Amended Annual Report (10-k/a)

Date : 06/28/2019 @ 2:34PM
Source : Edgar (US Regulatory)
Stock : Rocky Mountain Chocolate Factory Inc (RMCF)
Quote : 8.5834  0.0 (0.00%) @ 12:00AM

Amended Annual Report (10-k/a)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K /A

(Amendment No. 1)

(Mark One)

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

 

For the fiscal year ended February 28, 2019

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: 001-36865

 

 

Rocky Mountain Chocolate Factory, Inc.

(Exact name of registrant as specified in its charter)

Delaware

47-1535633

(State or Other Jurisdiction of Incorporation or Organization)

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

 

265 Turner Drive, Durango, CO 81303

(Address of principal executive offices, including ZIP code)

 

(970) 259-0554

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant To Section 12(b) Of The Act:

 

    Title of each class   Trading Symbol Name of each exchange on which registered  
  Common Stock, $0.001 Par Value per Share  RMCF Nasdaq Global Market  
  Preferred Stock Purchase Rights RMCF Nasdaq Global Market  

                              

Securities Registered Pursuant To Section 12(g) Of The Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐     No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐       No ☒

 

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

 

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

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company    

              

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards 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 Act).     Yes ☐    No ☒

 

The aggregate market value of the registrant’s common stock (based on the closing price as quoted on the Nasdaq Global Market on August 31, 2018, the last trading day of the registrant’s most recently completed second fiscal quarter) held by non-affiliates was $38,815,702. For purposes of this calculation, shares of common stock held by each executive officer and director and by holders of more than 5% of the registrant’s outstanding common stock have been excluded since those persons may under certain circumstances be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of May 10, 2019, there were 5,965,827 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

EXPLANATORY NOTE

 

Rocky Mountain Chocolate Factory, Inc. (the “Company,” “we,” “us” or “our”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment No. 1”) to amend our Annual Report on Form 10-K for the fiscal year ended February 28, 2019, originally filed with the Securities and Exchange Commission (“SEC”) on May 29, 2019 (the “Original Filing”), to include the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Filing in reliance on General Instruction G(3) of Form 10-K, which permits such information to be incorporated by reference in the Form 10-K from our definitive proxy statement if such proxy statement is filed no later than 120 days after the end of our fiscal year. We are filing this Amendment No. 1 to include the information required by Part III of the Original Filing because we no longer intend to file our definitive proxy statement within 120 days after the end of our fiscal year.

 

In addition, this Amendment No. 1 is being filed to include the auditor tenure statement in the audit reports contained in Part II, Item 8, which was inadvertently omitted in the Original Filing.

 

In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Item 8 of Part II and Items 10 through 14 of Part III of the Original Filing have been amended and restated in their entirety, and Item 15 of Part IV of the Original Filing has also been amended and restated in its entirety to include new certifications by our principal executive officer and principal financial officer and a new consent from Plante & Moran, PLLC. This Amendment No. 1 does not amend or otherwise update any other information in the Original Filing. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and with our other filings with the SEC subsequent to the Original Filing.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

FORM 10-K/A

 

 

TABLE OF CONTENTS 

 

PART II. 2
   
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 2
   
PART III 25
   
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 25
ITEM 11. EXECUTIVE COMPENSATION 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 33
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 34
   
PART IV 35
   
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 35

 

 

PART II.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

INDEX TO FINANCIAL STATEMENTS

 

 

 

Page

   

Reports of Independent Registered Public Accounting Firms

3-4

   

Consolidated Statements of Income

5

   

Consolidated Balance Sheets

6

   

Consolidated Statements of Changes in Stockholders’ Equity

7

   

Consolidated Statements of Cash Flows

8

   

Notes to Consolidated Financial Statements

9

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2019, the related consolidated statement of income, stockholders' equity, and cash flows for the year ended February 28, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and the results of its operations and its cash flows for the year ended February 28, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on March 1, 2018.

 

Basis for Opinion

 

The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

Change in Accounting Principle

 

As discussed in Note 1 and 17 to the financial statements, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective adoption method on March 1, 2018.

 

We have audited the impact on the 2018 financial statements as disclosed under the modified retrospective method as a result of the adoption of ASC Topic 606, “Revenue from Contracts with Customers”, as described in Note 1 and 17 to the financial statements. In our opinion, the impacts are appropriate and have been properly disclosed. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the impacts disclosed and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements taken as a whole.

  

/s/ Plante & Moran, PLLC

 

We have served as the Company’s auditor since 2004. 

 

Denver, Colorado

May 29, 2019 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors of Rocky Mountain Chocolate Factory, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2018, the related statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended February 28, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

  

/s/ EKS&H LLLP

  

 

Denver, Colorado

May 15, 2018   

       

We have served as the Company’s auditor since 2004. 

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

   

FOR THE YEARS ENDED FEBRUARY 28,

 
   

2019

   

2018

   

2017

 

Revenues

                       

Sales

  $ 27,563,794     $ 30,167,760     $ 29,876,507  

Franchise and royalty fees

    6,981,653       7,906,935       8,419,870  

Total Revenue

    34,545,447       38,074,695       38,296,377  
                         

Costs and Expenses

                       

Cost of sales

    20,599,551       21,176,711       20,735,739  

Franchise costs

    1,980,781       2,097,555       2,067,530  

Sales and marketing

    2,210,800       2,489,483       2,658,421  

General and administrative

    3,432,618       3,904,560       4,005,142  

Retail operating

    1,934,891       2,389,296       2,404,003  

Depreciation and amortization, exclusive of depreciation and amortization expense of $555,926, $523,034, and $447,651, respectively, included in cost of sales

    1,153,873       796,221       841,058  

Costs associated with Company-owned store closures

    226,981       -       60,000  

Total costs and expenses

    31,539,495       32,853,826       32,771,893  
                         

Income from Operations

    3,005,952       5,220,869       5,524,484  
                         

Other Income (Expense)

                       

Interest expense

    (70,787 )     (121,244 )     (170,351 )

Interest income

    20,496       24,578       41,572  

Other expense, net

    (50,291 )     (96,666 )     (128,779 )
                         

