SECURITIES & EXCHANGE COMMISSION EDGAR FILING
Rocky Mountain Chocolate Factory, Inc.
Form: 10-K
Date Filed: 2017-05-23
Corporate Issuer CIK: 1616262
© Copyright 2017, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2 8, 2017
OR
For the transition period from __________ to __________
Commission file number: 001-36865
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
47-1535633
(I.R.S. Employer Identification No.)
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
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
Common Stock, $0.001 Par Value per Share
Preferred Stock Purchase Rights
Name of each exchange on which registered
NASDAQ Global Market
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 and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
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 ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
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 our common stock (based on the closing price as quoted on the NASDAQ Global Market on August 31, 2016, the last business
day of our most recently completed second fiscal quarter) held by non-affiliates was $44,591,674. For purposes of this calculation, shares of common stock held
by each executive officer and director and by holders of more than 5% of our 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 12, 2017, there were 5,854,372 shares of our common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Portions of the registrant ’s definitive proxy statement in connection with the 2017 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by
reference in Part III of this Annual Report on Form 10-K . The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the
close of the registrant’s fiscal year ended February 28, 2017.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
TABLE OF CONTENTS
PART I.
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II.
ITEM 5. MARKET FOR REGISTRANT’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
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Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (“Annual Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange A ct of 1934, as
amended, and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements involve various risks and
uncertainties. The nature of our operations and the environment in which we operate subject us to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this Annual Report are forward-looking statements. Many
of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect,"
"anticipate," "should," "plan," "estimate," "potential," or similar expressions. Factors which could cause results to differ include, but are not limited to: changes in
the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the success of our frozen yogurt business,
receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding
strategy, the success of international expansion efforts and the effect of government regulations. Government regulations which we and our franchisees either
are or may be subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws
regarding health, sanitation, safety, building and fire codes, franchising, employment, manufacturing, packaging and distribution of food products and motor
carriers. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein,
please see the “Risk Factors” contained in this Annual Report in Item 1A. These forward-looking statements apply only as of the date of this Annual Report. As
such they should not be unduly relied upon for more current circumstances. Except as required by law, w e undertake no obligation to release publicly any
revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this Annual Report or those that might reflect
the occurrence of unanticipated events.
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PART I.
ITEM 1. BUSINESS
General
Rocky Mountain Chocolate Factory, Inc. , a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain
Chocolate Factory, Inc., a Colorado corporation) (collectively, the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery manufacturer and
retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other
confectionery products. Our subsidiary, U-Swirl International, Inc., franchises and operates self-serve frozen yogurt cafés. Our revenues and profitability are
derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products. We also sell our
candy in selected locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of March 31, 2017, there
were four Company-owned, 83 licensee-owned and 283 franchised Rocky Mountain Chocolate Factory stores operating in 40 states, Canada, Japan, South
Korea, the Philippines, and the United Arab Emirates. As of March 31, 2017, U-Swirl operated five Company-owned cafés, 105 franchised cafés and 40 licensed
locations located in 33 states and Canada. 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”.
Effective March 1, 2015, we reorganized to create a holding company structure. Our operating subsidiary with the same name, Rocky Mountain Chocolate
Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky
Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF were exchanged on a one-for-
one basis for shares of common stock of Newco. Our new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol
“RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), we entered into two agreements to sell all of the assets of
our ALY frozen yogurt stores, along with our interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which we also acquired in
January 2013, to U-Swirl, Inc., a publicly traded company (OTCQB: SWRL) (“SWRL”), in exchange for a 60% controlling equity interest in SWRL, which was
subsequently diluted down to 39% as of February 28, 2017 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a
wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased at the time
to directly operate any Company-owned Aspen Leaf Yogurt locations or sell and support frozen yogurt franchise locations, which were being supported by
SWRL.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of s elf-serve frozen yogurt concepts under the names “CherryBerry,”
“Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo
Bank, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase
price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the
assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was
subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on
January 16, 2016 without payment in full by SWRL. As a result of the defaults, we issued a demand for payment of all obligations under the SWRL Loan
Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, we foreclosed on all of the outstanding stock of U-
Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International,
Inc. (“U-Swirl”) becoming a wholly-owned subsidiary of the Company as of February 29, 2016, at which time we began operating the frozen yogurt business of
U-Swirl. U-Swirl currently operates self-serve frozen yogurt cafes under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy
Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
Approximately 53% of the products sold at Rocky Mountain Chocolate Factory stores are prepared on the premises. We believe that in-store preparation of
products creates a special store ambiance, and the aroma and sight of products being made attracts foot traffic and assures customers that products are fresh.
Our principal competitive strengths lie in our brand name recognition, our reputation for the quality, variety and taste of our products, the special ambiance of our
stores, our knowledge and experience in applying criteria for selection of new store locations, our expertise in the manufacture of chocolate candy products and
the merchandising and marketing of confectionary products, and the control and training infrastructures we have implemented to assure consistent customer
service and execution of successful practices and techniques at our stores.
We believe our manufacturing expertise and reputation for quality has facilitated the sale of selected products through specialty markets. We are currently selling
our products in a select number of specialty markets including wholesale, fundraising, corporate sales, mail order, private label and internet sales.
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U-Swirl cafés and associated brands are designed to be attractive to customers by offering the following:
inside café-style seating for 50 people and outside patio seating, where feasible and appropriate;
spacious surroundings of 1,800 to 3,000 square feet;
8 to 16 flavors of frozen yogurt;
up to 70 toppings; and
self-serve format allowing guests to create their own favorite snack.
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•
We believe that these characteristics provide U-Swirl with the ability to compete successfully in the retail frozen yogurt industry. While U-Swirl continues to
pursue locations with the characteristics described above, we recognize that its acquisition strategy may lead U-Swirl to purchase competitors with diverse
layouts.
The trade dress of the Aspen Leaf Yogurt, CherryBerry, Yogli Mogli, Fuzzy Peach, Let’s Yo! and Yogurtini locations are similar to that of U-Swirl, although their
locations use different color schemes and are typically smaller than the U-Swirl cafés.
Our consolidated revenues are primarily derived from three principal sources: (i) sales to franchisees and other third parties of chocolates and other
confectionery products manufactured by us (66%-65%-62%); (ii) sales at Company-owned stores of chocolates, other confectionery products and frozen yogurt
(including products manufactured by us) (12%-12%-15%) and (iii) the collection of initial franchise fees and royalties from franchisees (22%-23%-23%).
Approximately 97% of our revenues are derived from domestic sources, with 3% derived from international sources. The figures in parentheses above show the
percentage of total revenues attributable to each source for the FY 2017, 2016 and 2015, respectively.
According to industry data, the total U.S. candy market approximated $35.8 billion of retail sales in 2015 with chocolate generating sales of approximately $21.6
billion and candy sales per capita of $111.16, an increase of 2.8% when compared to 2014.
According to Ice Cream and Frozen Desserts in the U.S. 9th Edition, published in January 2017 by Packaged Facts, in 2016 the U.S. market for ice cream and
related frozen desserts, including frozen yogurt and frozen novelties, grew to $28 billion.
Business Strategy
Our objective is to build on our position as a leading international franchisor and manufacturer of high quality chocolate, other confectionery products and frozen
yogurt. We continually seek opportunities to profitably expand our business. To accomplish this objective, we employ a business strategy that includes the
elements set forth below.
Product Quality and Variety
We maintain gourmet taste and quality of our chocolate candies by using only the finest chocolate and other wholesome ingredients. We use our own proprietary
recipes, primarily developed by our master candy makers. A typical Rocky Mountain Chocolate Factory store offers up to 100 of our chocolate candies
throughout the year and as many as 200, including many packaged candies, during the holiday seasons. Individual stores also offer numerous varieties of
premium fudge and gourmet caramel apples, as well as other products prepared in the store from Company recipes.
Store Atmosphere and Ambiance
We seek to establish an enjoyable and inviting atmosphere in each of our stores. Each Rocky Mountain Chocolate Factory store prepares numerous products,
including fudge, barks and caramel apples, in the store. In-store preparation is designed to be both fun and entertaining for customers and to convey an image of
freshness and homemade quality. Our design staff has developed easily replicable designs and specifications to ensure that the Rocky Mountain Chocolate
Factory concept is consistently implemented at each store.
Site Selection
Careful selection of a site is critical to the success of our stores. We consider many factors in identifying suitable sites, including tenant mix, visibility,
attractiveness, accessibility, level of foot traffic and occupancy costs. Final site selection occurs only after our senior management has approved the site. We
believe that the experience of our management team in evaluating a potential site is one of our competitive strengths.
Customer Service Commitment
We emphasize excellence in customer service in our stores and cafés and seek to employ and to sell franchises to motivated and energetic people. We also
foster enthusiasm for our customer service philosophy and our concepts through our regional meetings and other frequent contacts with our franchisees. Rocky
Mountain Chocolate Factory holds a biennial convention for franchisees.
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Increase Same Store Retail Sales at Existing Rocky Mountain Chocolate Factory Locations
We seek to increase profitability of our store system through increasing sales at existing store locations. Changes in system wide domestic same store retail
sales at Rocky Mountain Chocolate Factory locations are as follows:
2013
2014
2015
2016
2017
Changes in system wide domestic same store retail sales at frozen yogurt franchise locations are as follows:
2013
2014
2015
2016
2017
0.2%
1.2%
3.1%
1.6%
0.9%
*
*
*
(1.4%)
(3.0%)
*Same store sales for acquired brands are reported after 24 months of operation as a part of our network of domestic franchise stores. Because the majority of
our frozen yogurt franchise brands were acquired in January 2014, the earliest period same store sales are reported is for FY 2016.
We have designed a contemporary and coordinated line of packaged products that we believe capture and convey the freshness, fun and excitement of the
Rocky Mountain Chocolate Factory retail store experience. We also believe that the successful launch of new packaging has had a positive impact on same store
sales.
Increase Same Store Pounds Purchased by Existing Locations
In FY 2017, same store pounds purchased by franchisees and licensees declined 4.7% compared to the prior fiscal year. We continue to add new products and
focus our existing product lines in an effort to increase same store pounds purchased by existing locations. We believe historical decreases in same store
pounds purchased were due, in part, to a product mix shift from factory-made products to products made in the store such as caramel apples.
Enhanced Operating Efficiencies
We seek to improve our profitability by controlling costs and increasing the efficiency of our operations. Efforts in the last several years include: the purchase of
additional automated factory equipment, implementation of a comprehensive Advanced Planning and Scheduling (APS) system for production scheduling,
implementation of alternative manufacturing strategies and installation of enhanced Point-of-Sale (POS) systems in all of our Company-owned and the majority
of our franchised stores. These measures have significantly improved our ability to deliver our products to our stores safely, quickly and cost-effectively and
impact store operations.
Acquisition Opportunities
We plan to evaluate other business es and opportunities that would be complementary to our business, including both our candy products and the frozen yogurt
business. Beginning in January 2013 with the acquisition of a controlling interest in SWRL, we began an initiative to improve profitability through the acquisition
of self-serve frozen yogurt franchise systems. We believe that the rapid growth of the self-serve frozen yogurt market has created a highly fragmented franchise
environment. We believe we can leverage the strategies we’ve developed over time to improve our profitability and bring the benefits of scale to smaller
franchisors. During FY 2013 and FY 2014, we acquired Yogurtini, CherryBerry, Yogli Mogli and Fuzzy Peach frozen yogurt concepts. During FY 2016, we
acquired the Let’s Yo! Frozen Yogurt concept.
Expansion Strategy
We are continually exploring opportunities to grow our brand and expand our business. Key elements of our expansion strategy are set forth below.
Unit Growth
We continue to pursue unit growth opportunities, despite the difficult financing environment for our concepts, in locations where we have traditionally been
successful, to pursue new and developing real estate environments for franchisees which appear promising based on early sales results, and to improve and
expand our retail store concepts, such that previously untapped and unfeasible environments generate sufficient revenue to support a successful Rocky
Mountain Chocolate Factory or U-Swirl location.
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High Traffic Environments
We currently establish franchised stores in the following environments: outlet centers, tourist environments, regional centers, street fronts, airports, other
entertainment-oriented environments and strip centers. We have established a business relationship with most of the major developers in the United States and
believe that these relationships provide us with the opportunity to take advantage of attractive sites in new and existing real estate environments.
Rocky Mountain Chocolate Factory Name Recognition and New Market Penetration
We believe the visibility of our stores and the high foot traffic at many of our locations has generated strong name recognition of Rocky Mountain Chocolate
Factory and demand for our franchises. The Rocky Mountain Chocolate Factory system has historically been concentrated in the western and Rocky Mountain
region of the United States, but growth has generated a gradual easterly momentum as new stores have been opened in the eastern half of the country. We
believe this growth has further increased our name recognition and demand for our franchises. Distribution of Rocky Mountain Chocolate Factory products
through specialty markets also increases name recognition and brand awareness in areas of the country in which we have not previously had a significant
presence. We believe that distributing selected Rocky Mountain Chocolate Factory products through specialty markets also increases our name brand
recognition and will improve and benefit our entire store system.
We seek to establish a fun and inviting atmosphere in our store locations. Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store
prepares certain products, including fudge and caramel apples, in the store. Customers can observe store personnel making fudge from start to finish, including
the mixing of ingredients in old-fashioned copper kettles and the cooling of the fudge on large granite or marble tables, and are often invited to sample the store's
products. An average of approximately 53% of the revenues of franchised stores are generated by sales of products prepared on the premises. We believe the
in-store preparation and aroma of our products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for our customers
and convey an image of freshness and homemade quality.
To ensure that all stores conform to the Rocky Mountain Chocolate Factory image, our design staff provides working drawings and specifications and approves
the construction plans for each new store. We also control the signage and building materials that may be used in the stores.
The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores are open seven days a week.
Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6 p.m. on Sundays. Store hours in tourist areas may vary depending upon the
tourist season.
In January 2007, we began testing co-branded locations, such as the co-branded stores with Cold Stone Creamery. Co-branding a location is a vehicle to exploit
retail environments that would not typically support a stand-alone Rocky Mountain Chocolate Factory store. Co-branding can also be used to more efficiently
manage rent structure, payroll and other operating costs in environments that have not historically supported stand-alone Rocky Mountain Chocolate Factory
stores. As of February 28, 2017, our partner’s franchisees operated 83 co-branded locations, our franchisees operated 16 locations and three Company-owned
co-branded units were in operation.
