifies its business interests into
five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. 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:
FY 2017
|
|
Franchising
|
|
|
Manufacturing
|
|
|
Retail
|
|
|
U-Swirl
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
5,951,055
|
|
|
$
|
26,678,514
|
|
|
$
|
1,710,734
|
|
|
$
|
5,216,076
|
|
|
$
|
-
|
|
|
$
|
39,556,379
|
|
Intersegment revenues
|
|
|
(5,332
|
)
|
|
|
(1,254,670
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,260,002
|
)
|
Revenue from external customers
|
|
|
5,945,723
|
|
|
|
25,423,844
|
|
|
|
1,710,734
|
|
|
|
5,216,076
|
|
|
|
-
|
|
|
|
38,296,377
|
|
Segment profit (loss)
|
|
|
2,495,709
|
|
|
|
5,609,957
|
|
|
|
128,024
|
|
|
|
1,017,395
|
|
|
|
(3,855,380
|
)
|
|
|
5,395,705
|
|
Total assets
|
|
|
1,216,241
|
|
|
|
12,900,070
|
|
|
|
1,101,461
|
|
|
|
9,124,822
|
|
|
|
5,075,762
|
|
|
|
29,418,356
|
|
Capital expenditures
|
|
|
15,480
|
|
|
|
966,619
|
|
|
|
17,047
|
|
|
|
40,924
|
|
|
|
198,402
|
|
|
|
1,238,472
|
|
Total depreciation & amortization
|
|
$
|
54,053
|
|
|
$
|
463,996
|
|
|
$
|
14,755
|
|
|
$
|
622,654
|
|
|
$
|
133,251
|
|
|
$
|
1,288,709
|
|
FY 2016
|
|
Franchising
|
|
|
Manufacturing
|
|
|
Retail
|
|
|
U-Swirl
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
5,947,769
|
|
|
$
|
27,726,443
|
|
|
$
|
1,622,906
|
|
|
$
|
6,535,646
|
|
|
$
|
-
|
|
|
$
|
41,832,764
|
|
Intersegment revenues
|
|
|
(5,185
|
)
|
|
|
(1,370,684
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,375,869
|
)
|
Revenue from external customers
|
|
|
5,942,584
|
|
|
|
26,355,759
|
|
|
|
1,622,906
|
|
|
|
6,535,646
|
|
|
|
-
|
|
|
|
40,456,895
|
|
Segment profit (loss)
|
|
|
2,608,351
|
|
|
|
6,731,221
|
|
|
|
(2,591
|
)
|
|
|
(2,128,649
|
)
|
|
|
(3,663,201
|
)
|
|
|
3,545,131
|
|
Total assets
|
|
|
1,205,616
|
|
|
|
11,980,933
|
|
|
|
1,008,783
|
|
|
|
10,126,209
|
|
|
|
5,994,184
|
|
|
|
30,315,725
|
|
Capital expenditures
|
|
|
76,762
|
|
|
|
432,473
|
|
|
|
3,306
|
|
|
|
66,476
|
|
|
|
164,234
|
|
|
|
743,251
|
|
Total depreciation & amortization
|
|
$
|
36,908
|
|
|
$
|
406,082
|
|
|
$
|
18,236
|
|
|
$
|
802,953
|
|
|
$
|
156,122
|
|
|
$
|
1,420,301
|
|
FY
2015
|
|
Franchising
|
|
|
Manufacturing
|
|
|
Retail
|
|
|
U-Swirl
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
5,976,964
|
|
|
$
|
27,459,828
|
|
|
$
|
2,134,976
|
|
|
$
|
7,501,943
|
|
|
$
|
-
|
|
|
$
|
43,073,711
|
|
Intersegment revenues
|
|
|
(342
|
)
|
|
|
(1,564,993
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,565,335
|
)
|
Revenue from external customers
|
|
|
5,976,622
|
|
|
|
25,894,835
|
|
|
|
2,134,976
|
|
|
|
7,501,943
|
|
|
|
-
|
|
|
|
41,508,376
|
|
Segment profit (loss)
|
|
|
2,783,734
|
|
|
|
6,993,693
|
|
|
|
(51,803
|
)
|
|
|
(245,546
|
)
|
|
|
(3,699,637
|
)
|
|
|
5,780,441
|
|
Total assets
|
|
|
1,193,407
|
|
|
|
12,155,004
|
|
|
|
1,157,674
|
|
|
|
12,424,801
|
|
|
|
7,207,327
|
|
|
|
34,138,213
|
|
Capital expenditures
|
|
|
28,806
|
|
|
|
378,060
|
|
|
|
41,361
|
|
|
|
61,053
|
|
|
|
117,464
|
|
|
|
626,744
|
|
Total depreciation & amortization
|
|
$
|
41,228
|
|
|
$
|
395,864
|
|
|
$
|
35,531
|
|
|
$
|
813,172
|
|
|
$
|
154,653
|
|
|
$
|
1,440,448
|
|
Revenue from one customer of the Company
’s Manufacturing segment represented approximately $4.1 million, or 10.6 percent, of the Company’s revenues from external customers during the year ended February 28, 2017, compared to $5.2 million, or 12.8 percent of the Company’s revenues from external customers during the year ended February 29, 2016.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For th
e three years ended February 28 or 29:
Cash paid (received) for:
|
|
201
7
|
|
|
201
6
|
|
|
201
5
|
|
Income taxes paid
|
|
$
|
1,997,751
|
|
|
$
|
1,383,805
|
|
|
$
|
1,896,274
|
|
Interest
|
|
|
129,927
|
|
|
|
170,709
|
|
|
|
193,022
|
|
Accrued Inventory
|
|
|
531,017
|
|
|
|
298,032
|
|
|
|
245,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payable
|
|
|
702,525
|
|
|
|
700,728
|
|
|
|
721,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale or distribution of assets in exchange for notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
20,989
|
|
|
|
127,500
|
|
|
|
414,353
|
|
Other assets
|
|
$
|
-
|
|
|
$
|
75,000
|
|
|
$
|
-
|
|
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee
’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28 or 29, 2017, 2016 and 2015, the Company’s contribution was approximately $66,000, $62,000, and $60,000, respectively, to the plan.