Income Before Income Taxes

    2,955,661       5,124,203       5,395,705  
                         

Income Tax Provision

    716,862       2,160,295       1,945,589  
                         

Consolidated Net Income

  $ 2,238,799     $ 2,963,908     $ 3,450,116  
                         

Basic Earnings per Common Share

  $ 0.38     $ 0.50     $ 0.59  

Diluted Earnings per Common Share

  $ 0.37     $ 0.50     $ 0.58  
                         

Weighted Average Common Shares Outstanding - Basic

    5,931,431       5,884,337       5,843,245  

Dilutive Effect of Employee Stock Awards

    51,207       96,099       150,447  

Weighted Average Common Shares Outstanding - Diluted

    5,982,638       5,980,436       5,993,692  

 

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

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   

AS OF FEBRUARY 28,

 
   

2019

   

2018

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 5,384,027     $ 6,072,984  

Accounts receivable, less allowance for doubtful accounts of $489,502 and $479,472, respectively

    3,993,262       3,897,334  

Notes receivable, current portion, less current portion of the valuation allowance of $0 and $9,000, respectively

    110,162       105,540  

Refundable income taxes

    190,201       342,863  

Inventories, less reserve for slow moving inventory of $371,147 and $357,706, respectively

    4,270,357       4,842,474  

Other

    318,126       310,173  

Total current assets

    14,266,135       15,571,368  
                 

Property and Equipment, Net

    5,786,139       6,166,240  
                 

Other Assets

               

Notes receivable, less current portion and valuation allowance of $0 and $17,500, respectively

    281,669       235,983  

Goodwill, net

    1,046,944       1,046,944  

Franchise rights, net

    3,678,920       4,433,927  

Intangible assets, net

    498,337       587,377  

Deferred income taxes

    607,421       835,463  

Other

    56,576       63,333  

Total other assets

    6,169,867       7,203,027  
                 

Total Assets

  $ 26,222,141     $ 28,940,635  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Current maturities of long term debt

  $ 1,176,488     $ 1,352,893  

Accounts payable

    897,074       1,647,991  

Accrued salaries and wages

    655,853       644,005  

Gift card liabilities

    742,289       3,057,131  

Other accrued expenses

    293,094       325,034  

Dividend payable

    714,939       708,652  

Contract liabilities

    256,094       471,910  
                 

Total current liabilities

    4,735,831       8,207,616  
                 

Long-Term Debt, Less Current Maturities

    -       1,176,416  

Contract Liabilities, Less Current Portion

    1,096,478       -  
                 

Commitments and Contingencies

               
                 

Stockholders' Equity

               

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

               

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

    -       -  

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

    -       -  

Common stock, $.001 par value, 46,000,000 shares authorized, 5,957,827 shares and 5,903,436 shares issued and outstanding, respectively

    5,958       5,903  

Additional paid-in capital

    6,650,864       6,131,147  

Retained earnings

    13,733,010       13,419,553  
                 

Total stockholders' equity

    20,389,832       19,556,603  
                 

Total Liabilities and Stockholders' Equity

  $ 26,222,141     $ 28,940,635  

 

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

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

   

FOR THE YEARS ENDED FEBRUARY 28,

 
   

2019

   

2018

   

2017

 

Common Stock

                       

Balance at beginning of year

  $ 5,903     $ 5,854     $ 5,839  

Repurchase and retirement of common stock

    -       -       (35 )

Issuance of common stock

    6       5       2  

Exercise of stock options, vesting of restricted stock units and other

    49       44       48  

Balance at end of year

    5,958       5,903       5,854  
                         

Additional Paid-In Capital

                       

Balance at beginning of year

    6,131,147       5,539,357       5,340,190  

Repurchase and retirement of common stock

    -       -       (351,548 )

Issuance of common stock

    55,971       59,095       20,418  

Exercise of stock options, vesting of restricted stock units and other

    463,746       532,695       564,425  

Tax (expense) benefit from employee stock transactions

    -       -       (34,128 )

Balance at end of year

    6,650,864       6,131,147       5,539,357  
                         

Retained Earnings

                       

Balance at beginning of year

    13,419,553       13,283,646       13,132,879  

Net income attributable to RMCF stockholders

    2,238,799       2,963,908       3,450,116  

Cash dividends declared

    (2,851,271 )     (2,828,001 )     (2,806,583 )

Correction of immaterial error 1

    -       -       (492,766 )

Adoption of ASC 606 2

    925,929       -       -  

Balance at end of year

    13,733,010       13,419,553       13,283,646  
                         

Total Stockholders' Equity

    20,389,832       19,556,603       18,828,857  
                         

Common Shares

                       

Balance at beginning of year

    5,903,436       5,854,372       5,839,396  

Repurchase and retirement of common stock

    -       -       (35,108 )

Issuance of common stock

    5,333       5,000       2,000  

Exercise of stock options, vesting of restricted stock units and other

    49,058       44,064       48,084  

Balance at end of year

    5,957,827       5,903,436       5,854,372  

 

1 As revised. Refer to Note 16 for information on immaterial correction of errors in prior period.

2 Refer to Note 17 for information on the adoption of ASC 606.

  

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

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

  

   

FOR THE YEARS ENDED FEBRUARY 28,

 
   

2019

   

2018

   

2017

 

Cash Flows From Operating Activities

                       

Net Income

  $ 2,238,799     $ 2,963,908     $ 3,450,116  

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

                 

Depreciation and amortization

    1,709,799       1,319,255       1,288,709  

Provision for obsolete inventory

    325,478       166,868       138,125  

Provision for loss on accounts and notes receivable

    155,600       225,858       100,049  

Asset impairment and store closure losses

    67,822       -       -  

Loss on sale or disposal of property and equipment

    36,024       38,496       37,112  

Expense recorded for stock compensation

    519,772       591,839       584,893  

Deferred income taxes

    (78,934 )     23,411       262,248  

Changes in operating assets and liabilities:

                       

Accounts receivable

    (390,663 )     (229,948 )     (128,404 )

Refundable income taxes

    157,544       (295,000 )     (47,863 )

Inventories

    41,310       (365,323 )     (2,735 )

Other current assets

    (8,225 )     (54,091 )     29,442  

Accounts payable

    (545,588 )     96,491       (87,657 )

Accrued liabilities

    (84,191 )     242,578       (293,402 )

Contract Liabilities

    (129,527 )     33,270       (9,619 )

Net cash provided by operating activities

    4,015,020       4,757,612       5,321,014  
                         

Cash Flows from Investing Activities

                       