We have previously entered into franchise developments and licensing agreements for the expansion of our franchise stores in Canada, the United Arab
Emirates, South Korea, The Republic of the Philippines and Japan. We believe that international opportunities may create a favorable expansion strategy and
reduce dependence on domestic franchise openings to achieve growth.
International units in operation were as follows at March 31, 201 7:
Rocky Mountain Chocolate Factory
Canada
Japan
The Republic of the Philippines
South Korea
United Arab Emirates
U-Swirl Cafés (Including all associated brands)
Canada
Total
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64
5
3
18
4
2
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Products and Packaging
We produce approximately 350 chocolate candies and other confectionery products, using proprietary recipes developed primarily by our master candy makers.
These products include many varieties of clusters, caramels, creams, mints and truffles. We continue to engage in a major effort to expand our product line by
developing additional exciting and attractive new products. During the Christmas, Easter and Valentine's Day holiday seasons, we may make as many as 130
additional items, including many candies offered in packages specially designed for the holidays. A typical Rocky Mountain Chocolate Factory store offers up to
100 of these candies throughout the year and up to an additional 100 during holiday seasons. Individual stores also offer more than 15 varieties of caramel
apples and other products prepared in the store. On average, approximately 42% of the revenues of Rocky Mountain Chocolate Factory stores are generated by
products manufactured at our factory, 53% by products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and
the remaining 5% by products such as ice cream, coffee and other sundries, purchased from approved suppliers.
Approximately 31% of our product sales result from the sale of products outside of our system of franchised and licensed locations (specialty markets). The
majority of sales outside our system of franchised and licensed locations are the result of a single customer. In the twelve months ended February 28, 2017, this
customer represented 52% of total shipments to specialty markets. These products are produced using the same quality ingredients and manufacturing
processes as the products sold in our network of retail stores.
We use only the finest chocolates, nutmeats and other wholesome ingredients in our candies and continually strive to offer new confectionery items in order to
maintain the excitement and appeal of our products. We develop special packaging for the Christmas, Valentine's Day and Easter holidays, and customers can
have their purchases packaged in decorative boxes and fancy tins throughout the year.
Chocolate candies that we manufacture are sold at prices ranging from $17.90 to $28.95 per pound, with an average price of $21.98 per pound. Franchisees set
their own retail prices, though we do recommend prices for all of our products.
Our frozen yogurt cafés feature a high quality yogurt that we believe is superior to products offered by many of our competitors. Our product is nationally
distributed and consistent among our cafés. Most cafés feature 8-16 flavor varieties, including custom and seasonal specialty flavors. Our toppings bars feature
up to 70 toppings allowing for a customizable frozen dessert experience. Cafés typically sell frozen yogurt by the ounce with prices generally ranging between
$0.44 and $0.59 per ounce.
Operating Environment
We currently establish Rocky Mountain Chocolate Factory stores in six primary environments: regional centers, tourist areas, outlet centers, street fronts, airports
and other entertainment-oriented shopping centers. Each of these environments has a number of attractive features, including high levels of foot traffic. Rocky
Mountain Chocolate Factory domestic franchise locations in operation as of February 28, 2017 include:
Regional Centers
Outlet Centers
Festival/Community Centers
Tourist Areas
Street Fronts
Airports
Other
Regional Centers
23.3%
22.8%
20.1%
15.9%
7.4%
4.2%
6.3%
As of February 28, 2017, there were Rocky Mountain Chocolate Factory stores in approximately 44 regional centers, including a location in the Mall of America
in Bloomington, Minnesota. Although often providing favorable levels of foot traffic, regional centers typically involve more expensive rent structures and
competing food and beverage concepts.
Outlet Centers
We have established business relationships with most of the major outlet center developers in the United States. Although not all factory outlet centers provide
desirable locations for our stores, we believe our relationships with these developers will provide us with the opportunity to take advantage of attractive sites in
new and existing outlet centers.
Tourist Areas, Street Fronts and Other Entertainment -Oriented Shopping Centers
As of February 2 8, 2017, there were approximately 30 Rocky Mountain Chocolate Factory stores in locations considered to be tourist areas, including
Fisherman's Wharf in San Francisco, California and the River Walk in San Antonio, Texas. Tourist areas are very attractive locations because they offer high
levels of foot traffic and favorable customer spending characteristics, and greatly increase our visibility and name recognition.
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Other Environments
We believe there are a number of other environments that have the characteristics necessary for the successful operation of Rocky Mountain Chocolate Factory
stores such as airports and sports arenas. Eight franchised Rocky Mountain Chocolate Factory stores exist at airport locations.
Strip/Convenience Centers
Our self-serve frozen yogurt locations are primarily located in strip and convenience center locations. Such centers generally have convenient parking and
feature many retail entities without enclosed connecting walkways. Such centers generally offer favorable rents and the ability to operate during hours when
other operating environments are closed, such as late at night.
Franchising Program
General
Our franchising philosophy is one of service and commitment to our franchise system, and we continuously seek to improve our franchise support services. Our
concept has been rated as an outstanding franchise opportunity by publications and organizations rating such opportunities. In January 2011, Rocky Mountain
Chocolate Factory was rated the number one franchise opportunity in the candy category by Entrepreneur Magazine (the last publication of this category
ranking). As of March 31, 2017, there were 283 franchised stores in the Rocky Mountain Chocolate Factory system and 105 franchised stores under the U-Swirl
frozen yogurt brands. We strive to bring this philosophy of service and commitment to all of our franchised brands and believe this strategy gives us a competitive
advantage in the support of frozen yogurt franchises.
Franchisee Sourcing and Selection
The majority of new franchises are awarded to persons referred by existing franchisees, to interested consumers who have visited Rocky Mountain Chocolate
Factory stores and to existing franchisees. We also advertise for new franchisees in national and regional newspapers as suitable potential store locations come
to our attention. Franchisees are approved by us on the basis of the applicant's net worth and liquidity, together with an assessment of work ethic and personality
compatibility with our operating philosophy.
International Franchising and Licensing
I n FY 1992, we entered into a franchise development agreement covering Canada with Immaculate Confections, Ltd. of Vancouver, British Columbia
(“Immaculate Confections”). Pursuant to this agreement, Immaculate Confections purchased the exclusive right to franchise and operate Rocky Mountain
Chocolate Factory stores in Canada. As of March 31, 2017, Immaculate Confections operated 64 stores under this agreement.
In FY 2000, we entered into a franchise development agreement covering the Gulf Cooperation Council States of United Arab Emirates, Qatar, Bahrain, Kuwait
and Oman with Al Muhairy Group of United Arab Emirates (“Al Muhairy Group”). Pursuant to this agreement, Al Muhairy Group purchased the exclusive right to
franchise and operate Rocky Mountain Chocolate Factory stores in the Gulf Cooperation Council States. As of March 31, 2017, Al Muhairy Group operated four
stores under this agreement.
Our business was significantly affected by the global recession during 2008-2009. During this period there was a decrease in leads and qualified franchisees for
domestic franchise growth. Amidst this environment we initiated a program to focus on international expansion. International growth is generally achieved
through entry into a Master License Agreement covering specific countries, with a licensee that meets minimum qualifications to develop Rocky Mountain
Chocolate Factory, or a brand of U-Swirl in that country. License agreements are generally entered into for a period of 3-10 years and allow the licensee
exclusive development rights in a country. Generally we require an initial license fee and commitment to a development schedule. International license
agreements in place at February 28, 2017 include the following:
•
•
In April 2012, we entered into a Master Licensing Agreement covering the country of Japan with a strategic licensee based in Hong Kong. As of March
31, 2017, five units were operating under this agreement. The licensee has not developed Japan in accordance with the development schedule set forth
in the agreement and we are currently evaluating ways to retain licensee operations in Japan.
In March 2013, we entered into a Licensing Agreement in the country of South Korea. As of March 31, 2017, 18 units were operating under this
agreement.
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•
•
In October 2014, we entered into a Licensing Agreement in the Republic of the Philippines. As of March 31, 2017 three units were operating under the
agreement.
Through our U-Swirl subsidiary , we have an additional international development agreement covering Canada.
Co-branding
In August 2009, we entered into a Master License Agreement with Kahala Franchise Corp. Under the terms of the agreement, select current and future Cold
Stone Creamery franchise stores are co-branded with both the Rocky Mountain Chocolate Factory and the Cold Stone Creamery brands. Locations developed
or modified under the agreement are subject to the approval of both parties. Locations developed or modified under the agreement will remain franchisees of
Cold Stone Creamery and will be licensed to offer the Rocky Mountain Chocolate Factory brand. As of March 31, 2017, Cold Stone Creamery franchisees
operated 83 stores under this agreement.
Additionally, we allow U-Swirl brands to offer Rocky Mountain Chocolate Factory products under terms similar to other co-branding agreements. As of March 31,
2017, there were 19 franchise and Company-owned U-Swirl cafés offering Rocky Mountain Chocolate Factory products.
Training and Support
Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a comprehensive training program in store
operations and management. We have established a training center at our Durango headquarters in the form of a full-sized replica of a properly configured and
merchandised Rocky Mountain Chocolate Factory store. U-Swirl franchisees are required to complete a similar training program. Topics covered in the training
course include our philosophy of store operation and management, customer service, merchandising, pricing, cooking, inventory and cost control, quality
standards, record keeping, labor scheduling and personnel management. Training is based on standard operating policies and procedures contained in an
operations manual provided to all franchisees, which the franchisee is required to follow by terms of the franchise agreement. Additionally, and importantly,
trainees are provided with a complete orientation to our operations by working in key factory operational areas and by meeting with members of our senior
management.
Our operating objectives include providing knowledge and expertise in merchandising, marketing and customer service to all front-line store level employees to
maximize their skills and ensure that they are fully versed in our proven techniques.
We provide ongoing support to franchisees through our field consultants, who maintain regular and frequent communication with the stores by phone and by site
visits. The field consultants also review and discuss with the franchisee store operating results and provide advice and guidance in improving store profitability
and in developing and executing store marketing and merchandising programs.
Quality Standards and Control
The franchise agreement for Rocky Mountain Chocolate Factory franchisees requires compliance with our procedures of operation and food quality
specifications and permits audits and inspections by us.
Operating standards for Rocky Mountain Chocolate Factory stores are set forth in operating manuals. These manuals cover general operations, factory ordering,
merchandising, advertising and accounting procedures. Through their regular visits to franchised stores, our field consultants audit performance and adherence
to our standards. We have the right to terminate any franchise agreement for non-compliance with our operating standards. Products sold at the stores and
ingredients used in the preparation of products approved for on-site preparation must be purchased from us or from approved suppliers.
The Franchise Agreement: Terms and Conditions
The domestic offer and sale of our franchise concepts are made pursuant to the respective Franchise Disclosure Document prepared in accordance with federal
and state laws and regulations. States that regulate the sale and operation of franchises require a franchisor to register or file certain notices with the state
authorities prior to offering and selling franchises in those states.
Under the current form of our domestic franchise agreements, franchisees pay us (i) an initial franchise fee for each store, (ii) royalties based on monthly gross
sales, and (iii) a marketing fee based on monthly gross sales. Franchisees are generally granted exclusive territory with respect to the operation of their stores
only in the immediate vicinity of their stores. Chocolate and yogurt products not made on the premises by franchisees must be purchased from us or approved
suppliers. The franchise agreements require franchisees to comply with our procedures of operation and food quality specifications, to permit inspections and
audits by us and to remodel stores to conform with standards then in effect. We may terminate the franchise agreement upon the failure of the franchisee to
comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission
by the franchisee of any unlawful or deceptive practice, which in our judgment is likely to adversely affect the system. Our ability to terminate franchise
agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See "Business - Regulation."
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The agreements prohibit the transfer or assignment of any interest in a franchise without our prior written consent. The agreements also give us a right of first
refusal to purchase any interest in a franchise if a proposed transfer would result in a change of control of that franchise. The refusal right, if exercised, would
allow us to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee.
The term of each franchise agreement is ten years, and franchisees have the right to renew for one additional ten-year term.
Franchise Financing
We do not typically provide prospective franchisees with financing for their stores, but we have developed relationships with several sources of franchisee
financing to whom we will refer franchisees. Typically, franchisees have obtained their own sources of such financing and have not required our assistance.
During FY 2014, we began an initiative to finance entrepreneurial graduates of the Missouri Western State University (“MWSU”) entrepreneurial program.
Beginning in FY 2010, recent graduates were awarded the opportunity to own a Rocky Mountain Chocolate Factory franchise under favorable financing terms.
Prior to FY 2014, the financing was provided by an independent benefactor of the MWSU School of Business. Beginning in FY 2014, we began to finance the
graduates directly, under similar terms as the previous financing facility. This program has generally included financing for the purchase of formerly Company-
owned locations or for the purchase of underperforming franchise locations. As of February 28, 2017, approximately $460,000 was included in notes receivable
as a result of this program. As of March 31, 2017, there were 18 units in operation by graduates of the MWSU entrepreneurial program.
Licensee Financing
During FY 2011, we began a program to finance the remodel costs of a select number of co-branded licensed Cold Stone Creamery locations. The financing
was provided to existing Cold Stone Creamery franchisees that were required to meet a number of financial qualifications prior to approval. At February 28,
2017, approximately $49,000 was included in notes receivable as a result of this program.
Company Store Program
As of March 31, 2017, there were four company-owned Rocky Mountain Chocolate Factory stores and five company-owned U-Swirl cafés. Company-owned
stores provide a training ground for Company-owned store personnel and district managers and a controllable testing ground for new products and promotions,
operating and training methods and merchandising techniques, which may then be incorporated into the franchise store operations.
Managers of company-owned stores are required to comply with all Company operating standards and undergo training and receive support from us similar to
the training and support provided to franchisees. See "Franchising Program-Training and Support" and "Franchising Program-Quality Standards and Control."
Manufacturing Operations
General
We manufacture our chocolate candies at our factory in Durango, Colorado. All products are produced consistent with our philosophy of using only the finest
high quality ingredients to achieve our marketing motto of "The Peak of Perfection in Handmade Chocolates ®."
We have always believed that we should control the manufacturing of our own chocolate products. By controlling manufacturing, we can better maintain our high
product quality standards, offer unique, proprietary products, manage costs, control production and shipment schedules and potentially pursue new or under-
utilized distribution channels.
