Item 1.01. Entry into a Material Definitive Agreement.
Strategic Alliance with Edible Arrangements
On December 20, 2019, Rocky Mountain Chocolate Factory, Inc. (the “Company”) entered into a strategic alliance (the “Strategic Alliance”) with Edible Arrangements, LLC (“EA”) and Farids & Co. LLC (“Farids,” and together with EA and any permitted transferees, “Edible Arrangements”), pursuant to which, among other things, the Company will become the exclusive provider of certain branded chocolate products to EA, its affiliates and its franchisees. In connection with the Strategic Alliance, the Company entered into a strategic alliance agreement, an exclusive supplier operating agreement and a warrant agreement with EA and Farids, as applicable, and as described further below.
Exclusive Supplier Agreement
On December 20, 2019, the Company entered into an Exclusive Supplier Operating Agreement (the “Exclusive Supplier Agreement”) with EA, pursuant to which the Company will be EA’s exclusive supplier for chocolates, candies and/or other confectionery products. In addition, the Company granted to EA a non-exclusive, worldwide right to market, offer for sale, sell and distribute such products, including through (i) retail stores and (ii) on-line distribution channels such as Internet websites and applications for personal computing devices, as an authorized and independent distributor of such products.
The Exclusive Supplier Agreement has an initial term of five years (the “Initial Term”). After the Initial Term, the Exclusive Supplier Agreement will automatically renew for an additional term of three years, unless either party gives the other at least 24 months’ written notice of non-renewal prior to the end of the Initial Term. Thereafter, the Exclusive Supplier Agreement will continue until either party gives the other at least 24 months’ written notice of termination. Notwithstanding the foregoing, following any change of control of the Company, neither party will issue a notice of non-renewal within four additional years following such change of control. The Exclusive Supplier Agreement also contains customary representations, warranties and covenants, and the parties have also agreed to indemnify and hold each other harmless from claims and losses arising directly or indirectly from the Exclusive Supplier Agreement under certain circumstances.
Strategic Alliance Agreement
On December 20, 2019, the Company entered into a Strategic Alliance Agreement (the “Strategic Alliance Agreement”) with EA and Farids, pursuant to which, among other things, the Company will issue and sell 126,839 shares (the “Purchased Shares”) of the Company’s common stock to Farids at a price of $7.884 per share, which represents a 10% discount to the 20-day volume-weighted average price of the Company’s common stock on the Nasdaq Global Market as of December 19, 2019. The issuance and sale of the Purchased Shares is required to close within 90 days, subject to the satisfaction of certain customary closing conditions. The Purchased Shares may not be transferred within the first two years following the date of the Strategic Alliance Agreement, subject to certain limited exceptions. In addition, the Company has certain rights of first offer and rights of first refusal with respect to the Purchased Shares or the Warrants Shares (as defined below), and the Company also granted certain registration rights to Edible Arrangements with respect to the Purchased Shares and the Warrants Shares. Subject to certain limited exceptions, Edible Arrangements is also prohibited from beneficially owning 19.99% or more of the fully diluted number of shares of Common Stock outstanding at any time.
Under the Strategic Alliance Agreement, the Company agreed to nominate Tariq Farid for election to the Board of Directors of the Company at the Company’s 2019 annual meeting of stockholders to be held on January 9, 2020. In addition, only at such time that Edible Arrangements owns more than 5% of the outstanding common stock of the Company, Edible Arrangements will have the right to nominate Tariq Farid, or in the event of Mr. Farid’s death or permanent disability, another individual that is reasonably acceptable to the Company, as director of the Company (the “Springing Nomination Right”). The Springing Nomination Right will terminate at such time that Edible Arrangements owns less than 5% of the outstanding common stock of the Company and if EA does not achieve certain revenue thresholds.
The Strategic Alliance Agreement also contains customary representations, warranties and covenants and includes the terms and conditions for, among other things, the sale of the Purchased Shares to Farids and the Springing Nomination Rights, indemnification and contribution obligations and other terms and conditions typical to agreements of this type.
Warrant
In consideration of EA entering into the Exclusive Supplier Agreement and the performance of its obligations therein, on December 20, 2019, the Company issued EA a warrant (the “Warrant”) to purchase up to 960,677 shares of Common Stock (the “Warrant Shares”) at an exercise price of $8.76 per share, which represents the 20-day volume-weighted average price of the Company’s common stock on the Nasdaq Global Market as of December 19, 2019. The Warrant Shares vest in annual tranches in varying amounts following each contract year under the Exclusive Supplier Agreement, subject to, and only upon, EA’s achievement of certain revenue thresholds on an annual or cumulative five-year basis in connection with its performance under the Exclusive Supplier Agreement. The Warrant expires six months after the final and conclusive determination of revenue thresholds for the fifth contract year and the cumulative revenue determination in accordance with the terms of the Warrant. The vesting of the Warrant Shares will accelerate under certain circumstances upon a change of control of the Company.
Amendment to Rights Agreement
On December 20, 2019, in order to permit the transactions contemplated in connection with the Strategic Alliance, the Company entered into an Amendment (the “Rights Amendment”) to the Company’s Rights Agreement, dated as of March 1, 2015 (the “Rights Agreement”), by and between the Company and Computershare Trust Company, N.A., as rights agent (the “Rights Agent”). The Company amended the Rights Agreement to add the defined term “Designated Holder” for the purpose of providing a limited exemption to Farids, together with all of its Affiliates and Associates (each as defined in the Rights Agreement) from the definition of “Acquiring Person” under the Rights Agreement, along with other conforming changes.
This limited exemption permits Farids, together with all of its Affiliates and Associates, to become the Beneficial Owner (as defined in the Rights Agreement) of up to 20% of the Common Stock of the Company then outstanding without becoming an Acquiring Person rather than the 15% threshold otherwise applicable. Farids, together with all of its affiliates and associates will be deemed a Designated Holder until the earliest of such time as (i) Farids, together with all of its affiliates and associates ceases to beneficially own 10% or more of the Common Stock, (ii) either Farids & Co. LLC or Edible Arrangements, LLC or any parent entity of either is subject to a change of control and either purchases or acquires any additional shares of common stock of the Company following such change of control or (iii) Farids, together with all of its affiliates and associates reports or is required to report on Schedule 13D (or any successor or comparable report) its beneficial ownership of common stock of the Company and discloses its intent to effect or promote a change in control of the Company.
The foregoing descriptions of the Exclusive Supplier Agreement, the Strategic Alliance Agreement, the Warrant and the Rights Amendment do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the full text of such agreements, which are attached hereto as Exhibits 10.1, 10.2, 4.1 and 4.2, respectively, to this Current Report on Form 8-K, each of which is incorporated by reference herein.