Addition to notes receivable

    -       (14,293 )     (133,202 )

Proceeds received on notes receivable

    102,256       230,637       318,219  

Purchase of intangible assets

    -       (8,508 )     (312,947 )

Proceeds from (cost of) sale or distribution of assets

    13,498       (7,926 )     39,045  

Purchases of property and equipment

    (613,786 )     (544,956 )     (1,238,472 )

(Increase) decrease in other assets

    (8,140 )     5,529       34,479  

Net cash used in investing activities

    (506,172 )     (339,517 )     (1,292,878 )
                         

Cash Flows from Financing Activities

                       

Payments on long-term debt

    (1,352,821 )     (1,302,432 )     (1,253,392 )

Repurchase of common stock

    -       -       (351,583 )

Tax expense of stock option exercise

    -       -       (34,128 )

Dividends paid

    (2,844,984 )     (2,821,874 )     (2,804,786 )

Net cash used in financing activities

    (4,197,805 )     (4,124,306 )     (4,443,889 )
                         

Net Decrease in Cash and Cash Equivalents

    (688,957 )     293,789       (415,753 )
                         

Cash and Cash Equivalents, Beginning of Period

    6,072,984       5,779,195       6,194,948  
                         

Cash and Cash Equivalents, End of Period

  $ 5,384,027     $ 6,072,984     $ 5,779,195  

 

 

  

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

  

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

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), Aspen Leaf Yogurt, LLC (“ALY”), and U-Swirl International, Inc. (“U-Swirl”), and its 46%-owned subsidiary, U-Swirl, Inc. (“SWRL”) (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.

 

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

 

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

 

The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2019:

 

   

Sold, Not Yet Open

   

Open

   

Total

 

Rocky Mountain Chocolate Factory

                       

Company-owned stores

    -       2       2  

Franchise stores - Domestic stores and kiosks

    4       183       187  

International license stores

    1       64       65  

Cold Stone Creamery - co-branded

    11       91       102  

U-Swirl (Including all associated brands)

                       

Company-owned stores

    -       1       1  

Company-owned stores - co-branded

    -       3       3  

Franchise stores - Domestic stores

    -       87       87  

Franchise stores - Domestic - co-branded

    -       9       9  

International license stores

    -       2       2  

Total

    16       442       458  

 

Consolidation

 

Management 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 excluded 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 a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (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 $4.9 million at February 28, 2019.

 

 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts and Notes Receivable

 

In the normal course of business, the Company extends 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, 2019, the Company had $391,831 of notes receivable outstanding and an allowance for doubtful accounts of $0 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through November 2023 and approximately $375,000 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.

 

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

 

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 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 the Company established a full valuation allowance on the Company’s deferred tax assets. During FY 2016 the Company took possession of the outstanding equity in U-Swirl. As a result of the Company’s ownership increasing to 100%, the Company began filing consolidated income tax returns in FY 2017. Because of this change, the Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 the Company 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 the Company’s balance sheet is further described in Note 16. The Company's temporary differences are listed in Note 6.

 

Gift Card Breakage

 

The Company and its franchisees sell gift cards that are redeemable for product in 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 the Company’s gift cards, and the Company does not charge any service fees. While the Company’s franchisees continue to honor all gift cards presented for payment, the Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. Accrued gift card liability was $742,289 and $3,057,131 at February 28, 2019 and 2018, respectively. The Company recognized breakage of $139,188 and $0 during FY 2019 and FY 2018, respectively. See Note 17 to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC 606.

 

 

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 the Company’s 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 SWRL Loan Agreement. 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. 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 the Company’s test indicated a full impairment of the U-Swirl goodwill. The Company’s testing and impairment is described in Note 13 to the 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.

 

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 the Company’s 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

 

Beginning in FY 2019, upon adoption of adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue was 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. 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. 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, the Company is required to pay a portion of franchise fee revenue, or royalty fees to parties the Company has 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, the Company reports franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.

 

 

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 our manufacturing segment represented approximately $3.1 million or 9% of our total revenues during the year ended February 28, 2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by further decreases in the purchases of this customer or the loss of this customer entirely.

 

Stock-Based Compensation

 

At February 28, 2019, the Company had one stock-based compensation plan, the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.

 

The Company recognized $519,772, $591,839, and $584,893 related to equity-based compensation expense during the years ended February 28, 2019, 2018 and 2017, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.

 

Beginning March 1, 2017, the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement. Prior to March 1, 2017 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 expense included in net cash provided by financing activities for the years ended February 28, 2017 was $34,128.

 

During FY 2019 and 2018, the Company granted no restricted stock units. There were no stock options granted to employees during FY 2019 or FY 2018. The restricted stock unit grants generally vest 17 to 20% annually over a period of five to six years. The Company recognized $463,795 of consolidated stock-based compensation expense related to grants made in prior years during FY 2019 compared with $532,739 in FY 2018 and $564,473 in FY 2017. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 2019 was $114,183, which is expected to be recognized over the weighted average period of 0.4 years.

 

The Company issued 2,000 fully vested, unrestricted shares of stock to non-employee directors during the year ended February 28, 2019 compared to no shares issued during the year ended February 28, 2018 and 2,000 issued during the year ended February 28, 2017. In connection with these non-employee director stock issuances, the Company recognized $24,480, $0 and $20,420 of stock-based compensation expense during year ended February 28, 2019, 2018 and 2017, respectively.

 

During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized $31,497 in stock-based compensation expense during the year ended February 28, 2019.

 

Earnings Per 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. Following the expiration of all outstanding options, during FY 2017, no stock options were excluded from diluted shares.

 

Advertising and Promotional Expenses

 

The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $275,441, $355,678, and $279,698 for the fiscal years ended February 28, 2019, 2018 and 2017, respectively. Total advertising expense for U-Swirl and its brands amounted to $168,000, $222,093, and $335,771 for the fiscal years ended February 28, 2019, 2018 and 2017, respectively.

 

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable 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 August 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in Quarterly Reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Quarterly Report on Form 10-Q. The Company does not anticipate that the adoption of these SEC amendments will have a material effect on the Company’s financial position, results of operations, cash flows or stockholders’ equity.