Manufacturing Processes
The manufacturing process primarily involves cooking or preparing candy centers, including nuts, caramel, peanut butter, creams and jellies, and then coating
them with chocolate or other toppings. All of these processes are conducted in carefully controlled temperature ranges, and we employ strict quality control
procedures at every stage of the manufacturing process. We use a combination of manual and automated processes at our factory. Although we believe that it is
currently preferable to perform certain manufacturing processes, such as dipping of some large pieces by hand, automation increases the speed and efficiency
of the manufacturing process. We have from time to time automated processes formerly performed by hand where it has become cost-effective for us to do so
without compromising product quality or appearance.
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We seek to ensure the freshness of products sold in Rocky Mountain Chocolate Factory stores with frequent shipments. Most Rocky Mountain Chocolate
Factory stores do not have significant space for the storage of inventory, and we encourage franchisees and store managers to order only the quantities that they
can reasonably expect to sell within approximately two to four weeks. For these reasons, we generally do not have a significant backlog of orders.
Ingredients
The principal ingredients used in our products are chocolate, nuts, sugar, corn syrup, cream and butter. The factory receives shipments of ingredients daily. To
ensure the consistency of our products, we buy ingredients from a limited number of reliable suppliers. In order to assure a continuous supply of chocolate and
certain nuts, we frequently enter into purchase contracts of between six to eighteen months for these products. Because prices for these products may fluctuate,
we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall. We have one or more
alternative sources for most essential ingredients and therefore believe that the loss of any supplier would not have a material adverse effect on our business or
results of operations. We currently purchase small amounts of finished candy from third parties on a private label basis for sale in Rocky Mountain Chocolate
Factory stores.
Trucking Operations
We operate eight trucks and ship a substantial portion of our products from the factory on our own fleet. Our trucking operations enable us to deliver our products
to the stores quickly and cost-effectively. In addition, we back-haul our own ingredients and supplies, as well as products from third parties, on return trips, which
helps achieve even greater efficiencies and cost savings.
Marketing
General
We rely primarily on in-store promotion and point-of-purchase materials to promote the sale of our products. The monthly marketing fees collected from
franchisees are used by us to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update our local store marketing
handbooks.
We focus on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and mail order catalogs
generated by our in-house Creative Services department. The department works directly with franchisees to implement local store marketing programs.
We have not historically , and do not intend to, engage in national traditional media advertising in the near future. Consistent with our commitment to community
support, we aggressively seek opportunities to participate in local and regional events, sponsorships and charitable causes. This support leverages low cost,
high return publicity opportunities for mutual gain partnerships. Through programs such as Fudge for Troops, and collaborations with Sylvan Learning Centers
and other national/local organizations focused on youth/leadership development and underserved populations in our community we have developed
relationships that define our principal platforms, and contribute to charitable causes that provide great benefits at a national level.
Internet and Social Media
Beginning in 2010, we initiated a program to leverage the marketing benefits of various social media outlets. These low cost marketing opportunities seek to
leverage the positive feedback of our customers to expand brand awareness through a customer’s network of contacts. Complementary to local store marketing
efforts, these networks also provide a medium for us to communicate regularly and authentically with customers. When possible, we work to facilitate direct
relationships between our franchisees and their customers. We use social media as a powerful tool to build brand recognition, increase repeat exposure and
enhance dialogue with consumers about their preferences and needs. To date, the majority of stores have location specific websites and location specific
Facebook® pages dedicated to help customers interact directly with their local store. Proceeds from the monthly marketing fees collected from franchisees are
used by us to facilitate and assist stores in managing their online presence consistent with our brand and marketing efforts.
Licensing
We have developed relationships and utilized licensing partners to leverage the equity of the Rocky Mountain Chocolate Factory brand. These licensed products
place our brand and story in front of consumers in environments where they regularly shop but may not be seeing our brand at present. We regularly review
product opportunities and selectively pursue those we believe will have the greatest impact. The most recent example is the announcement of our Rocky
Mountain Chocolate Factory Chocolatey Almond breakfast cereal manufactured, marketed, and distributed by Kellogg’s Company. Some of our specialty
markets customers (customers outside our system of franchised domestic retail locations) have worked with us to offer licensed products alongside products we
produce to further enhance brand placement and awareness.
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Competition
The retailing of confectionery and frozen dessert products is highly competitive. We and our franchisees compete with numerous businesses that offer products
similar to those our stores offer. Many of these competitors have greater name recognition and financial, marketing and other resources than us. In addition,
there is intense competition among retailers for real estate sites, store personnel and qualified franchisees.
We believe that our principal competitive strengths lie in our name recognition and our reputation for the quality, value, variety and taste of our products and the
special ambiance of our stores; our knowledge and experience in applying criteria for selection of new store locations; our expertise in merchandising and
marketing of chocolate and other candy products; and the control and training infrastructures we have implemented to assure execution of successful practices
and techniques at our store locations. In addition, by controlling the manufacturing of our own chocolate products, we can better maintain our high product quality
standards for those products, offer proprietary products, manage costs, control production and shipment schedules and pursue new or under-utilized distribution
channels.
Trade Name and Trademarks
The trade name " Rocky Mountain Chocolate Factory®," the phrases, "The Peak of Perfection in Handmade Chocolates ®", "America's Chocolatier®” , “The
World’s Chocolatier®” as well as all other trademarks, service marks, symbols, slogans, emblems, logos and designs used in the Rocky Mountain Chocolate
Factory system, are our proprietary rights. We believe that all of the foregoing are of material importance to our business. The registration for the trademark
“Rocky Mountain Chocolate Factory” is registered in the United States and Canada. Applications have been filed to register the Rocky Mountain Chocolate
Factory trademark and/or obtained in certain foreign countries.
In connection with U-Swirl’s frozen yogurt café operations, the following marks are owned by U-Swirl and have been registered with the U.S. Patent and
Trademark Office: “U-Swirl Frozen Yogurt And Design”; “U-Swirl Frozen Yogurt”; “U-Swirl”; “U and Design”; “Worth The Weight”; “Frequent Swirler”; “Yogurtini”;
“CherryBerry Self-Serve Yogurt Bar”; “Yogli Mogli”; “Best on the Planet”; “Fuzzy Peach”; “U-Swirl-N-Go”; and “Serve Yo Self”. The “U-Swirl Frozen Yogurt and
Design” (a logo) is also registered in Mexico and U-Swirl has a registration for “U-Swirl” in Canada.
We have not attempted to obtain patent protection for the proprietary recipes developed by our master candy-maker and instead rely upon our ability to maintain
the confidentiality of those recipes.
Employees
At February 28, 2017, we employed approximately 280 people. Most employees, with the exception of store management, factory management and corporate
management, are paid on an hourly basis. We also employ some people on a temporary basis during peak periods of store and factory operations. We seek to
assure that participatory management processes, mutual respect and professionalism and high performance expectations for the employee exist throughout the
organization. We believe that we provide working conditions, wages and benefits that compare favorably with those of our competitors. Our employees are not
covered by a collective bargaining agreement. We consider our employee relations to be good.
Seasonal Factors
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays and the summer vacation season than at other
times of the year, which may cause fluctuations in our quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be,
affected by the timing of new store openings, the sale of franchises and the timing of purchases by customers outside our network of franchised locations.
Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full
fiscal year.
Regulation
Company-owned Rocky Mountain Chocolate Factory stores and Company-owned U-Swirl cafés are subject to licensing and regulation by the health, sanitation,
safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining the required licensing or approvals could delay or
prevent the opening of new stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises. We are also subject
to the Federal Trade Commission regulations relating to disclosure requirements in the sale of franchises and ongoing disclosure obligations.
Additionally, certain states have enacted and others may enact laws and regulations governing the termination or non-renewal of franchises and other aspects of
the franchise relationship that are intended to protect franchisees. Although these laws and regulations, and related court decisions, may limit our ability to
terminate franchises and alter franchise agreements, we do not believe that such laws or decisions will have a material adverse effect on our franchise
operations. However, the laws applicable to franchise operations and relationships continue to develop, and we are unable to predict the effect on our intended
operations of additional requirements or restrictions that may be enacted or of court decisions that may be adverse to franchisors.
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Federal and state environmental regulations have not had a material impact on our operations but more stringent and varied requirements of local governmental
bodies with respect to zoning, land use and environmental factors could delay construction of new stores.
Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A
finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an
indeterminate period of time. Our product labeling is subject to and complies with the Nutrition Labeling and Education Act of 1990 and the Food Allergen
Labeling and Consumer Protection Act of 2004.
We provide a limited amount of trucking services to third parties, to fill available space on our trucks. Our trucking operations are subject to various federal and
state regulations, including regulations of the Federal Highway Administration and other federal and state agencies applicable to motor carriers, safety
requirements of the Department of Transportation relating to interstate transportation and federal, state and Canadian provincial regulations governing matters
such as vehicle weight and dimensions.
We believe that we are operating in substantial compliance with all applicable laws and regulations.
Financial Information About Segments
See Note 9 “Operating Segments” to our consolidated financial statements included in this Annual Report in Part II. Item 8. “Financial Statements and
Supplementary Data” for financial information relating to our segments.
Available Information
The Internet address of our website is www.rmcf.com. Additional websites specific to our franchise opportunities are www.sweetfranchise.com and www.u-
swirl.com.
We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission
(“SEC”). We make available free of charge, through our Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after
we file such material with, or furnish it to, the SEC. The public may also read and copy materials we file with the SEC at the SEC’s Public Reference Room,
which is located at 100 F Street, NE, Room 1580, Washington, DC 20549. You can obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers
that file electronically with the SEC at www.sec.gov. The contents of our websites are not incorporated into, and should not be considered a part of, this Annual
Report.
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Item 1A. RISK FACTORS
General Economic Conditions Could Have a Material Adverse Effect on our Business, Results of Operations and Liquidity.
Consumer purchases of discretionary items, including our products, generally decline during weak economic periods and other periods where disposable income
is adversely affected. Our performance is subject to factors that affect worldwide economic conditions including employment, consumer debt, reductions in net
worth based on severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence,
value of the U.S. dollar versus foreign currencies and other macroeconomic factors. These factors may cause consumers to purchase products from lower
priced competitors or to defer purchases of products altogether.
Economic weakness could have a material effect on our results of operations, liquidity and capital resources. It could also impact our ability to fund growth and/or
result in us becoming more reliant on external financing, the availability and terms of which may be uncertain. In addition, a weak economic environment may
exacerbate the other risks noted below.
Our Sales to Specialty Market Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among a Small Number of
Customers.
Revenue from one customer of the Company ’s manufacturing segment represented approximately $4.1 million or 11% of the Company’s revenues during the
year ended February 28, 2017. The Company’s future results may be adversely impacted by a change in the purchases of this customer.
Our Growth is Dependent Upon Attracting and Retaining Qualified Franchisees and Their Ability to Operate Their Franchised Stores Successfully .
Our continued growth and success is dependent in part upon our ability to attract, retain and contract with qualified franchisees. Our growth is dependent upon
the ability of franchisees to operate their stores successfully, promote and develop our store concepts, and maintain our reputation for an enjoyable in-store
experience and high quality products. Although we have established criteria to evaluate prospective franchisees and have been successful in attracting
franchisees, there can be no assurance that franchisees will be able to operate successfully in their franchise areas in a manner consistent with our concepts
and standards.
Our Expansion Plans Are Dependent on the Availability of Suitable Sites for Franchised Stores at Reasonable Occupancy Costs .
Our expansion plans are critically dependent on our ability to obtain suitable sites at reasonable occupancy costs for our franchised stores in high foot traffic retail
environments. There is no assurance that we will be able to obtain suitable locations for our franchised stores and kiosks in this environment at a cost that will
allow such stores to be economically viable.
A Significant Shift by Franchisees from Company-Manufactured Products to Products Produced By Third Parties Could Adversely Affect Our
Operations.
We believe approximately 42% of franchised stores' revenues are generated by sales of products manufactured by and purchased from us, 53% by sales of
products made in the stores with ingredients purchased from us or approved suppliers and 5% by sales of products purchased from approved suppliers for
resale in the stores. Franchisees' sales of products manufactured by us generate higher revenues to us than sales of store-made or other products. We have
seen a significant increase in system-wide sales of store-made and other products, which has led to a decrease in purchases from us and an adverse effect on
our revenues. If this trend continues, it could further adversely affect our total revenues and results of operations. Such a decrease could result from franchisees'
decisions to sell more store-made products or products purchased from approved third party suppliers.
Same Store Sales Have Fluctuated and Will Continue to Fluctuate on a Regular Basis .
Our same store sales, defined as year-over-year sales for a store that has been open at least one year, have fluctuated significantly in the past on an annual and
quarterly basis and are expected to continue to fluctuate in the future. During the past five fiscal years, same store sales results at RMCF franchise stores have
fluctuated as follows: (a) from 0.2% to 3.1% for annual results; (b) from (3.9%) to 7.5% for quarterly results. Sustained declines in same store sales or significant
same store sales declines in any single period could have a material adverse effect on our results of operations.
Increases in Costs Could Adversely Affect Our Operations .
Inflationary factors such as increases in the costs of ingredients, energy and labor directly affect our operations. Most of our leases provide for cost-of-living
adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease costs for new
facilities may reflect potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on our increased costs to our
customers.
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Price Increases May Not Be Sufficient To Offset Cost Increases An d Maintain Profitability Or Ma y Result In Sales Volume Declines Associated With
Pricing Elasticity.
We may be able to pass some or all raw material, energy and other input cost increases to customers by increasing the selling prices of our products , however,
higher product prices may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices sufficiently, or in a
timely manner, to offset increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our sales
volume decreases significantly, there could be a negative impact on our financial condition and results of operations.
The Availability and Price of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our Control .
Several of the principal ingredients used in our products, including chocolate and nuts, are subject to significant price fluctuations. Although cocoa beans, the
primary raw material used in the production of chocolate, are grown commercially in Africa, Brazil and several other countries around the world, cocoa beans are
traded in the commodities market, and their supply and price are subject to volatility. We believe our principal chocolate supplier purchases most of its beans at
negotiated prices from African growers, often at a premium to commodity prices. The supply and price of cocoa beans, and in turn of chocolate, are affected by
many factors, including monetary fluctuations and economic, political and weather conditions in countries in which cocoa beans are grown. We purchase most of
our nut meats from domestic suppliers who procure their products from growers around the world. The price and supply of nuts are also affected by many
factors, including weather conditions in the various regions in which the nuts we use are grown. Although we often enter into purchase contracts for these
products, significant or prolonged increases in the prices of chocolate or of one or more types of nuts, or the unavailability of adequate supplies of chocolate or
nuts of the quality sought by us, could have a material adverse effect on us and our results of operations.