NOTE 1
2 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the f
iscal years ended February 28 or 29, 2017 and 2016:
Fiscal Quarter
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
201
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
9,376,199
|
|
|
$
|
8,601,962
|
|
|
$
|
9,955,239
|
|
|
$
|
10,362,977
|
|
|
$
|
38,296,377
|
|
Gross margin
|
|
|
2,222,405
|
|
|
|
2,289,011
|
|
|
|
2,706,456
|
|
|
|
1,922,896
|
|
|
|
9,140,768
|
|
Net income
|
|
|
731,834
|
|
|
|
974,813
|
|
|
|
1,011,799
|
|
|
|
731,670
|
|
|
|
3,450,116
|
|
Basic earnings per share
|
|
|
0.13
|
|
|
|
0.17
|
|
|
|
0.17
|
|
|
|
0.13
|
|
|
|
0.59
|
|
Dilute earnings per share
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.17
|
|
|
$
|
0.12
|
|
|
$
|
0.58
|
|
Fiscal Quarter
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
201
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
10,364,022
|
|
|
$
|
9,274,554
|
|
|
$
|
9,807,313
|
|
|
$
|
11,011,006
|
|
|
$
|
40,456,895
|
|
Gross margin
|
|
|
2,470,383
|
|
|
|
2,536,811
|
|
|
|
2,723,841
|
|
|
|
2,763,228
|
|
|
|
10,494,263
|
|
Net income
|
|
|
762,959
|
|
|
|
779,796
|
|
|
|
440,801
|
|
|
|
2,442,351
|
|
|
|
4,425,907
|
|
Basic earnings per share
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
0.08
|
|
|
|
0.42
|
|
|
|
0.75
|
|
Diluted earnings per share
|
|
$
|
0.12
|
|
|
$
|
0.13
|
|
|
$
|
0.07
|
|
|
$
|
0.41
|
|
|
$
|
0.73
|
|
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
3 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28
or 29:
|
|
|
|
201
7
|
|
|
2016
|
|
|
|
Amortization Period
(Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Value
|
|
|
Accumulated
Amortization
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store design
|
|
|
10
|
|
|
|
$
|
220,778
|
|
|
$
|
211,152
|
|
|
$
|
220,778
|
|
|
$
|
209,653
|
|
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
|
|
|
|
715,339
|
|
|
|
92,758
|
|
|
|
459,340
|
|
|
|
51,423
|
|
Franchise Rights
|
|
|
20
|
|
|
|
|
5,971,129
|
|
|
|
1,144,957
|
|
|
|
5,914,181
|
|
|
|
760,818
|
|
Total
|
|
|
|
|
|
|
|
7,459,049
|
|
|
|
2,000,670
|
|
|
|
7,146,102
|
|
|
|
1,573,697
|
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchising segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company stores goodwill
|
|
|
|
|
|
|
|
1,099,328
|
|
|
|
267,020
|
|
|
|
1,099,328
|
|
|
|
267,020
|
|
Franchising goodwill
|
|
|
|
|
|
|
|
295,000
|
|
|
|
197,682
|
|
|
|
295,000
|
|
|
|
197,682
|
|
Manufacturing segment-Goodwill
|
|
|
|
|
|
|
|
295,000
|
|
|
|
197,682
|
|
|
|
295,000
|
|
|
|
197,682
|
|
Trademark
-indefinite life
|
|
|
|
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
|
1,709,328
|
|
|
|
662,384
|
|
|
|
1,709,328
|
|
|
|
662,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
$
|
9,168,377
|
|
|
$
|
2,663,054
|
|
|
$
|
8,855,430
|
|
|
$
|
2,236,081
|
|
Effective
March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
On February 29, 2016
, RMCF foreclosed on all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. As described in Note 1, this was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. We performed a test of impairment in conjunction with the change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. We recognized an impairment loss of $1,930,529 to reduce the carrying value of Goodwill to the fair value. In making this determination we reviewed the fair value of U-Swirl compared to its carrying value. In performing this testing we focused on the actual performance of the acquired businesses that created the initial recognition of the goodwill, as well as U-Swirl’s past performance and future expected performance. Because of the significant underperformance of the acquired businesses as well as U-Swirl we determined that the carrying value of the reporting unit exceeded its fair value.