 

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

  

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. The Company will adopt this guidance effective with the three month period ending May 31, 2019 (the first quarter of Fiscal Year 2020). The Company can elect to record a cumulative-effect adjustment as of the beginning of the year of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption. The Company anticipates ASU 2016-02 will have a material impact on the consolidated balance sheet. The impact of ASU 2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The cumulative adjustment to be recorded as right-of-use assets and operating lease liabilities, upon adoption, is expected to be in the range of $3,500,000 to $3,900,000.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in ASC 605 “Revenue Recognition.” ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also did not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard changed the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store opening and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10 to 15 years.

 

The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.

 

 

NOTE 2 - INVENTORIES

 

Inventories consist of the following at February 28:

 

   

2019

   

2018

 

Ingredients and supplies

  $ 2,612,954     $ 2,764,727  

Finished candy

    1,983,854       2,371,610  

U-Swirl food and packaging

    44,696       63,843  

Reserve for slow moving inventory

    (371,147 )     (357,706 )

Total inventories

  $ 4,270,357     $ 4,842,474  

 

NOTE 3 - PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following at February 28:

 

   

2019

   

2018

 

Land

  $ 513,618     $ 513,618  

Building

    5,031,395       4,905,103  

Machinery and equipment

    10,263,119       10,686,631  

Furniture and fixtures

    864,944       1,067,788  

Leasehold improvements

    1,131,659       1,568,260  

Transportation equipment

    422,458       434,091  

Asset impairment

    (30,000 )     (62,891 )
      18,197,193       19,112,600  
                 

Less accumulated depreciation

    (12,411,054 )     (12,946,360 )

Property and equipment, net

  $ 5,786,139     $ 6,166,240  

 

NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT

 

Line of Credit

 

At February 28, 2019, the Company had a $5.0 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% (4.7% at February 28, 2019). At February 28, 2019, $5.0 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, 2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2019 and the Company believes it is likely to be renewed on terms similar to current terms. At February 28, 2019 and 2018 there was no amount outstanding under this line of credit.

 

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. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. As of February 28, 2019, the Company was in compliance with all such 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:

 

   

2019

   

2018

 

Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by sustantially all business assets

  $ 1,176,488     $ 2,529,309  

Less current maturities

    1,176,488       1,352,893  

Long-term obligations

  $ -     $ 1,176,416  

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

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 following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:

 

2020

  $ 318,000  

2021

    259,000  

2022

    249,000  

2023

    243,000  

2024

    249,000  

Thereafter

    175,000  

Total

  $ 1,493,000  

 

The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing locations are leased by the franchisee directly. The Company’s current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At February 28, 2019, the Company was the primary lessee at four of the Company’s 313 domestic franchised stores.

 

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'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:

 

2020

  $ 92,000  

2021

    75,000  

2022

    21,000  

Total

  $ 188,000  

 

The following is a schedule of lease expense for all retail operating leases for the three years ended February 28:

 

   

2019

   

2018

   

2017

 

Minimum rentals

  $ 1,030,536     $ 1,270,240     $ 944,938  

Less sublease rentals

    (572,000 )     (603,000 )     (318,000 )

Contingent rentals

    22,800       26,100       25,200  
    $ 481,336     $ 693,340     $ 652,138  

 

In FY 2019, 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 or 29:

 

2020

  $ 116,000  

2021

    121,000  

2022

    125,000  

2023

    129,000  

2024

    33,000  

Total

  $ 524,000  

 

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:

 

2020

  $ 323,000  

2021

    323,000  

2022

    257,000  

2023

    29,000  

Total

  $ 932,000  

 

The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28:

 

 

2019

   

2018

   

2017

 
    325,229       225,992       220,791  

 

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, 2019, the Company was contracted for approximately $880,000 of raw materials under such agreements.

 

 

NOTE 6 - INCOME TAXES

 

Income tax expense (benefit) is comprised of the following for the years ended February 28:

 

   

2019

   

2018

   

2017

 

Current

                       

Federal

  $ 653,226     $ 1,916,720     $ 1,411,127  

State

    142,570       220,164       272,214  

Total Current

    795,796       2,136,884       1,683,341  
                         

Deferred

                       

Federal

    (67,410 )     55,658       240,233  

State

    (11,524 )     (32,247 )     22,015  

Total Deferred

    (78,934 )     23,411       262,248  

Total

  $ 716,862     $ 2,160,295     $ 1,945,589  

 

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 ended February 28 or 29:

 

   

2019

   

2018

   

2017

 

Statutory rate

    21.0 %     31.9 %     34.0 %

State income taxes, net of federal benefit

    3.4 %     2.4 %     3.6 %

Domestic production deduction

    0.0 %     (0.9 )%     (1.1 )%

Work opportunity tax credits

    (0.7 )%     (0.2 )%     (0.4 )%

Other

    0.5 %     0.8 %     0.0 %

Impact of tax reform

    0.0 %     8.2 %     0.0 %

Effective rate - provision (benefit)

    24.2 %     42.2 %     36.1 %

 

The components of deferred income taxes at February 28 are as follows:

 

   

2019

   

2018

 

Deferred Tax Assets

               

Allowance for doubtful accounts and notes

  $ 120,368     $ 124,469  

Inventories

    91,265       86,938  

Accrued compensation

    87,930       130,049  

Loss provisions and deferred income

    492,468       817,945  

Self-insurance accrual

    34,426       38,868  

Amortization

    217,481       520,379  

Restructuring charges

    98,693       98,728  

U-Swirl accumulated net loss

    325,253       258,173  

Valuation allowance

    (98,693 )     (98,728 )

Net deferred tax assets

  $ 1,369,191     $ 1,976,821  
                 

Deferred Tax Liabilities

               

Depreciation and amortization

    (682,542 )     (1,066,113 )

Prepaid expenses

    (79,228 )     (75,245 )

Deferred Tax Liabilities

    (761,770 )     (1,141,358 )
                 

Net deferred tax assets

  $ 607,421     $ 835,463  

 

The following table summarizes deferred income tax valuation allowances as of February 28:

 

   

2019

   

2018

 

Valuation allowance at beginning of period

  $ 98,728     $ 148,494  

Tax expense (benefits) realized by valuation allowance

    (35 )     -  

Tax benefits released from valuation allowance

    -       -  

Impact of tax reform

    -       (49,766 )

Valuation allowance at end of period

  $ 98,693     $ 98,728  

 

Income tax expense and the effective income tax rate for the year ended February 28, 2019 decreased from the year ended February 28, 2018, primarily as a result of the revaluation of deferred tax assets and liabilities to the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act recognized during the year ended February 28, 2018 and the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act effective for the year ended February 28, 2019. The revaluation of deferred tax assets and liabilities resulted in income tax expense of approximately $421,000 recognized in consideration of the lower enacted rate for the year ended February 28, 2018.