We Now Own 100% of the Operations of U-Swirl, Which Has a History of Losses and May Continue to Report Losses in the Future.
In January 2013, we obtained a controlling ownership interest in SWRL. This interest was the result of a transaction designed to create a self-serve frozen yogurt
company through the combination of three formerly separate self-serve frozen yogurt retailers (U-Swirl, Yogurtini and Aspen Leaf Yogurt). SWRL has historically
reported net losses. In February 2016, we foreclosed on the all of the outstanding common stock of U-Swirl (the operating subsidiary of SWRL) in full
satisfaction of the obligations under the SWRL Loan Agreement, meaning that U-Swirl is now a wholly-owned subsidiary of the Company. If U-Swirl continues to
not be profitable, those operating losses of U-Swirl could have a material adverse effect on our overall results of operations.
We And Our Subsidiaries May Be Unable To Successfully Integrate The Operations Of Acquired Businesses And May Not Achieve The Co st Savings
And Increased Revenues Anticipated As A Result Of These Acquisitions.
Over the past three years, U-Swirl has acquired a number of other yogurt franchising businesses. Achieving the anticipated benefits of acquisitions will depend
in part upon our and our subsidiaries’ ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously
operated independently may result in significant challenges, and we and our subsidiaries may be unable to accomplish the integration smoothly or successfully.
The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management’s
attention from the day-to-day operations of the Company. In addition, the process of integrating operations may cause an interruption of, or loss of momentum
in, the activities of one or more of our or our subsidiaries’ businesses and the loss of key personnel from us or the acquired businesses. Our and our
subsidiaries’ strategy is, in part, predicated on the ability to realize cost savings and to increase revenues through the acquisition of businesses that add to the
breadth and depth of our products and services. Achieving these cost savings and revenue increases is dependent upon a number of factors, many of which are
beyond our control.
The Seasonality of Our Sales and New Store Openings Can Have a Significant Impact on Our Financial Results from Quarter to Quarter .
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays and summer vacation season than at other times
of the year, which causes fluctuations in our quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by
the timing of new store openings and the sale of franchises. Because of the seasonality of our business and the impact of new store openings and sales of
franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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The Retailing of Confectionery and Frozen Dessert Products is Highly Competitive and Many of Our Competitors Have Competitive Advantages Over
Us.
The retailing of confectionery and frozen dessert products is highly competitive. We and our franchisees compete with numerous businesses that offer similar
products. Many of these competitors have greater name recognition and financial, marketing and other resources than we do. In addition, there is intense
competition among retailers for real estate sites, store personnel and qualified franchisees. Competitive market conditions could have a material adverse effect
on us and our results of operations and our ability to expand successfully.
Changes in Consumer Tastes and Trends Could Have a Material Adverse Effect on Our Operations .
The sale of our products is affected by changes in consumer tastes and eating habits, including views regarding consumption of chocolate and frozen yogurt.
Numerous other factors that we cannot control, such as economic conditions, demographic trends, traffic patterns and weather conditions, influence the sale of
our products. Changes in any of these factors could have a material adverse effect on us and our results of operations.
We Are Subject to Federal, State and Local Regulation .
We are subject to regulation by the Federal Trade Commission and must comply with certain state laws governing the offer, sale and termination of franchises
and the refusal to renew franchises. Many state laws also regulate substantive aspects of the franchisor-franchisee relationship by, for example, requiring the
franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees and regulating discrimination
among franchisees in charges, royalties or fees. Franchise laws continue to develop and change, and changes in such laws could impose additional costs and
burdens on franchisors. Our failure to obtain approvals to sell franchises and the adoption of new franchise laws, or changes in existing laws, could have a
material adverse effect on us and our results of operations.
Each of our Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state
or municipality where located. Difficulties or failures in obtaining required licenses or approvals from such agencies could delay or prevent the opening of a new
store. We and our franchisees are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working
and safety conditions and citizenship requirements. Because a significant number of our employees are paid at rates related to the federal minimum wage,
increases in the minimum wage would increase our labor costs. The failure to obtain required licenses or approvals, or an increase in the minimum wage rate,
employee benefits costs (including costs associated with mandated health insurance coverage) or other costs associated with employees, could have a material
adverse effect on us and our results of operations.
Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A
finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an
indeterminate period of time, and could have a material adverse effect on us and our results of operations.
We Are Subject to Periodic Litigation, Which Could Result in Unexpected Expense of Time and Resources.
From time to time, we are called upon to defend ourselves against lawsuits relating to our business. Due to the inherent uncertainties of litigation, we cannot
accurately predict the ultimate outcome of any such proceedings. We are currently involved in one potentially adverse legal proceeding. For a detailed
discussion of our current material legal proceedings, see Item 3. Legal Proceedings in Part I of this Form 10-K. An unfavorable outcome in any current or future
legal proceedings could have an adverse impact on our business, and financial results. In addition, any significant litigation in the future, regardless of its merits,
could divert management's attention from our operations and result in substantial legal fees. Any litigation could result in substantial costs and a diversion of
management's attention and resources that are needed to successfully run our business.
Changes in Health Benefit Claims and Healthcare Reform Legislation Could Have a Material Adverse Effect on Our Operations .
We accrue for costs to provide self-insured benefits for our employee health benefits program. We accrue for self-insured health benefits based on historical
claims experience and we maintain insurance coverage to prevent financial losses from catastrophic health benefit claims. We monitor pending and enacted
legislation in an effort to evaluate the effects of such legislation upon our business. Our financial position or results of operations could be materially adversely
impacted should we experience a material increase in claims costs or a change in healthcare legislation that impacts our business. Our accrued liability for self-
insured employee health benefits at February 28, 2017 and February 29, 2016 was $100,000 and $78,200, respectively.
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Our Expansion Into New Markets May Present Increased Risks Due To Our Unfamiliarity With Those Areas And Our Target Customers’ Unfamiliarity
With Our Brands.
Consumers in any new markets we enter will not be familiar with our brands, and we will need to build brand awareness in those markets through significant
investments in advertising and promotional activity. We may find it more difficult in our markets to secure desirable locations and to hire, motivate and keep
qualified employees.
Anti-Takeover Provisions In Our Certificate Of Incorporation An d Bylaws Ma y Delay Or Prevent A Third Party Acquisition Of The Company, Which
Could Decrease The Value Of Our Common Stock.
As described above, effective March 1, 2015, we reorganized to create a holding company structure and the new holding company is organized in the State of
Delaware. Our new certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us without the consent of
our Board of Directors. These provisions will:
•
•
•
•
limit the business at special meetings to the purpose stated in the notice of the meeting;
authorize the issuance of “blank check” preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover
attempt and that the Board of Directors can create and issue without prior stockholder approval;
establish advance notice requirements for submitting nominations for election to the Board of Directors and for proposing matters that can be acted upon
by stockholders at a meeting;
require the affirmative vote of the “disinterested” holders of a majority of our common stock to approve certain business combinations involving an
“interested stockholder” or its affiliates, unless either minimum price criteria and procedural requirements are met, or the transaction is approved by a
majority of our “continuing directors” (known as “fair price provisions”).
Although we believe all of these provisions will make a higher third-party bid more likely by requiring potential acquirers to negotiate with the Board of Directors,
these provisions will apply even if an initial offer may be considered beneficial by some stockholders and therefore could delay and/or prevent a deemed
beneficial offer from being considered. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors
and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition,
Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of us. Any delay or prevention of a change of
control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.
Issues Or Concerns Related To The Quality And Safety Of Our Products, Ingredients Or Packaging Could Cause A Product Recall And/Or Result In
Harm To The Company’s Reputation, Negatively Impacting Our Results of Operations.
In order to sell our products, we need to maintain a good reputation with our customers and consumers. Issues related to the quality and safety of our products,
ingredients or packaging could jeopardize our Company’s image and reputation. Negative publicity related to these types of concerns, or related to product
contamination or product tampering, whether valid or not, could decrease demand for our products or cause production and delivery disruptions. We may need to
recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could
result in payments of fines or damages. Costs associated with these potential actions could negatively affect our results of operations.
Disruption To Our Manufacturing Operations Or Supply Chain Could Impair Our Ability To Produce Or Deliver Finished Products, Resulting In A
Negative Impact On Our Results of Operations.
All of our manufacturing operations are located in Durango, Colorado . Disruption to our manufacturing operations or our supply chain could result from a number
of factors, including: natural disaster, pandemic outbreak of disease, weather, fire or explosion, terrorism or other acts of violence, labor strikes or other labor
activities, unavailability of raw or packaging materials, and operational and/or financial instability of key suppliers and other vendors or service providers. We
believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if
they were to occur. However, if we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive
events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted.
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O u r Financial Results Ma y Be Adversely Impacted By Th e Failure To Successfully Execute Or Integrate Acquisitions, Divestitures An d Joint
Ventures.
From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity
depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate
contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational
risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and
challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions,
divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our results of operations.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our manufacturing operations and corporate headquarters are located at a 53,000 square foot manufacturing facility, which we own, in Durango, Colorado.
During FY 2017, our factory produced approximately 2.56 million pounds of chocolate candies, which was a decrease of 6% from the approximately 2.74 million
pounds produced in FY 2016. During FY 2008, we conducted a study of factory capacity. As a result of this study, we believe the factory has the capacity to
produce approximately 5.3 million pounds per year, subject to certain assumptions about product mix. In January 1998, we acquired a two-acre parcel adjacent
to our factory to ensure the availability of adequate space to expand the factory as volume demands.
U-Swirl’s principal offices are the same as the Company’s and located at 265 Turner Drive, Durango, Colorado 81303. U-Swirl also has an office located at 1175
American Pacific, Suite C, Henderson, Nevada 89074, in approximately 5,200 square feet of space leased for a term of five years expiring in July 2018. The rent
is approximately $2,800 per month. As of May 1, 2015, we have a signed sublease agreement for this location.
A s of February 28, 2017, all four Rocky Mountain Chocolate Factory Company-owned stores were occupied pursuant to non-cancelable leases of five to ten
years having varying expiration dates from August 2018 to January 2026, some of which contain optional five or ten-year renewal rights. We do not deem any
individual store lease to be significant in relation to our overall operations.
The leases for our U-Swirl Company-owned cafés range from approximately 1,600 to 3,000 square feet and have varying expiration dates from March 2019 to
February 2020, some of which contain optional five or ten-year renewal rights. We currently have 5 café leases in place, which range between $3,400 and $7,600
per month, exclusive of common area maintenance charges and taxes.
We act as primary lessee of some franchised store premises, which we then sublease to franchisees, but the majority of existing locations are leased by the
franchisee directly. Our current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we were
the primary lessee at five of our 332 franchised stores and one office location. The subleases for such locations are on the same terms as the Company's leases
of the premises. For information as to the amount of our rental obligations under leases on both Company-owned and franchised stores, see Note 5
“Commitments and Contingencies” to our consolidated financial statements included in Item 8 of this Annual Report.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Except as described below, we are not presently
a party to any litigation that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe could have a
material adverse effect on our business, operating results, financial condition or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry
Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (together with the CherryBerry Entities, the “CherryBerry
Selling Parties”), pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a
part of the consideration for the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to
the CherryBerry Selling Parties. Pursuant to the CherryBerry Purchase Agreement, if the proceeds from the sale of any of the CB Shares on the open market
was less than $0.50 per share and the CherryBerry Selling Parties complied with other terms of the CherryBerry Purchase Agreement, SWRL agreed to pay a
shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry
Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been approximately
$1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at February 28, 2017. In
July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of shortfall payments based
on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District
Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an
improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement.
SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the
CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal
court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through
a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that
SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The
CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter
ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
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On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint from the Colorado District Court, and
thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern
District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court
seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado
Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed
a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the
CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry
Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion).
On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May
9, 2016, the Oklahoma Court granted that application and we filed an answer to this action in on June 6, 2016. All parties are currently involved in discovery
proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this
lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT ’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the NASDAQ Global Market under the trading symbol “RMCF.” The table below sets forth high and low sales price information and
dividends declared for our common stock for each quarter of FY 2017 and FY 2016.
Fiscal Year Ended February 2 8, 2017
HIGH
LOW
Dividends declared
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal Year Ended February 2 9, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Holders
$
$
$
$
$
$
$
$
12.17 $
10.97 $
11.28 $
10.69 $
HIGH
LOW
11.05 $
12.35 $
13.39 $
15.40 $
9.95 $
9.65 $
9.50 $
9.84 $
0.1200
0.1200
0.1200
0.1200
Dividends declared
0.1200
0.1200
0.1200
0.1200
9.30 $
10.75 $
11.56 $
12.65 $
On May 12, 2017, there were approximately 308 record holders of our common stock. We believe that there are more than 800 beneficial owners of our common
stock.
Dividends
The Company paid a quarterly cash dividend of $0.12 per common share on March 10, 2017 to stockholders of record on February 24, 2017. The dividends
paid by the Company for the past two fiscal years are outlined in the table above. Future declarations of dividends will depend on, among other things, our
results of operations, financial condition, cash flows and capital requirements, and on such other factors as the Board of Directors may in its discretion consider
relevant and in the best long term interest of stockholders. We are subject to various financial covenants related to our line of credit and other long-term debt,
however, those covenants do not restrict the Board of Director’s discretion of the future declaration of cash dividends.
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Stock Repurchase Program
O n July 15, 2014, the Company publicly announced a plan to purchase 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 common stock under the repurchase plan during the fourth
quarter of FY 2017. As of February 28, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended February 28 or 29, 2013 through 2017, are derived from the consolidated financial
statements of the Company, which have been audited by EKS&H LLLP, our independent registered public accounting firm. The selected financial data should be
read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report and in Item 7. “Management's
Discussion and Analysis of Financial Condition and Results of Operations” below.
All material inter-Company balances have been eliminated upon consolidation.