The following are events that have indicated that it is more likely than not that the fair value of goodwill is less than the carrying amount
:
|
●
|
SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed
on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement.
|
|
●
|
The loan covenant for SWRL required
that SWRL maintain adjusted EBITDA of $1,804,000 and during the term of the loan SWRL reported trailing twelve month adjusted EBITDA of between $1,532,000 and $1,284,000.
|
|
●
|
SWRL franchise stores in operation has declined from a peak of 28
7 franchise cafés in operation at August 31, 2014 to 210 franchise cafés in operation at February 28, 2016.
|
|
●
|
During the three and six months ended August 31, 2015, SWRL disclosed
in its separate financial statements that there was substantial doubt about its ability to continue as a going concern.
|
Amortization expense related to intangible assets totaled
$427,840, $378,373, and $361,723 during the fiscal years ended February 28 or 29, 2017, 2016 and 2015, respectively.
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 2
8, 2017, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following:
2018
|
|
$
|
445,214
|
|
2019
|
|
|
451,644
|
|
2020
|
|
|
438,487
|
|
2021
|
|
|
426,778
|
|
2022
|
|
|
403,596
|
|
Thereafter
|
|
|
3,292,660
|
|
Total
|
|
$
|
5,458,379
|
|
NOTE
14 – IMPAIRMENT OF LONG-LIVED RETAIL ASSETS, RESTRUCTURING AND ACQUISITION RELATED CHARGES
In
2014, SWRL entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, SWRL purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store. SWRL also entered into an Asset Purchase Agreement with Yogli Mogli, which was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, SWRL purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February 20, 2014, SWRL entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rights associated with 17 Fuzzy Peach Frozen Yogurt stores. Associated with these transactions, the Company recorded net restructuring charges of $124,551 during the year ended February 28, 2015. No restructuring charges were incurred during the year ended February 29, 2016.
On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of
SWRL. In addition, Messrs. Conte, H. Cartwright and T. Cartwright resigned as officers of U-Swirl. Also on September 4, 2014, the SWRL Board of Directors appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.
In connection with these management changes,
SWRL announced an operational restructuring designed to enhance SWRL’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements with the named officers, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement, property and equipment. The Company recorded restructuring charges of $503,526 during year ended February 28, 2015 associated with this operational restructuring.
As described in Note 1 above, e
ffective March 1, 2015, the Company was reorganized to create a holding company structure pursuant to the Agreement and Plan of Merger, dated as of November 10, 2014, among Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and RKB Merger Corp. In connection with the holding company reorganization, the Company recorded restructuring fees of $179,399 during the year ended February 28, 2015.
During the year ended February 29, 2016
, we closed an underperforming Company-owned café resulting in an impairment charge of $39,933. As described in Note 1, on February 29, 2016 the Company foreclosed on 100% of the outstanding equity of U-Swirl in full satisfaction of the obligations owed under the SWRL Loan Agreement. The Company reviewed all operating assets possessed as a part of this transaction and made the determination to offer for sale certain retail assets below their carrying value. This determination was made after a review of expected future cash flow. As a result of this review and determination an impairment charge of $356,280 was recorded to reflect these assets at their fair value.
Impairment of long-lived assets and goodwill, r
estructuring and acquisition charges incurred at February 28 or 29, 2017, 2016 and 2015 were comprised of the following:
|
|
201
7
|
|
|
201
6
|
|
|
2015
|
|
Professional fees
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
284,275
|
|
Severance/transitional compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
212,027
|
|
Leasehold improvements, property and equipment impairment of long-lived assets
and goodwill
|
|
|
-
|
|
|
|
2,326,742
|
|
|
|
243,000
|
|
Provision for termination of contractual obligations
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
Acceleration of restricted stock unit vesting
|
|
|
-
|
|
|
|
-
|
|
|
|
65,049
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
3,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,000
|
|
|
$
|
2,326,742
|
|
|
$
|
807,476
|
|
ROCKY MO
UNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 – RELATED PARTY TRANSACTIONS
Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have, on occasion, provided services to the Company and may provide services in the future.
For the year ended February 28, 2017, the Company paid $47,822 and no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of operations.
NOTE 1
6 – SUBSEQUENT EVENTS
On May
22, 2017, the Company announced that its Board of Directors has declared a first quarter FY2018 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 16, 2017 to shareholders of record at the close of business June 6, 2017.
NOTE
17 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an
immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company
’s prior annual consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233 and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.