 

 

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 2013. 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. The Company’s federal income tax returns are being examined for the years ended February 28 or 29, 2017 and 2016.

 

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, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2019.

 

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, 2019 or 2018. 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, 2019 and 2018.

 

As of February 29, 2016, the Company foreclosed on the outstanding equity of U-Swirl and U-Swirl was consolidated for income tax purposes. SWRL, along with U-Swirl 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. As of February 29, 2016, a portion of the U-Swirl deferred tax assets were recognized as a result of it becoming more likely than not that some of these assets would be realized in the future as a result of RMCF and U-Swirl filing a consolidated income tax return.

 

In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. The Company has 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 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl’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.

 

The Company estimates that the potential future tax deductions of U-Swirl’s Federal net operating losses, limited by section 382, to be approximately $1,323,000 with a resulting deferred tax asset of approximately $325,000. U-Swirl’s Federal net operating loss carryovers will expire at various dates beginning in 2026.

 

NOTE 7 – STOCKHOLDERS’ EQUITY

 

Cash Dividend

 

The Company paid a quarterly cash dividend of $0.12 per common share on March 16, 2018 to stockholders of record on March 6, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 15, 2018 to stockholders of record on June 5, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 14, 2018 to stockholders of record on September 4, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 7, 2018 to stockholders of record on November 23, 2018. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 14, 2019, which was paid on March 15, 2019 to stockholders of record on March 5, 2019.

 

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

 

Stock Repurchases

 

On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. 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 FY 2017, 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 years ended February 28, 2019 or 2018. As of February 28, 2019, 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 and restatement of the 2007 Equity Incentive Plan (as amended and restated, 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, 2019:

 

Original share authorization:

    300,000  

Prior plan shares authorized and incorporated in the 2007 Plan:

    85,340  

Additional shares authorized through 2007 Plan amendment:

    300,000  

Available for award:

    685,340  

Cancelled/forfeited:

    199,859  

Shares awarded as unrestricted shares, stock options or restricted stock units:

    (557,409 )
         

Shares available for award:

    327,790  

 

Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2019, and changes for the three years then ended was as follows:

 

   

Twelve Months Ended

 
   

February 28:

 
   

2019

   

2018

   

2017

 

Outstanding stock options at beginning of year:

    -       -       12,936  

Granted

    -       -       -  

Exercised

    -       -       -  

Cancelled/forfeited

    -       -       (12,936 )

Outstanding stock options as of February 28:

    -       -       -  
                         

Weighted average exercise price

    n/a       n/a       n/a  

Weighted average remaining contractual term (in years)

    n/a       n/a       n/a  

 

Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2019, and changes for the three years then ended was as follows:

 

   

Twelve Months Ended

 
   

February 28:

 
   

2019

   

2018

   

2017

 

Outstanding non-vested restricted stock units at beginning of year:

    77,594       123,658       181,742  

Granted

    -       -       -  

Vested

    (49,058 )     (44,064 )     (48,084 )

Cancelled/forfeited

    (3,534 )     (2,000 )     (10,000 )

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

    25,002       77,594       123,658  
                         

Weighted average grant date fair value

  $ 12.05     $ 12.16     $ 12.21  

Weighted average remaining vesting period (in years)

    0.38       1.27       2.23  

 

 

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 2019

 

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Other

   

Total

 

Total revenues

  $ 5,361,528     $ 25,324,024     $ 1,272,009     $ 3,737,606     $ -     $ 35,695,167  

Intersegment revenues

    (5,236 )     (1,144,484 )     -       -       -       (1,149,720 )

Revenue from external customers

    5,356,292       24,179,540       1,272,009       3,737,606       -       34,545,447  

Segment profit (loss)

    2,288,871       4,310,722       (52,009 )     (32,391 )     (3,559,532 )     2,955,661  

Total assets

    1,182,355       12,267,458       1,001,419       5,264,989       6,505,920       26,222,141  

Capital expenditures

    3,548       526,402       9,617       16,512       57,707       613,786  

Total depreciation & amortization

  $ 46,369     $ 573,846     $ 32,762     $ 952,178     $ 104,644     $ 1,709,799  

 

FY 2018

 

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Other

   

Total

 

Total revenues

  $ 6,004,897     $ 27,491,089     $ 1,876,021     $ 4,142,085     $ -     $ 39,514,092  

Intersegment revenues

    (4,882 )     (1,434,515 )     -       -       -       (1,439,397 )

Revenue from external customers

    6,000,015       26,056,574       1,876,021       4,142,085       -       38,074,695  

Segment profit (loss)

    2,623,081       5,791,980       (37,102 )     542,073       (3,795,829 )     5,124,203  

Total assets

    1,157,158       12,729,659       1,134,876       8,125,171       5,793,771       28,940,635  

Capital expenditures

    15,429       429,545       33,056       11,899       55,027       544,956  

Total depreciation & amortization

  $ 46,087     $ 540,033     $ 32,567     $ 576,162     $ 124,406     $ 1,319,255  

 

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  

 

Revenue from one customer of the Company’s Manufacturing segment represented approximately $3.1 million, or 9.1 percent, of the Company’s revenues from external customers during the year ended February 28, 2019, compared to $5.1 million, or 13.4 percent of the Company’s revenues from external customers during the year ended February 28, 2018.

  

NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION

 

For the three years ended February 28 or 29:

 

Cash paid for:

 

2019

   

2018

   

2017

 

Interest, net

  $ 52,102     $ 102,640     $ 129,927  

Income taxes

    638,252       2,431,884       1,997,751  

Non-cash Operating Activities

                       

Accrued Inventory

    52,918       258,247       531,017  

Non-cash Financing Activities

                       

Dividend payable

  $ 714,939     $ 708,652       702,525  

 

 

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, 2019, 2018 and 2017, the Company’s contribution was approximately $70,000, $68,000, and $66,000, respectively, to the plan.