(Amounts in thousands, except per share data)
Selected Statement of Operations Data
YEARS ENDED FEBRUARY 28 or 29,
2017
2016
2015
2014
2013
Total revenues
Operating income
Net income
Basic Earnings per Common Share
Diluted Earnings per Common Share
$
$
$
$
38,296 $
5,524
3,450 $
40,457 $
3,713
4,426 $
41,508 $
5,965
3,938 $
39,185 $
5,236
4,392 $
0.59 $
0.75 $
0.64 $
0.72 $
0.58 $
0.73 $
0.61 $
0.68 $
Weighted average common shares outstanding
5,843
5,894
6,144
6,100
Weighted average common shares outstanding,
assuming dilution
5,994
6,095
6,413
6,437
Selected Balance Sheet Data
Working capital
Total assets
Long-term debt
Stockholders’ equity
$
7,091 $
29,418
2,529
18,829
7,433 $
30,316
3,831
18,479
9,371 $
34,138
5,083
19,738
8,884 $
35,153
6,292
19,852
36,315
2,540
1,478
0.24
0.24
6,079
6,219
8,981
23,834
-
17,389
Cash Dividend Declared per Common Share
$
0.480 $
0.480 $
0.450 $
0.440 $
0.440
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Rocky Mountain Chocolate Factory, Inc. , a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain
Chocolate Factory, Inc., a Colorado corporation) (collectively, the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery manufacturer and
retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other
confectionery products. Our subsidiary, U-Swirl International, Inc., franchises and operates self-serve frozen yogurt stores. Our revenues and profitability are
derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products. We also sell our
candy in selected locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of March 31, 2017, there
were four Company-owned, 83 licensee-owned and 283 franchised Rocky Mountain Chocolate Factory stores operating in 40 states, Canada, Japan, South
Korea, the Philippines, and the United Arab Emirates. As of March 31, 2017, U-Swirl operated five Company-owned stores and 105 franchised and 40 licensed
stores located in 33 states and Canada. U-Swirl operates self-serve frozen yogurt cafes under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli
Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
Effective March 1, 2015, we reorganized to create a holding company structure. Our operating subsidiary with the same name, Rocky Mountain Chocolate
Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky
Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF were exchanged on a one-for-
one basis for shares of common stock of Newco. Our new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol
“RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), we entered into two agreements to sell all of the assets of
our ALY frozen yogurt stores, along with our interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which we also acquired in
January 2013, to U-Swirl, Inc., a publicly traded company (OTCQB: SWRL) (“SWRL”), in exchange for a 60% controlling equity interest in SWRL, which was
subsequently diluted down to 39% as of February 28, 2017 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a
wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly
operate any Company-owned Aspen Leaf Yogurt locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of s elf-serve frozen yogurt concepts under the names “CherryBerry,”
“Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo,
N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and
other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of
SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to
various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January
16, 2016 without payment in full by SWRL. As a result of the defaults, we issued a demand for payment of all obligations under the SWRL Loan Agreement.
SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, we foreclosed on all of the outstanding stock of U-Swirl
International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl International, Inc.
(“U-Swirl”) becoming a wholly-owned subsidiary of the Company as of February 29, 2016.
Current Trends and Outlook
Our business was significantly affected by the global recession during 2008-2009. We continued to experience this difficult environment throughout FY 2010 and
FY 2011. The environment somewhat improved from FY 2012 to FY 2017, though we do not believe that the challenges have fully reversed. The economic
recovery has had a lesser positive impact upon retail as consumers shift shopping to online. Locations that have historically been favorable locations for our
franchisees, such as regional malls and outlet centers, have continued to struggle in the current environment. As a result, we intend to continue to focus on
managing the business in a seasoned, disciplined and controlled manner.
The financing that our franchisees have historically relied upon was substantially affected by the changes in banking and lending requirements in the years after
the global recession. Limited financing alternatives for domestic franchise growth have led us to pursue a strategy of expansion through co-branding with
complimentary concepts such as ice cream and frozen yogurt, international development, sale of our products to specialty markets, licensing the Rocky
Mountain Chocolate Factory brand for use with other appropriate consumer products, and selected entry of Rocky Mountain Chocolate Factory branded
products into other wholesale channels, along with business acquisitions as primary drivers of growth. This is a trend that continued in FY 2017 and we expect to
continue into the foreseeable future.
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Going forward in FY 2018, we are taking a conservative view of market conditions in the United States. We intend to continue to focus on our long-term
objectives while seeking to maintain flexibility to respond to market conditions, including the pursuit of international growth opportunities to reduce our
dependence on the domestic economy.
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in resort or
tourist locations, and the nature of the products we sell, which are highly seasonal. As we expanded our geographical diversity to include regional centers and
our franchise offerings to include frozen desserts, we have seen some moderation to our seasonal sales mix. Seasonal fluctuation in sales causes fluctuations in
quarterly results of operations. Historically, the strongest sales of our products have occurred during key holidays and summer vacation seasons. Additionally,
quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of
our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved
in other quarters or for a full fiscal year.
The most important factors in continued growth in our earnings are ongoing unit growth, increased same store sales and increased same store pounds
purchased from the factory.
Our ability to successfully achieve expansion of our franchise systems depends on many factors not within our control including the availability of suitable sites
for new store establishment and the availability of qualified franchisees to support such expansion.
Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depend on many factors,
including new store openings, competition, the receptivity of our franchise system to our product introductions and promotional programs. In FY 2017, same store
pounds purchased from the factory by franchised and co-branded licensed stores declined approximately 5.8% in the first quarter, declined approximately 2.1%
in the second quarter, declined approximately 0.8% in the third quarter, declined approximately 11.3% in the fourth quarter, and declined 4.7% overall in FY
2017 as compared to the same periods in FY 2016.
In May 2009, we announced the expansion of the co-branding test relationship with Cold Stone Creamery. The Company and Cold Stone Creamery, Inc. have
agreed to expand the co-branding relationship to more than a hundred potential locations, based upon the performance of several test locations, operating under
the test agreement announced in October 2008. We have additionally agreed to develop co-branded locations through U-Swirl and their associated brands. We
believe that if this co-branding strategy continues to prove financially viable it could represent a significant future growth opportunity. As of February 28, 2017,
Cold Stone licensees operated 83 co-branded locations, our U-Swirl franchisees operated 16 co-branded locations and we have co-branded 3 of our Company-
owned cafés.
In April 2012 we announced the execution of a Master Licensing Agreement covering the country of Japan. Under the terms of the agreement, the licensee will
pay the Company a Master License Fee for the right to open Rocky Mountain Chocolate Factory stores for its own account and for the account of franchisees
throughout the country of Japan. Since 2012, we have continued to develop internationally through the execution of license agreements in the countries of South
Korea and the Republic of the Philippines. Through our U-Swirl subsidiary we have an additional international development agreement covering Canada.
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Results of Operations
Fiscal 2017 Compared To Fiscal 2016
Results Summary
Basic earnings per share decreased 21.3% from $0.75 in FY 2016 to $0.59 in FY 2017. Revenues decreased 5.3% from $40.5 million for FY 2016 to $38.3
million for FY 2017. Operating income increased 48.8% from $3.7 million in FY 2016 to $5.5 million in FY 2017. Net income decreased 22.0% from $4.4 million
in FY 2016 to $3.5 million in FY 2017. The increase in operating income for FY 2017 compared to FY 2016 is due primarily to a decrease in costs for impairment
of long-lived assets and goodwill. The decrease in net income is primarily the result of income tax expense recognized in FY 2017, compared with FY 2016.
REVENUES
($’s in thousands)
Factory sales
Retail sales
Royalty and marketing fees
Franchise fees
Total
Factory Sales
For the Year Ended
February 29 or 28,
2017
25,423.8 $
4,452.7
8,095.2
324.7
38,296.4 $
2016
26,355.8 $
5,005.0
8,547.6
548.5
40,456.9 $
$
$
$
Change
( 932.0)
( 552.3)
( 452.4)
( 223.8)
(2,160.5)
%
Change
(3.5%)
(11.0%)
(5.3%)
(40.8%)
(5.3%)
The decrease in factory sales for FY 2017 compared to FY 2016 was primarily due to an 5.6% decrease in shipments of product to customers outside our
network of franchised retail stores and a 4.7% decrease in same-store pounds purchased by franchise and co-branded license locations during FY 2017
compared with FY 2016, and a 3.0% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of certain Company-owned locations and the closure
of a certain underperforming Company-owned location. Same store sales at all Company-owned stores and cafés increased 0.5% during FY 2017 compared
with FY 2016. Same-store sales at U-Swirl cafés decreased 2.2% during FY 2017 compared to FY 2016.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 201 7 compared to FY 2016 resulted from a 12.3% decrease in franchise units in operation and lower same
store sales. The average number of total franchise stores in operation decreased from 423 during FY 2016 to 371 during FY 2017. This decrease is the result of
domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation decreased 0.2% during FY 2017
compared to FY 2016. Franchise fee revenues decreased as a result of $9,000 in international license fees being recognized during FY 2017 compared with
$263,000 recognized during FY 2016.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2017, U-Swirl revenue decreased 20.2% to $5,216,100 compared with $6,535,600 of U-Swirl revenue consolidated within our results for FY 2016.
The decrease resulted from a 20.4% decrease in average domestic U-Swirl franchise cafés in operation during FY 2017 compared to FY 2016, primarily as a
result of store closings exceeding store openings, in-line with expected industry trends.
24
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COSTS AND EXPENSES
($’s in thousands)
Cost of sales – factory
Cost of sales – retail
Franchise costs
Sales and marketing
General and administrative
Retail operating
Total
Gross Margin
($’s in thousands)
Factory gross margin
Retail
Total
Gross Margin
(Percent)
Factory gross margin
Retail
Total
Adjusted Gross Margin
($’s in thousands)
Factory gross margin
Plus: depreciation and amortization
Factory adjusted gross margin
Retail
Total Adjusted Gross Margin
Factory adjusted gross margin
Retail
Total Adjusted Gross Margin
For the Year Ended
February 28 or 29,
2017
2016
$
Change
%
Change
$
$
$
$
19,181.0 $
1,554.8
2,067.5
2,658.4
4,005.1
2,404.0
31,870.8 $
19,151.7 $
1,714.8
2,452.6
2,466.5
4,663.9
2,951.8
33,401.3 $
29.3
(160.0)
(385.1)
191.9
(658.8)
(547.8)
(1,530.5)
0.2%
(9.3%)
(15.7%)
7.8%
(14.1%)
(18.6%)
(4.6%)
For the Year Ended
February 28 or 29,
2017
2016
$
Change
%
Change
6,242.8 $
2,897.9
9,140.7 $
7,204.1 $
3,290.2
10,494.3 $
( 961.3)
(392.3)
(1,353.6)
(13.3%)
(11.9%)
(12.9%)
For the Year Ended
February 28 or 29,
2017
2016
%
Change
%
Change
24.6%
65.1%
30.6%
27.3%
65.7%
33.5%
(2.7%)
(0.6%)
(2.9%)
(9.9%)
(0.9%)
(8.7%)
For the Year Ended
February 28 or 29,
2017
2016
$
Change
%
Change
$
$
6,242.8
447.7
6,609.5
2,897.9
9,507.4
$
$
26.0%
65.1%
31.8%
7,204.1
404.4
7,608.5
3,290.2
10,898.7
$
$
( 961.3)
43.3
(999.0)
(392.3)
(1,391.3)
28.9%
65.7%
34.8%
(2.9%)
(0.6%)
(3.0%)
(13.3%)
10.7%
(13.1%)
(11.9%)
(12.8%)
(10.0%)
(0.9%)
(8.6%)
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross
margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and
amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement
to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory
adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by
non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin
to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the
impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of
capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we
use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as
gross margin and factory gross margin.
25
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Cost of Sales and Gross Margin
Factory gross margin decreased 270 basis points during FY 2017 compared to FY 2016 due primarily to increased costs of labor and overhead related to
maintenance, equipment issues and product mix shift, partially offset by lower costs of certain materials. The decrease in Company-owned store margin is due to
product mix shift primarily resulting from the sale or closure of certain underperforming Company-owned stores and Cafés.
Franchise Costs
The decrease in franchise costs for FY 2017 compared to FY 2016 is due primarily to lower franchise costs associated with supporting U-Swirl franchise units in
FY 2017 compared to FY 2016 as a result of fewer store openings in FY 2017. As a percentage of total royalty and marketing fees and franchise fee revenue,
franchise costs decreased to 24.6% during FY 2017 from 27.0% during FY 2016. This decrease as a percentage of royalty, marketing and franchise fees is
primarily a result of a 15.7% decrease in franchise costs during FY 2017 compared to FY 2016.
Sales and Marketing
The increase in sales and marketing costs during FY 2017 compared to FY 2016 is primarily due to higher marketing related compensation and professional
fees partially offset by lower marketing-related costs associated with U-Swirl franchise locations. Marketing costs for U-Swirl franchise locations declined
because of lower marketing fee revenues resulting from fewer franchise stores in operation.
General and Administrative
The decrease in general and administrative costs during FY 2017 compared to FY 2016 is due primarily to the foreclosure of U-Swirl in the prior year and the
associated focus on reduction of duplicative general and administrative costs. During FY 2017, approximately $460,000 of U-Swirl general and administrative
costs were consolidated within our results, compared with approximately $1,291,000 during FY 2016. As a percentage of total revenues, general and
administrative expenses decreased to 10.5% in FY 2017 compared to 11.5% in FY 2016.
Retail Operating Expenses
The decrease in retail operating expenses during FY 2017 compared to FY 2016 was due primarily to changes in units in operation, resulting from the sale of
certain Company-owned units and the closure of certain underperforming Company-owned units. Retail operating expenses, as a percentage of retail sales,
decreased to 54.0% during FY 2017 from 59.0% during FY 2016. This is primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $ 841,000 during FY 2017, a decrease of 17.2% from
$1,016,000 incurred during FY 2016. This decrease was the result of fewer Company-owned store assets in service due to the sale or closure of certain
Company-owned stores and cafés. Depreciation and amortization included in cost of sales increased 10.7% from $404,000 during FY 2016 to $448,000 during
FY 2017. This increase was the result of an increase in production assets in service.
Other Income
Net interest expense was $ 128,800 in FY 2017 compared to net interest expense of $167,900 in FY 2016. This change was the result of lower average
outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions of U-Swirl.
Income Tax Expense
We realized an income tax expense of $1,946,000 in FY 2017 compared to an income tax benefit of $261,400 during FY 2016. As described further in Note 6 to
the consolidated financial statements, the increase in the effective tax rate is primarily due to the tax consequences of acquiring a 100% controlling interest in U-
Swirl during FY 2016.
26
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Fiscal 2016 Compared To Fiscal 2015
Results Summary
Basic earnings per share increased 17.2% from $0.64 in FY 2015 to $0.75 in FY 2016. Revenues decreased 2.5% from $41.5 million for FY 2015 to $40.5
million for FY 2016. Operating income decreased 5.4% from $6.0 million in FY 2015 to $5.6 million in FY 2016. Net income increased 12.4% from $3.9 million in
FY 2015 to $4.4 million in FY 2016. The decrease in operating income for FY 2016 compared to FY 2015 is due primarily to a decrease in revenues. The
increase in net income is primarily the result of an impairment charge associated with U-Swirl goodwill and certain long lived assets more than offset by income
tax benefit recognized.
REVENUES
($’s in thousands)
Factory sales
Retail sales
Royalty and marketing fees
Franchise fees
Total
Factory Sales
For the Year Ended
February 29 or 28,
2016
26,355.8 $
5,005.0
8,547.6
548.5
40,456.9 $
2015
25,894.6 $
6,206.0
8,821.0
586.8
41,508.4 $
$
$
$
Change
461.2
(1,201.0)
(273.4)
(38.3)
(1,051.5)
%
Change
1.8%
(19.4%)
(3.1%)
(6.5%)
(2.5%)
The increase in factory sales for FY 2016 compared to FY 2015 was primarily due to an 8.1% increase in shipments of product to customers outside our
network of franchised retail stores. This increase was partially offset by a 5.3% decrease in the average number of domestic Rocky Mountain Chocolate Factory
franchised stores in operation and a 1.5% decrease in same-store pounds purchased by franchise and co-branded license locations during FY 2016 compared
with FY 2015.
Retail Sales
The decrease in retail sales was primarily due to changes in retail units in operation resulting from the sale of five Company-owned locations and the closure of
two underperforming Company-owned cafés. Same store sales at all Company-owned stores and cafés decreased 0.8% during FY 2016 compared with FY
2015. Same-store sales at U-Swirl cafés decreased 1.0% during FY 2016 compared to FY 2015.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 2016 compared to FY 2015 resulted from an 11.1% decrease in franchise units in operation and lower same
store sales. The average number of total franchise stores in operation decreased from 476 during FY 2015 to 423 during FY 2016. This decrease is the result of
domestic store closures exceeding domestic store openings. Same store sales at all franchise stores and cafés in operation increased 0.7% during FY 2016
compared to FY 2015. Franchise fee revenues decreased as a result of fewer international license fees during FY 2016 compared to FY 2015.
U-Swirl Café Sales, Royalties, Marketing Fees and Franchise Fees
During FY 2016, U-Swirl revenue decreased 15.7% to $6,535,600 compared with $7,753,000 of U-Swirl revenue consolidated within our results for FY 2015. The
decrease resulted from a 15.1% decrease in average domestic U-Swirl franchise cafés in operation during FY 2016 compared to FY 2015, primarily as a result
of store closings exceeding store openings and acquired franchisees.
27
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COSTS AND EXPENSES
($’s in thousands)
Cost of sales – factory adjusted
Cost of sales – retail
Franchise costs
Sales and marketing
General and administrative
Retail operating
Total
Gross Margin
($’s in thousands)
Factory gross margin
Retail
Total
Gross Margin
(Percent)
Factory gross margin
Retail
Total
Adjusted Gross Margin
($’s in thousands)
Factory gross margin
Plus: depreciation and amortization
Factory adjusted gross margin
Retail
Total Adjusted Gross Margin
Factory adjusted gross margin
Retail
Total Adjusted Gross Margin
For the Year Ended
February 28 or 29,
2016
2015
$
Change
%
Change
$
$
$
$
19,151.7 $
1,714.8
2,452.6
2,466.5
4,663.9
2,951.8
33,401.3 $
18,432.3 $
2,177.3
2,264.1
2,474.0
4,831.9
3,509.6
33,689.2 $
For the Year Ended
February 28 or 29,
2016
2015
719.4
(462.5)
188.5
(7.5)
(168.0)
(557.8)
( 287.9)
3.9%
(21.2%)
8.3%
(0.3%)
(3.5%)
(15.9%)
(0.9%)
$
Change
%
Change
7,204.1 $
3,290.2
10,494.3 $
7,462.3 $
4,028.7
11,491.0 $
( 258.2)
(738.5)
( 996.7)
(3.5%)
(18.3%)
(8.7%)
For the Year Ended
February 28 or 29,
2016
2015
%
Change
%
Change
27.3%
65.7%
33.5%
28.8%
64.9%
35.8%
(1.5%)
0.8%
(2.3%)
(5.2%)
1.2%
(6.4%)
For the Year Ended
February 28 or 29,
2016
2015
$
Change
%
Change
$
$
7,204.1
404.4
7,608.5
3,290.2
10,898.7
$
$
7,462.3
393.8
7,856.1
4,028.7
11,884.8
$
$
( 258.2)
10.6
(247.6)
(738.5)
( 986.1)
28.9%
65.7%
34.8%
30.3%
64.9%
37.0%
(1.4%)
0.8%
(2.2%)
(3.5%)
2.7%
(3.2%)
(18.3%)
(8.3%)
(4.6%)
1.2%
(5.9%)
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross
margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and
amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement
to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory
adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by
non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin
to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the
impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of
capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we
use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as
gross margin and factory gross margin.
28
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Cost of Sales and Gross Margin
Factory gross margin decreased 150 basis points during FY 2016 compared to FY 2015 due primarily to increased costs of certain materials and a shift in
product and customer mix. The increase in Company-owned store margin is due primarily to the sale or closure of certain underperforming Company-owned
stores and cafés.
Franchise Costs
The increase in franchise costs for FY 2016 compared to FY 2015 is due primarily to franchise costs associated with supporting U-Swirl franchise units. As a
percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.0% during FY 2016 from 24.1% during FY 2015. This
increase as a percentage of royalty, marketing and franchise fees is primarily a result of a 3.3% decrease in royalty, marketing and franchise fee revenue as a
result of a decrease in the number of domestic franchise stores during FY 2016 compared to FY 2015.
Sales and Marketing
Sales and marketing costs were approximately unchanged during FY 2016 compared to FY 2015 .
General and Administrative
The decrease in general and administrative costs during FY 2016 compared to FY 2015 is due primarily to the reorganization of U-Swirl in the prior year and the
associated focus on reduction of duplicative general and administrative costs, partially offset by an increase in professional fees. During FY 2016, approximately
$1,291,000 of U-Swirl general and administrative costs were consolidated within our results, compared with approximately $1,651,000 during FY 2015. As a
percentage of total revenues, general and administrative expenses decreased to 11.5% in FY 2016 compared to 11.6% in FY 2015.
Retail Operating Expenses
The decrease in retail operating expense was due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the
closure of certain underperforming Company-owned units. The average number of Company-owned stores in operation decreased from 16 during FY 2015 to 12
units during FY 2016. Retail operating expenses, as a percentage of retail sales, increased from 56.6% during FY 2015 to 59.0% in FY 2016. This increase is
primarily the result of a change in units in operation.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $ 1,016,000 during FY 2016, a decrease of 3.0% from
$1,047,000 incurred during FY 2015. This decrease is due to a decrease in amortization related to franchise rights, trademark and intangible assets.
Depreciation and amortization included in cost of sales increased 2.5% from $394,000 during FY 2015 to $404,000 during FY 2016. This increase was the result
of an increase in production assets in service.
Other Income
Net interest expense was $167,900 in FY 2016 compared to net interest expense of $184,500 in FY 2015. This change was the result of lower average
outstanding debt from a promissory note entered into in January 2014 to fund business acquisitions of U-Swirl.
Income Tax Expense
We realized an income tax benefit of $261,400 in FY 2016 compared to expense of $2,037,695, an effective rate of 35.3%, during FY 2015. As described further
in Note 6 to the consolidated financial statements, the decrease in the effective tax rate is primarily due to the tax consequences of our controlling interest in U-
Swirl.
Liquidity and Capital Resources
As of February 2 8, 2017, working capital was $7.1 million compared with $7.2 million as of February 29, 2016. The decrease in working capital was due
primarily to our operating results less the payment of $2.8 million in cash dividends, the purchase of $1.2 million of property and equipment and $1.3 million in
debt repayments. We have historically generated excess operating cash flow. We review our working capital needs and projections and when we believe that we
have greater working capital than necessary we have historically utilized that excess working capital to repurchase common stock and pay dividends to our
stockholders. This trend continued during FY 2017, resulting in the decrease in working capital at February 28, 2017 compared with February 29, 2016.
29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Cash and cas h equivalent balances decreased from $6.2 million as of February 29, 2016 to $5.8 million as of February 28, 2017 as a result of cash flows
generated by operating activities being less than cash flows used in financing and investing activities. The Company’s current ratio was 1.9 to 1.0 at February
28, 2017, which was the same at February 29, 2016. The Company monitors current and anticipated future levels of cash and cash equivalents in relation to
anticipated operating, financing and investing requirements.
During FY 2017, we had net income of $3.45 million. Operating activities provided cash of $5.3 million, with the principal adjustment to reconcile the net income
to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock compensation expense of $0.6 million. During FY 2016,
we had net income of $3.8 million, and operating activities provided cash of $6.8 million. The principal adjustment to reconcile the net income to net cash
provided by operating activities was asset impairments of $2.3 million, depreciation and amortization of $1.4 million and stock compensation expense of $0.8
million.
During FY 2017, investing activities used cash of $1.3 million, primarily due to the purchases of property and equipment of $1.2 million the result of investment in
factory infrastructure improvements. In comparison, investing activities used cash of $0.7 million during FY 2016 primarily due to the purchases of property and
equipment of $0.7 million.
Financing activities used cash of $ 4.4 million during FY 2017 and used cash of $7.1 million during the prior year. This was primarily due to a decrease in the
amount of common stock repurchased during FY 2017.
The Company has a $ 5 million credit line for general corporate and working capital purposes, of which $5 million was available for borrowing (subject to certain
borrowing base limitations) as of February 28, 2017, secured by substantially all of the Company’s assets except retail store assets. Additionally, the line of credit
is subject to various financial ratio and leverage covenants. At February 28, 2017, the Company was in compliance with all such covenants. The credit line is
subject to renewal in September 2017.
The Company’s long-term debt is comprised of a promissory note used to finance business acquisitions of U-Swirl (unpaid balance as of February 28, 2017, $3.8
million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed
annual rate of 3.75%. This promissory note matures in January 2020. Additionally, the promissory note is subject to various financial ratio and leverage
covenants. As of February 28, 2017, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets of s elf-serve frozen yogurt concepts under the names
“CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility
with Wells Fargo Bank, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into the SWRL Loan Agreement with SWRL.
Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-
Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial
covenants during the year ended February 29, 2016 and the loan matured on January 16, 2016 without payment in full by SWRL. As a result of the defaults, we
issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement,
and as a result, we foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under
the SWRL Loan Agreement. This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016.
The table below presents significant contractual obligations of the Company at February 28, 2017.
(Amounts in thousands)
Contractual Obligations
Total
Notes payable
Operating leases
Other long-term obligations
Total
Less than 1
year
3,832
2,166
472
6,470
1,303
817
189
2,309
2-3 Years
4-5 years
More Than 5
years
2,529
980
171
3,680
-
176
112
288
-
193
-
193
For FY 2018, the Company anticipates making capital expenditures of approximately $1.0 million, which will be used to maintain and improve existing factory
and administrative infrastructure. The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital
requirements for FY 2018. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
As of February 2 8, 2017, we had no off-balance sheet arrangements or obligations.
30
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Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for
cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’s
future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able
to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that
replacement will be a gradual process over many years.
Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the
Company’s products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to
be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of the Company’s business and the impact of new store
openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and
assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets,
goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although
not all inclusive.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria.
We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we
ordinarily extend 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 we perform our 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.
We recorded an average expense of approximately $174,300 per year for potential uncollectible accounts over the three-year period ended February 28, 2017.
Write-offs of uncollectible accounts net of recoveries averaged approximately $195,900 over the same period. The provision for uncollectible accounts is
recognized as general and administrative expense in the Statements of Income. Over the past three years, the allowances for doubtful notes and accounts have
ranged from 10.7% to 12.6% of gross receivables.
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. Franchise fee revenue is
recognized upon the opening of the store. International license fees are recognized upon the execution of the license agreement and payment of the license fee.
We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores’ gross retail sales and
a royalty fee based on gross retail sales. Beginning with franchise store openings in the third quarter of FY 2004, we modified our royalty structure. Under the
current structure, we recognize no royalty on Rocky Mountain Chocolate Factory franchised stores’ retail sales of products purchased from us and recognize a
ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 we recognize
a royalty fee of five percent (5%) of franchised stores’ gross retail sales. Rebates received from purveyors that supply products to our franchisees are included in
franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-owned locations are offset
against operating costs.
31
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Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced by an allowance for slow-moving, excess, discontinued and
shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for
our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If
actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We
closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete
inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28, 2017, the Company recorded expense
averaging $110,600 per year for potential inventory losses, or approximately 0.5% of total cost of sales for that period.
Consolidation – The consolidated financial statements in this Annual Report include the accounts of the Company and its subsidiaries. On January 14, 2013 we
acquired a controlling interest in U-Swirl. Prior to January 14, 2013, our consolidated financial statements exclude the financial information of U-Swirl. Beginning
on January 14, 2013 and continuing through February 28, 2017, the results of operations, assets and liabilities of U-Swirl have been included in our consolidated
financial statements. All material inter-Company balances have been eliminated upon consolidation.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC
Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the
event of an impairment indicator. On February 29, 2016 RMCF repossessed all stock in U-Swirl pledged as collateral on the Loan Agreement with SWRL. As
described in Note 1 below, this was the result of SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants. As of
February 29, 2016 U-Swirl had $1,930,529 of Goodwill recorded as a result of past business acquisitions. RMCF performed a test of impairment as a result of the
change in ownership and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the
financial statements.
Franchise Rights – Franchise rights consists of the purchase price paid in consideration of certain rights associated with franchise agreements. These franchise
agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.
Other accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with its evaluation of the
recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other
factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors
such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and
makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates
described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrument s for trading or other
speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the
Company to market risk. However, the Company is exposed to some commodity price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company
to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the
Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to
renegotiate the terms of the contract. As of February 28, 2017, based on future contractual obligations for chocolate products, we estimate that a 10% increase
or decrease in the prices of contracted ingredients would result in a $259,000 favorable or unfavorable price benefit or cost resulting from our commodity
purchase contracts.