 

NOTE 12 – SUMMARIZED QUARTERLY DATA (UNAUDITED)

 

Following is a summary of the quarterly results of operations for the fiscal years ended February 28, 2019 and 2018:

 

2019

 

First

   

Second

   

Third

   

Fourth

   

Total

 

Total revenue

  $ 8,366,085     $ 7,800,088     $ 8,949,747     $ 9,429,527     $ 34,545,447  

Gross margin

    1,916,807       1,852,435       1,882,975       1,312,026       6,964,243  

Net income

    576,944       750,815       525,361       385,679       2,238,799  

Basic earnings per share

    0.10       0.13       0.09       0.06       0.38  

Diluted earnings per share

  $ 0.10     $ 0.13     $ 0.09     $ 0.06     $ 0.37  

 

2018

 

First

   

Second

   

Third

   

Fourth

   

Total

 

Total revenue

  $ 9,346,447     $ 8,266,691     $ 9,961,572     $ 10,499,985     $ 38,074,695  

Gross margin

    2,191,974       2,210,910       2,311,579       2,276,586       8,991,049  

Net income

    813,672       928,284       751,056       470,896       2,963,908  

Basic earnings per share

    0.14       0.16       0.13       0.08       0.50  

Diluted earnings per share

  $ 0.14     $ 0.16     $ 0.13     $ 0.08     $ 0.50  

 

NOTE 13 – GOODWILL AND INTANGIBLE ASSETS

 

Intangible assets consist of the following at February 28:

 

             

2019

   

2018

 
   

Amortization Period (Years)

   

Gross Carrying Value

   

Accumulated Amortization

   

Gross Carrying Value

   

Accumulated Amortization

 

Intangible assets subject to amortization

                                         

Store design

    10       $ 220,778     $ 214,152     $ 220,778     $ 212,653  

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       223,628       715,339       136,087  

Franchise rights

    20         5,979,637       2,300,717       5,979,637       1,545,710  

Total

              7,467,557       3,290,300       7,467,557       2,446,253  
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

              20,000       -       20,000       -  

Total goodwill

              1,709,328       662,384       1,709,328       662,384  
                                           

Total Intangible Assets

            $ 9,176,885     $ 3,952,684     $ 9,176,885     $ 3,108,637  

 

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.

 

Amortization expense related to intangible assets totaled $844,320, $446,050, and $427,840 during the fiscal years ended February 28 or 29, 2019, 2018 and 2017, respectively.

 

During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.

 

 

At February 28, 2019, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:

 

2020

  $ 706,177  

2021

    594,229  

2022

    490,060  

2023

    411,607  

2024

    345,642  

Thereafter

    1,629,542  

Total

  $ 4,177,257  

 

NOTE 14 – COSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES

 

Costs associated with Company-owned store closures at February 28, 2019, 2018 and 2017 were comprised of the following:

 

   

2019

   

2018

   

2017

 

Loss on distribution of assets

  $ 81,981     $ -     $ -  

Lease settlement costs

    145,000       -       60,000  
                         

Total

  $ 226,981     $ -     $ 60,000  

 

NOTE 15 – SUBSEQUENT EVENTS

 

On May 28, 2019, the Company announced that its Board of Directors has declared a first quarter FY2020 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 14, 2019 to shareholders of record at the close of business June 4, 2019.

 

In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period.

 

NOTE 16 – 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.

 

NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”)

 

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

 

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

 

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

 

 

Gift Cards

 

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

 

Impact to Prior Periods

 

The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:

 

   

Amount

 

Increase in deferred revenue

  $ (1,022,720 )

Reduction in gift card liabilities

    2,250,743  

Adjustment to deferred income tax assets

    (302,094 )
         

Cumulative increase to retained earnings

  $ 925,929  

 

The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

 

The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:

 

   

CONSOLIDATED BALANCE SHEET

 
   

AS OF FEBRUARY 28, 2018

 
   

Previously

Reported

   

Adjustments

   

Restated

 

Assets

                       

Current Assets

                       

Cash and cash equivalents

  $ 6,072,984     $ -     $ 6,072,984  

Accounts receivable, net

    3,897,334       -       3,897,334  

Notes receivable, current portion, net

    105,540       -       105,540  

Refundable income taxes

    342,863       -       342,863  

Inventories, net

    4,842,474       -       4,842,474  

Other

    310,173       -       310,173  

Total current assets

    15,571,368       -       15,571,368  
                         

Property and Equipment, Net

    6,166,240       -       6,166,240  
                         

Other Assets

                       

Notes receivable, less current portion, net

    235,983       -       235,983  

Goodwill, net

    1,046,944       -       1,046,944  

Franchise rights, net

    4,433,927       -       4,433,927  

Intangible assets, net

    587,377       -       587,377  

Deferred income taxes

    835,463       (302,094 )     533,369  

Other

    63,333       -       63,333  

Total other assets

    7,203,027       (302,094 )     6,900,933  

Total Assets

  $ 28,940,635     $ (302,094 )   $ 28,638,541  
                         

Liabilities and Stockholders' Equity

                       

Current Liabilities

                       

Current maturities of long-term debt

  $ 1,352,893       -     $ 1,352,893  

Accounts payable

    1,647,991       -       1,647,991  

Accrued salaries and wages

    644,005       -       644,005  

Gift card liabilities

    3,057,131       (2,250,743 )     806,388  

Other accrued expenses

    325,034       -       325,034  

Dividend payable

    708,652       -       708,652  

Deferred revenue

    471,910       (143,445 )     328,465  

Total current liabilities

    8,207,616       (2,394,188 )     5,813,428  
                         

Long-Term Debt, Less Current Maturities

    1,176,416       -       1,176,416  

Deferred Revenue, Less Current Portion

    -       1,166,165       1,166,165  
                         

Commitments and Contingencies

                       
                         

Stockholders' Equity

                       

Preferred stock

                       

Common stock

    5,903       -       5,903  

Additional paid-in capital

    6,131,147       -       6,131,147  

Retained earnings

    13,419,553       925,929       14,345,482  

Total stockholders' equity

    19,556,603       925,929       20,482,532  
                         

Total Liabilities and Stockholders' Equity

  $ 28,940,635     $ (302,094 )   $ 28,638,541  

 

 

The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:

 

   

For the Years Ended February 28,

 
   

2019

   

2018

   