The Company has a $ 5 million bank line of credit that bears interest at a variable rate. As of February 28, 2017, no amount was outstanding under the line of
credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of
February 28, 2017, $3.8 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to
this promissory note.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
33
Page
34
35
36
37
38
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Rocky Mountain Chocolate Factory, Inc. and Subsidiaries
Durango, Colorado
We have audited the accompanying consolidated balance sheets of Rocky Mountain Chocolate Factory, Inc. and Subsidiaries (the “Company”) as of February
28, 2017 and February 29, 2016, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the
three-year period ended February 28, 2017. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These
consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting (“Internal Control”). Our audit included
consideration of Internal Control as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s Internal Control. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate
Factory, Inc. and Subsidiaries as of February 28, 2017 and February 29, 2016, and the results of their operations and their cash flows for each of the years in the
three-year period ended February 28, 2017 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
/s/ EKS&H LLLP
May 23, 2017
Denver, Colorado
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2016
2017
2015
Revenues
Sales
Franchise and royalty fees
Total revenues
Costs and Expenses
Cost of sales
Franchise costs
Sales & marketing
General and administrative
Retail operating
Depreciation and amortization, exclusive of depreciation and amortization expense of
$447,651, $404,391 and $393,776, respectively, included in cost of sales
Impairment of long-lived assets and goodwill
Restructuring and acquisition related charges
Total costs and expenses
Operating Income
Other Income (Expense)
Interest expense
Interest income
Other, net
Income Before Income Taxes
Income Tax Expense (Benefit)
Net Income
$
29,876,507 $
8,419,870
38,296,377
31,360,745 $
9,096,150
40,456,895
32,100,824
9,407,552
41,508,376
20,735,739
2,067,530
2,658,421
4,005,142
2,404,003
841,058
-
60,000
20,866,482
2,452,609
2,466,469
4,663,914
2,951,783
1,015,910
2,326,742
-
20,609,609
2,264,138
2,474,027
4,831,903
3,509,584
1,046,672
-
807,476
32,771,893
36,743,909
35,543,409
5,524,484
3,712,986
5,964,967
(170,351)
41,572
(128,779)
(216,600)
48,745
(167,855)
(243,188)
58,662
(184,526)
5,395,705
3,545,131
5,780,441
1,945,589
(261,400)
2,037,695
3,450,116
3,806,531
3,742,746
Less: Net loss attributable to non-controlling interest
-
(619,376)
(195,094)
Net Income attributable to RMCF stockholders
Basic Earnings per Common Share
Diluted Earnings per Common Share
$
$
$
3,450,116 $
4,425,907 $
3,937,840
0.59 $
0.58 $
0.75 $
0.73 $
0.64
0.61
Weighted Average Common Shares Outstanding
5,843,245
5,893,618
6,144,426
Dilutive Effect of Employee Stock Awards
Weighted Average Common Shares Outstanding, Assuming Dilution
150,447
5,993,692
201,856
6,095,474
268,913
6,413,339
The accompanying notes are an integral part of these consolidated financial statements.
35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $487,446 and $595,471, respectively
Notes receivable, current portion, less current portion of the valuation allowance of $22,147 and $0,
$
5,779,195 $
3,855,823
6,194,948
3,799,691
AS OF FEBRUARY 28 or 29,
2016
2017
respectively
Refundable income taxes
Inventories, less reserve for slow moving inventory of $249,051 and $261,346, respectively
Other
Total current assets
Property and Equipment, Net
Other Assets
Notes receivable, less current portion and allowance for doubtful accounts of $26,500 and $75,000,
respectively
Goodwill, net
Franchise rights
Intangible assets, net
Deferred income taxes
Other
Total other assets
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Current maturities of long term debt
Accounts payable
Accrued salaries and wages
Gift card liabilities
Other accrued expenses
Dividend payable
Deferred income
Total current liabilities
235,612
47,863
4,975,779
256,548
15,150,820
317,248
-
4,840,108
286,859
15,438,854
6,457,931
6,010,303
370,769
1,046,944
4,826,172
632,207
858,874
74,639
7,809,605
29,418,356 $
1,302,501 $
1,820,470
608,510
2,921,585
253,497
702,525
451,171
8,060,259
530,446
1,046,944
5,153,363
419,042
1,421,655
295,118
8,866,568
30,315,725
1,254,007
1,663,245
683,863
2,835,943
364,955
700,728
502,950
8,005,691
$
$
Long-Term Debt, Less Current Maturities
2,529,240
3,831,126
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding
Series A Junior Participating Preferred Stock, authorized 50,000 shares
Undesignated series, authorized 200,000 shares
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,854,372 and 5,839,396 issued,
and 5,854,372 and 5,839,396 outstanding, respectively
Additional paid-in capital
Retained earnings
Total stockholders’ equity
-
-
-
-
5,854
5,539,357
13,283,646
18,828,857
5,839
5,340,190
13,132,879
18,478,908
Total Liabilities and Stockholders’ Equity
$
29,418,356 $
30,315,725
The accompanying notes are an integral part of these consolidated financial statements.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2016
2017
2015
Common Stock
Balance at beginning of year
Exchange of $.03 par value per share for $.001 par value per share common stock
Repurchase and retirement of common stock
Issuance of common stock
Exercise of stock options, vesting of restricted stock units and other
Balance at end of year
$
5,839 $
-
(35)
2
48
5,854
180,384 $
(174,371)
(233)
4
55
5,839
Additional Paid-In Capital
Balance at beginning of year
Exchange of $.03 par value per share for $.001 par value per share common stock
Repurchase and retirement of common stock
Issuance of common stock
Exercise of stock options, vesting of restricted stock units and other
Transfers from non-controlling interest
Tax (expense) benefit from employee stock transactions
Balance at end of year
Retained Earnings
Balance at beginning of year
Net income attributable to RMCF stockholders
Cash dividends declared
Correction of immaterial error1
Balance at end of year
Non-controlling Interest in Equity of Subsidiary
Balance at beginning of year
Net loss
Deductions
Contributions
Balance at end of year
Total Stockholders’ Equity
Common Shares
184,206
-
(7,383)
120
3,441
180,384
8,921,723
-
(3,120,241)
47,360
731,400
382,306
200,544
7,163,092
10,344,794
3,937,840
(2,757,926)
-
11,524,708
401,655
(195,094)
-
663,110
869,671
5,340,190
-
(351,548)
20,418
564,425
-
(34,128)
5,539,357
13,132,879
3,450,116
(2,806,583)
(492,766)
13,283,646
-
-
-
-
-
7,163,092
174,371
(3,030,475)
61,036
602,498
349,800
19,868
5,340,190
11,524,708
4,425,907
(2,817,736)
-
13,132,879
869,671
(619,376)
(310,995)
60,700
-
$
18,828,857 $
18,478,908 $
19,737,855
Balance at beginning of year
Repurchase and retirement of common stock
Issuance of common stock
Exercise of stock options, vesting of restricted stock units and other
Balance at end of year
5,839,396
(35,108)
2,000
48,084
5,854,372
6,012,799
(233,302)
4,000
55,899
5,839,396
6,140,200
(246,106)
4,000
114,705
6,012,799
1 As revised. Refer to Note 17 for information on immaterial correction of errors in prior period.
The accompanying notes are an integral part of these consolidated financial statements.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2016
2017
2015
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for loss on accounts and notes receivable
Provision for inventory loss
Asset impairment and store closure losses
(Gain) loss on sale of assets
Expense recorded for stock compensation
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Refundable income taxes
Inventories
Other assets
Accounts payable
Accrued liabilities
Deferred income
Net cash provided by operating activities
Cash Flows From Investing Activities:
Additions to notes receivable
Proceeds received on notes receivable
Proceeds from sale or distribution of assets
Intangible assets
Decrease (increase) in other assets
Purchase of property and equipment
Net cash (used in) provided by investing activities
Cash Flows From Financing Activities:
Payments on long-term debt
Repurchase of common stock
Issuance of common stock
Proceeds from issuance of common stock in subsidiary
Tax (expense) benefit of stock option exercise
Dividends paid
Net cash used in financing activities
$
3,450,116 $
3,806,531 $
3,742,746
1,288,709
138,125
100,049
-
37,112
584,893
262,248
(128,404)
(47,863)
(2,735)
29,442
(87,657)
(293,402)
(9,619)
5,321,014
(133,202)
318,219
39,045
(312,947)
34,479
(1,238,472)
(1,292,878)
(1,253,392)
(351,583)
-
-
(34,128)
(2,804,786)
(4,443,889)
1,420,301
171,000
76,695
2,319,003
90,149
763,094
(1,878,205)
364,767
172,945
144,454
24,415
(310,533)
154,800
(531,331)
6,788,085
(46,489)
368,122
23,692
(83,103)
(212,860)
(743,251)
(693,889)
(1,207,234)
(3,030,708)
-
-
19,868
(2,838,545)
(7,056,619)
1,440,448
214,600
58,836
225,640
(46,857)
865,240
(55,068)
662,625
(12,055)
(202,333)
(16,087)
(451,080)
325,544
(880,684)
5,871,515
(179,569)
488,691
530,175
-
(2,395)
(626,744)
210,158
(107,633)
(3,127,624)
69,599
892,895
200,544
(2,711,812)
(4,784,031)
Net (Decrease) Increase In Cash And Cash Equivalents
(415,753)
(962,423)
1,297,642
Cash And Cash Equivalents At Beginning Of Year
6,194,948
7,157,371
5,859,729
Cash And Cash Equivalents At End Of Year
$
5,779,195 $
6,194,948 $
7,157,371
The accompanying notes are an integral part of these consolidated financial statements.
38
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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) and Aspen Leaf Yogurt, LLC (“ALY”), its 39%-owned subsidiary, U-Swirl, Inc.
(“SWRL”), and U-Swirl International, Inc. (“U-Swirl”), a wholly-owned subsidiary as of February 29, 2016 (collectively, the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango,
Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen
yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer
products.
Effective March 1, 2015, the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain
Chocolate Factory, Inc., a Colorado corporation (“RMCF”), which was previously the public company, became a wholly-owned subsidiary of a newly formed
entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03
per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001, of Newco. The new holding company began trading on March
2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”), the Company entered into two agreements to sell all of the
assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company
also acquired in January 2013, to SWRL, in exchange for a 60% controlling equity interest in SWRL, which was subsequently diluted down to 39% as of
February 29, 2016 following various issuances of common stock of SWRL. At that time, U-Swirl International, Inc. was a wholly-owned subsidiary of SWRL, and
was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY
locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. As of February 28, 2017, the Company held a 39% interest
in SWRL. The SWRL Board of Directors is composed solely of Board members also serving as the Company’s Board of Directors.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of s elf-serve frozen yogurt concepts under the names “CherryBerry,”
“Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo,
N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and
other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of
SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl International, Inc. Under the SWRL Loan Agreement, SWRL was subject to
various financial covenants. SWRL was not compliant with the financial covenants during the year ended February 29, 2016 and the loan matured on January
16, 2016 without payment in full by SWRL. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan
Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding
stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl
International, Inc. becoming a wholly-owned subsidiary of the Company as of February 29, 2016. As of February 29, 2016 U-Swirl, Inc. had no assets.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen
Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products
manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates,
frozen yogurt, and other confectionery products. The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory
brand and its subsidiaries at February 28, 2017:
Rocky Mountain Chocolate Factory
Company-owned stores
Franchise stores – Domestic stores and kiosks
International License Stores
Cold Stone Creamery – co-branded
U-Swirl cafés (Including all associated brands)
Company-owned cafés
Company-owned cafés – co-branded
Franchise stores – North American cafés
Franchise stores – North American – co-branded
International License cafés
Total
Sold, Not Yet
Open
Open
Total
-
6
-
5
-
-
*
*
-
11
4
189
94
83
2
3
129
16
2
522
4
195
94
88
2
3
129
16
2
533
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under
development and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area
will result in a determinable number of café openings.
Consolidation
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 exclude the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets
and liabilities of SWRL have been included in these consolidated financial statements. The Company foreclosed on all of the outstanding stock of U-Swirl
International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl becoming a
wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February
29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the
year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $5.3 million at
February 28, 2017.
Accounts and Notes Receivable
In the normal course of business, we extend credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has
limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit,
including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts
receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process
by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other
relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to
projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its
customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability
of accounts receivable are reasonably likely to change in the future. At February 28, 2017, the Company has $655,028 of notes receivable outstanding and an
allowance for doubtful accounts of $48,647 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%.
The notes mature through September, 2022 and approximately $579,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess
inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in
inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The
process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value,
sales history and future sales potential. Cost is determined using the first-in, first-out method.
40
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of
the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases
or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate
the carrying amount of such assets may not be recoverable. The Company’s policy is to review the recoverability of all assets, at a minimum, on an annual
basis.
Income Taxes
We provide for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences
between financial reporting and income tax bases of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in
taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is
required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward
prior to its expiration, is more likely than not. Due to historical U-Swirl losses, prior to FY 2016 we established a full valuation allowance on our deferred tax
assets. During FY 2016 we took possession of the outstanding equity in U-Swirl International, Inc. As a result of our ownership increasing to 100%, we began
filing consolidated income tax returns in FY 2017. Because of this change, we have recognized the full value of deferred tax assets that had full valuation
allowances prior to FY 2016. During the fourth quarter of FY 2017 we further evaluated the value of deferred tax assets and determined that the assets are
restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure
transaction. The correction of this immaterial error to our balance sheet is further described in Note 17. The Company's temporary differences are listed in Note
6.
Gift Card Breakage
The Company and our franchisees sell gift cards that are redeemable for product in our stores. The Company manages the gift card program, and therefore
collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is
included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on our gift cards, and we do not charge any service fees. While our franchisees continue to honor all gift cards presented for
payment, we may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company is in the process of
accumulating sufficient historical redemption patterns to calculate breakage estimates related to unredeemed gift cards. This breakage rate is based on a
percentage of sales when the likelihood of the redemption of the gift card becomes remote. When the Company has sufficient historical redemption patterns to
calculate breakage estimates, the gift card breakage will be recognized over the same performance period, and in the same proportion, that the Company’s data
has demonstrated that gift cards are redeemed. As the Company is in the process of accumulating sufficient historical redemption patterns to calculate breakage
estimates, the Company did not recognize gift card breakage during the year ended February 28 or 29, 2017 or 2016. Accrued gift card liability was $2,921,585
and $2,835,943 at February 28 or 29, 2017 and 2016, respectively.