2017

 

Franchise Fees contained within the

                       

Statement of Income:

  $ 335,028     $ 681,613     $ 324,718  

Adjustment required to conform revenue to prior period method:

    (53,528 )     -       -  

Comparable franchise fees:

  $ 281,500     $ 681,613     $ 324,718  

 

On February 28, 2019, annual revenue expected to be recognized in the future, related to performance obligations that are not yet fully satisfied, are estimated to be the following:

 

2020

  $ 256,093  

2021

    204,071  

2022

    190,524  

2023

    176,394  

2024

    137,477  

Thereafter

    388,013  

Total

  $ 1,352,572  

 

NOTE 18 – DISAGGREGATION OF REVENUE

 

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

 

For the Year Ended February 28, 2019

 

Revenues recognized over time under ASC 606:

 

   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 
Revenues recognized over time under ASC 606:                                        

Franchise fees

  $ 199,362     $ -     $ -     $ 135,666     $ 335,028  

 

Revenues recognized at a point in time:

 

   

Franchising

   

Manufacturing

   

Retail

   

U-Swirl

   

Total

 

Factory sales

    -       24,179,540       -       -       24,179,540  

Retail sales

    -       -       1,272,009       2,112,245       3,384,254  

Royalty and marketing fees

    5,156,930       -       -       1,489,695       6,646,625  

Total

  $ 5,356,292     $ 24,179,540     $ 1,272,009     $ 3,737,606     $ 34,545,447  

 

 

PART III.

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our Board of Directors currently consists of five members. Information concerning our executive officers and members of our Board of Directors as of June 1, 2019 is set forth below. There are no family relationships between any of our directors and executive officers.

 

Name

 

Title/Position

 

Age

Bryan J. Merryman

 

Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Treasurer and Director

 

58

Franklin E. Crail

 

Director

 

77

Clyde Wm. Engle

 

Director

 

76

Scott G. Capdevielle

 

Director

 

53

Brett P. Seabert

 

Director

 

58

Gregory L. Pope

 

Senior Vice President – Franchise Development

 

53

Edward L. Dudley

 

Senior Vice President - Sales and Marketing

 

55

Donna L. Coupe

 

Vice President - Franchise Support and Training

 

53

Ryan R. McGrath

 

Vice President - Information Technology

 

45

Directors

 

Bryan J. Merryman . Mr. Merryman joined us in December 1997 as Chief Financial Officer and Vice President - Finance. Since April 1999, Mr. Merryman also served as our Chief Operating Officer and as a director, and since January 2000, as our Treasurer. In February 2019, Mr. Merryman was appointed as our Chief Executive Officer and was elected Chairman of the Board. From January 1997 to December 1997, Mr. Merryman was a principal in Knightsbridge Holdings, Inc., a leveraged buyout firm. Mr. Merryman also served as Chief Financial Officer of Super Shops, Inc., a retailer and manufacturer of after-market auto parts, from July 1996 to November 1997, and prior to July 1996, was employed for more than eleven years by Deloitte & Touche LLP, most recently as a Senior Manager. Mr. Merryman also currently serves as Chief Executive Officer of U-Swirl, Inc. (“U-Swirl”), a consolidated subsidiary of the company, a position he has held since October 2014, and has served as Chairman of the Board of U-Swirl since January 2013. Mr. Merryman’s extensive operational, accounting and financial expertise, along with his extensive knowledge of our business and broad industry expertise, provides significant value and insights to the Board of Directors.

 

Franklin E. Crail . Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May 1981. He served as our Chief Executive Officer and President from November 1982 until his retirement in February 2019, and, from September 1981 to January 2000, he served as our Treasurer. He has served as a director since November 1982 and served as Chairman of the Board from March 1986 until February 2019. Prior to founding the Company, Mr. Crail was co-founder and President of CNI Data Processing, Inc., a software firm which developed automated billing systems for the cable television industry. Mr. Crail has also served as a director for U-Swirl since January 2013. As our co-founder and as our former Chief Executive Officer and President, and director since 1982, Mr. Crail brings his leadership, extensive experience and knowledge of the Company, the industry, our customers and the investment community to the Board of Directors.

 

Clyde Wm. Engle. Mr. Engle has served on our Board of Directors since January 2000, and previously from December 1987 to August 1995. Mr. Engle is currently the Chairman of the Board, President and Chief Executive Officer of Lincolnwood Bancorp, Inc. (formerly known as GSC Enterprises, Inc.). Lincolnwood Bancorp, Inc. owned the Bank of Lincolnwood until June 2009 when the Bank of Lincolnwood came under control of the Federal Deposit Insurance Corporation. Mr. Engle has also served as a director of U-Swirl since January 2013. Mr. Engle’s extensive executive and board experience brings governance, investment and strategic expertise to the Board of Directors.

 

Scott G. Capdevielle. Mr. Capdevielle has served on our Board of Directors since June 2009. Mr. Capdevielle founded, and has served as President, Chief Executive Officer and a member of the Board of Directors of, Syndicom, Inc., a software and consulting company, since 2000. Prior to founding Syndicom, Inc., from 1999 to 2000, Mr. Capdevielle was Chief Executive Officer and founder of Untv, Inc., a company pioneering user-generated web video and distribution on the Internet. From 1995 to 1999, Mr. Capdevielle founded and held the position of Chief Technical Officer and a member of the Board of Directors of Andromedia Corporation, a developer of web analytics software to Fortune 1000 companies prior to its sale to Macromedia, Inc. Mr. Capdevielle has been engaged in the software industry since 1993 and has served on several advisory boards and board of directors of technology companies from 1994 to present. Mr. Capdevielle has also served as a director of U-Swirl since January 2013. Mr. Capdevielle’s extensive executive and board experience brings operational, investment, strategic, technology and industry expertise to the Board of Directors.

 

Brett P. Seabert. Mr. Seabert has served on our Board of Directors since April 2017. Mr. Seabert, a Certified Public Accountant (“CPA”), has 29 years of experience in business management, operations, finance and administration. Mr. Seabert currently serves in various capacities, including as a director or executive officer of various companies, including Tanamera Construction, LLC, a high-end real estate development and construction company (since April 2007), TD Construction, LP, a construction company (since September 2009), Caughlin Club Management Partners, LLC, a health and tennis club and preschool owner and operator (since July 2008), and B&L Investments, Inc., a management and holding company (since March 2003). From 2001 to 2008, Mr. Seabert served as Chief Financial and Operating Officer of Tanamera Commercial Development, LLC. Between 1989 and 2001, Mr. Seabert served in various positions at CMS International, an owner and management company operating several casinos, most recently as Executive Vice President and Chief Financial Officer, including oversight of internal audit, risk management and human resource functions. Mr. Seabert has been primarily engaged in commercial and residential real estate development and construction for the past 17 years. From 1984 to 1989, Mr. Seabert was a practicing CPA with Deloitte & Touche LLP. Mr. Seabert’s extensive management, accounting and financial experience brings operational, investment, and strategic value and insights to the Board of Directors.

 

 

Executive Officers

 

Bryan J. Merryman . Mr. Merryman’s biographical information is set forth above under the heading “Directors.”     

 

Gregory L. Pope. Mr. Pope has served as Senior Vice President - Development since May 2004. Since joining the Company in October 1990, he has served in various positions, including store manager, new store opener and franchise field consultant. In March 1996, he became Director of Franchise Development and Support. In June 2001, he became Vice President of Franchise Development, a position he held until he was promoted to his present position.

 

Edward L. Dudley. Mr. Dudley has served as Senior Vice President - Sales and Marketing since June 2001. Previously, he served as Vice President of Sales and Marketing from January 1997 to June 2001. Prior to joining the Company, Mr. Dudley spent 10 years with Baxter Healthcare Corporation, a medical devices and services company, where he served in a number of senior marketing and sales management capacities, including most recently that of Director, Distribution Services from March 1996 to January 1997.

 

Donna L. Coupe . Ms. Coupe has served as Vice President - Franchise Support and Training since June 2008. From 1992 to 1997, she managed franchised Rocky Mountain Chocolate Factory stores in Northern California for absentee owners. Since joining the Company in October 1997, she has served in various positions including Field Consultant, Regional Manager and Director of Franchise Support.

 

Ryan R. McGrath . Mr. McGrath has served as Vice President - Information Technology since August 2017. Since joining the Company in October 2009, he has served in various positions, including Systems Analyst and Director of Information Technology. Prior to joining the Company he held various operating and information technology roles, including work for Sports Express, a travel logistics company, where he focused on software, database and application development.

 

Involvement in Certain Other Legal Proceedings

 

On March 29, 1994, a class action was filed in the Circuit Court for the 21st Judicial District, Centerville, Hickman County, Tennessee against National Development Company, Inc. (“NDI”) and Sunstates Corporation (“Sunstates”) for breach of contract by a class of purchasers (the “Plaintiffs”) of real property in a recreational development developed and marketed by NDI. The Plaintiffs brought the class action to recover for the diminution in value of their properties caused by the failure of NDI to complete the primary lake in the development. On January 19, 1999, Mr. Engle, one of our directors, was added as a defendant to the class action, alleging that Mr. Engle operated the two defendant corporations as his alter ego. On January 24, 2000, the court found the defendants NDI liable for over $2.5 million to the Plaintiffs for the diminution in value of their real property based on a failure to build an adjacent lake as promised. On August 30, 2005, a judgment was entered against Mr. Engle, personally, for the amount of the original judgment plus statutory interest (the “Tennessee Judgment”).

 

In a related case filed on October 29, 2007 in the Circuit Court for the Second Circuit, State of Hawaii, the Plaintiffs pursued a class action against Mr. Engle and others to set aside fraudulent transfers, for declaratory and injunctive relief and for damages. In that complaint, the Plaintiffs claimed they were unable to collect on the Tennessee Judgment and alleged that Mr. Engle engaged in a scheme to aggressively and fraudulently transfer assets and earnings to his wife to hinder, delay and defraud his creditors. Following a trial, a jury verdict was entered against Mr. Engle on March 3, 2010, whereby he was found to have fraudulently transferred shares of stock valued at $10,768,450 and the jury awarded punitive damages to the Plaintiffs in the amount of $43,073,800. Several post-trial motions were filed after the jury verdict but no judgement was ever entered by the court against Mr. Engle, and no material activity has occurred in this case since March 2010.

 

Corporate Governance

 

Code of Ethics and Code of Conduct

 

We have adopted a Code of Ethics for Senior Financial Officers that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. In addition, in accordance with NASDAQ listing rules, we have adopted a Code of Conduct applicable to all our officers, directors and employees. The text of each of the Code of Ethics for Senior Financial Officers and the Code of Conduct (together, the “Codes”) is available under Corporate Governance on the Investor Relations page of our website at www.rmcf.com. If we waive, or implicitly waive, any material provision of either of the Codes, or substantively amend either of the Codes, we will disclose that fact on our website within four business days.

 

Audit Committee

 

The Board of Directors has a separately-designated standing Audit Committee. The Audit Committee operates under a written charter adopted by the Board of Directors. A copy of the Audit Committee Charter is available under Corporate Governance on the Investor Relations page of the Company's website at www.rmcf.com .

 

 

The members of the Audit Committee currently consist of Brett P. Seabert, Clyde Wm. Engle and Scott G. Capdevielle. The responsibilities of our Audit Committee include:

 

 

Assisting the full Board of Directors;

 

 

Oversight of the Company’s accounting and financial reporting principles and policies and internal controls and procedures;

 

 

Oversight of the Company’s financial statements and the independent audit thereof;

 

 

Selecting, evaluating and, where deemed appropriate, replacing the independent auditors; and

 

 

Evaluating the independence and performance of the independent auditors.

 

The Board of Directors has determined that Brett P. Seabert is an “audit committee financial expert” as defined in Item 407 of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and thus possesses “financial sophistication” as that term is used in applicable NASDAQ listing rules.

 

The Board of Directors has also determined that each of Brett P. Seabert, Clyde Wm. Engle and Scott G. Capdevielle, representing all of the members of the Audit Committee, is an “independent director” under applicable Nasdaq listing rules and SEC regulations applicable to Audit Committee members.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth certain information with respect to annual compensation for the years indicated for the Company’s named executive officers.

 

Name and Principal Position

 

Fiscal Year

 

Salary
($)

   

Stock

Awards
($)

   

All Other Compensation
($)

   

Total
($)

 

Bryan J. Merryman (1)

 

2019

    $340,000       -0-