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill
recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its
Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase
price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for
acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a
reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of our reporting units
with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On
February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the Loan Agreement with SWRL. This was the result of
SWRL’s inability to repay the Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016 U-Swirl had $1,930,529 of goodwill
recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership
and the result of our test indicated a full impairment of the U-Swirl goodwill. Our testing and impairment is described in Note 13 to the financial statements.
41
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and
Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers ’ compensation, general liability, property
insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the
Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company
believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from
these assumptions and historical trends.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under the acquisition method, the purchase price of the acquisition is allocated
to the underlying tangible and intangible assets acquired based on their respective fair values. Fair values are derived from various observable and
unobservable inputs and assumptions. The Company utilizes third-party valuation specialists to assist in the allocation. Initial purchase price allocations are
preliminary and are subject to revision within the measurement period, not to exceed one year from the date of acquisition. The costs of the business acquisitions
are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our
estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where
applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical
experience and information obtained from the management of the acquired companies and are inherently uncertain. Moreover, unanticipated events and
circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at
standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the
period in which they are earned. Rebates related to company-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company ’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are
reported as cost of sales or inventory.
Franchise and Royalty Fees
Franchise fee revenue is recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and
promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. Beginning with Rocky Mountain
Chocolate Factory franchise store openings in the third quarter of FY 2004, the Company modified its royalty structure. Under the current structure, the
Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all
other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 the Company recognizes a royalty fee of five
percent (5%) of franchised stores’ gross retail sales. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights
and range from 2.5% to 6% of gross retail sales.
In certain instances we are required to pay a portion of franchise fee revenue, or royalty fees to parties we’ve contracted with to assist in developing and growing
a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the
ongoing royalty fees, or both. When such agreements exist, we report franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
42
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of
the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of the Company ’s Manufacturing segment represented approximately $4.1 million or 11% of the Company’s revenues during the
year ended February 28, 2017. The Company’s future results may be adversely impacted by a change in the purchases of this customer.
Stock-Based Compensation
At February 28, 2017, the Company had stock-based compensation plans, which currently consists solely of the Company’s 2007 Equity Incentive Plan, for
employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $ 584,893, $763,094, and $865,240 related equity-based compensation expense during the years ended February 28 or 29, 2017,
2016 and 2015, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
Tax benefits or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the
accompanying Statements of Cash Flows. The excess tax benefit or (expense) included in net cash provided by financing activities for the years ended February
28 or 29, 2017, 2016 and 2015 was $(34,128), $19,868 and $200,544, respectively.
During FY 2017 and 2016, the Company granted no restricted stock units. There were no stock options granted to employees during FY 2017 or FY 2016. The
restricted stock unit grants generally vest 17-20% annually over a period of five to six years. The Company recognized $564,473 of consolidated stock-based
compensation expense related to these grants during FY 2017 compared with $602,554 in FY 2016. Total unrecognized stock-based compensation expense of
non-vested, non-forfeited shares granted, as of February 28, 2017 was $1,179,492, which is expected to be recognized over the weighted average period of 2.2
years.
During FY 2017, the Company issued 2,000 fully-vested, unrestricted shares to non-employee directors compared with 4,000 fully-vested, unrestricted shares of
stock to non-employee directors in FY 2016. In connection with these non-employee director stock issuances, the Company recognized $20,420 and $61,040 of
stock-based compensation expense during FY 2017 and FY 2016, respectively.
Earnings 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. During FY 2017,
FY 2016 and FY 2015, 0, 12,936, and 12,936, respectively, of stock options were excluded from diluted shares as their effect was anti-dilutive.
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $279,698, $215,314, and $244,946 for the fiscal years
ended February 28 or 29, 2017, 2016 and 2015, respectively. Total advertising expense for U-Swirl and its brands amounted to $335,771, $460,034, and
$399,414 for the fiscal years ended February 28 or 29, 2017, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade receivables, payables, and notes receivable. The fair value of all instruments
approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step
quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair
value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under
the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance
in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-
15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduce the
current diversity in practice. ASU No. 2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods,
beginning after December 15, 2017, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2018. The
Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU
2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016- 13 will require immediate recognition of
estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit
losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods.
The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment
Accounting, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock
compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of
employee share based payment transactions. ASU No. 2016-09 is effective for public business entities for annual and interim periods beginning after December
15, 2016, with early application permitted. This guidance is applicable to the Company's fiscal year beginning March 1, 2017. Amendments requiring recognition
of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax
benefits on the statement of cash flows may be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the
statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the
process of assessing the impact of the adoption of ASU No. 2016-09 on its consolidated financial statements. During the fiscal years ended February 28, 2017
and February 29, 2016 the Company would have realized additional expense of $34,000 and additional income of $20,000, respectively, if this guidance had
been applied.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet
by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with
specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified
retrospective approach. The Company expects that substantially all of its operating lease commitments (see note 5) will be subject to the new guidance and will
be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and
Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be
effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard
will have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance, as amended by subsequent ASUs on the
topic, supersedes current guidance on revenue recognition in Topic 605, Revenue Recognition. This guidance will be effective for annual reporting periods
beginning after December 15, 2017, including interim reporting periods. Early application of the guidance is permitted for annual reporting periods beginning after
December 31, 2016. This guidance is applicable to the Company's fiscal year beginning March 1, 2018. The Company expects the adoption of the new
guidance to change the timing of recognition of initial franchise fees, including master license and territory fees for our international business, and renewal fees.
Currently, these fees are generally recognized upfront upon either opening of the respective franchise store or entry into a license agreement. The new guidance
will generally require these fees to be recognized over the term of the related agreement, which we expect will result in a material impact to revenue recognized
for franchise fees, license fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales
of products. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, as well as
the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net
income, working capital or equity previously reported.
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:
Ingredients and supplies
Finished candy
U-Swirl food and packaging
Reserve for slow moving inventory
Total inventories
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:
Land
Building
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Transportation equipment
Asset impairment
Less accumulated depreciation
Property and equipment, net
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
$
$
$
$
2017
2016
3,021,220 $
2,137,609
66,001
(249,051)
4,975,779 $
2,868,157
2,138,952
94,345
(261,346)
4,840,108
2017
2016
513,618 $
4,787,855
10,598,355
1,047,319
1,531,112
418,402
(47,891)
18,848,770
12,390,839
6,457,931 $
513,618
4,784,272
9,987,906
1,169,475
1,862,603
438,601
(568,803)
18,187,672
12,177,369
6,010,303
At February 28, 2017, the Company had a $5 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the
Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50%
of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (3.0% at February 28, 2017). At February 28, 2017, $5 million was available for borrowings
under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At
February 28, 2017, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2017 and we believe it is likely
to be renewed on terms similar to current terms.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0
million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The
Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at
February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid
without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets, including the SWRL Loan
Agreement. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. The Wells Fargo Loan Agreement also contains
customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
Long-term debt consists of the following at February 28 or 29:
Note payable in monthly installments of principal and interest at 3.75% per annum through
December 2019 collateralized by substantially all business assets.
Less current maturities
Long-term obligations
$
$
2017
2016
3,831,741 $
1,302,501
2,529,240 $
5,085,133
1,254,007
3,831,126
The following is a schedule by year of maturities of long-term debt for the years ending February 28 or 29:
2018
2019
2020
Total
$
$
1,302,501
1,352,900
1,176,340
3,831,741
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under five to ten-year non -cancelable operating leases. Certain leases contain renewal options for
between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined
base levels.
The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2018
2019
2020
2021
2022
Thereafter
Total
$
$
603,000
561,000
272,000
49,000
49,000
194,000
1,728,000
We act as primary lessee of some franchised store premises, which we then sublease to franchisees, but the majority of existing locations are leased by the
franchisee directly. Our current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At March 31, 2017, we were
the primary lessee at five of our 332 franchised stores and 1 former office space.
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:
2018
2019
2020
2021
2022
Total
$
$
189,000
90,000
81,000
83,000
29,000
472,000
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28 or 29:
Minimum rentals
Less sublease rentals
Contingent rentals
$
$
2017
2016
2015
944,938 $
(318,000)
25,200
652,138 $
1,187,003 $
(479,000)
22,200
730,203 $
1,282,363
(468,000)
22,200
836,563
In FY 2013, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule,
by year, of future minimum rental payments required under such lease for the years ending February 28:
2018
Total
$
$
28,000
28,000
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under
such leases for the years ending February 28 or 29:
2018
2019
2020
2021
2022
Total
$
$
185,700
84,300
62,100
62,100
15,500
409,700
The following is a schedule of lease expense for trucking equipment operating leases for the
three years ended February 28 or 29:
2017
220,791
2016
46
182,006
185,703
2015
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company
to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the
Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to
renegotiate the terms of the contract. As of February 28, 2017 the Company was contracted for approximately $2,595,000 of raw materials under such
agreements.
Contingencies
The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these
matters will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry
Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners (collectively, the “CherryBerry Selling Parties”), pursuant
to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for
the CherryBerry Acquisition, SWRL agreed to issue an aggregate of 4,000,000 shares of SWRL common stock (the “CB Shares”) to the CherryBerry Selling
Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the
terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB
Shares, they must first offer such shares to SWRL and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the
CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, SWRL agreed to
pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the
CherryBerry Selling Parties. If SWRL had been required to pay the shortfall payment on February 28, 2017, the shortfall payment would have been
approximately $1,800,000. SWRL determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at
February 28, 2017. In July and August 2015, the CherryBerry Selling Parties submitted to SWRL several requests for payment of approximately $205,000 of
shortfall payments based on the sale of a portion of the CB Shares.
In August 2015, SWRL filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of SWRL and unknown other parties, in the District
Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of SWRL’s common stock to decline and thereafter making an
improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement.
SWRL sought unspecified damages, attorney’s fees, other costs, and a determination that the shortfall payment arrangement is void. In September 2015, the
CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal
court in the U.S. District Court for the District of Colorado (the “Colorado District Court”). In addition, the CherryBerry Entities added RMCF to the lawsuit through
a third-party complaint. The complaint alleged that SWRL materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that
SWRL is the alter ego of RMCF and RMCF is liable for any obligations of SWRL, and that the SWRL Loan Agreement should be recharacterized as equity. The
CherryBerry Entities sought payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that SWRL is the alter
ego of RMCF and the SWRL Loan Agreement should be recharacterized as equity, and interest, attorney’s fees, costs and other equitable relief.
On January 13, 2016, the CherryBerry Entities dismissed without prejudice their counterclaim and third-party complaint in the Colorado District Court, and
thereafter on January 13, 2016, the CherryBerry Entities refiled the exact claims (the “Oklahoma Action”) in the United States District Court for the Northern
District of Oklahoma (the “Oklahoma Court”). Also on January 13, 2016, RMCF filed a lawsuit against the CherryBerry Entities in the Colorado District Court
seeking a declaratory judgment that it is not the alter ego of SWRL and that the SWRL Loan Agreement should not be re-characterized as equity (the “Colorado
Action”). On that same date, SWRL filed a complaint against the CherryBerry Selling Parties asserting the same claims as it had asserted previously. RMCF filed
a motion to dismiss for lack of jurisdiction and improper venue and in the alternative a motion to transfer venue in response to the Oklahoma Action, and the
CherryBerry Selling Parties subsequently filed a motion to dismiss the Colorado Action. In April 2016, the Colorado District Court granted in part the CherryBerry
Selling Parties’ motion and administratively closed the case. In addition, in April 2016, the Oklahoma Court denied RMCF’s motion (and SWRL’s similar motion).
On April 8, 2016, the CherryBerry Entities moved to add RMCF as a defendant on the alter ego and re-characterization claims in the Oklahoma Action. On May
9, 2016, the Oklahoma Court granted that application and we filed an answer to this action on June 6, 2016. All parties are currently involved in discovery
proceedings relating to this matter. A trial date has been set to commence on September 18, 2017. We intend to vigorously assert and defend our rights in this
lawsuit.
47
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28 or 29:
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Total
2017
2016
2015
$
$
1,411,126 $
272,214
1,683,340
1,420,811 $
195,993
1,616,804
240,234
22,015
262,249
1,945,589 $
(1,725,918)
(152,286)
(1,878,204)
(261,400) $
1,846,365
246,398
2,092,763
(50,603)
(4,465)
(55,068)
2,037,695
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years end ed February 28 or
29:
Statutory rate
State income taxes, net of federal benefit
Domestic production deduction
Work opportunity tax credits
Statutory rate change
Other
U-Swirl loss carryforward recognized
Valuation allowance, U-Swirl Consolidated loss
Effective rate – provision (benefit)
2017
2016
2015
34.0%
3.6%
(1.1%)
(0.4%)
-
0.0%
-
-
36.1%
34.0%
0.8%
(3.0%)
-
(1.6%)
0.5%
(1.8%)
(36.3%)
(7.4%)
34.0%
2.8%
(1.6%)
-
-%
0.1%
(3.0%)
3.0%
35.3%
The components of deferred income taxes at February 28 or 29 are as follows:
Deferred Tax Assets
Allowance for doubtful accounts and notes
Inventories
Accrued compensation
Loss provisions and deferred income
Self-insurance accrual
Amortization
Restructuring charges
U-Swirl accumulated net loss
Valuation allowance
Net deferred tax assets
Deferred Tax Liabilities
Depreciation and amortization
Prepaid expenses
Deferred tax liabilities
Net deferred tax assets
$
$
$
2017
2016
198,354 $
90,027
188,002
1,175,351
37,000
782,683
148,494
164,035
(148,494)
2,635,452
248,537
96,698
183,898
1,299,191
28,923
861,594
148,494
346,605
(148,494)
3,065,446
(1,683,778)
(92,800)
(1,776,578) $
(1,537,653)
(106,138)
(1,643,791)
858,874 $
1,421,655
The following table summarizes deferred income tax valuation allowances as of February 28 or 29:
Valuation allowance at beginning of period
Tax expense (benefits) realized by valuation allowance
Tax benefits released from valuation allowance
Valuation allowance at end of period
$
$
2017
2016
148,494 $
-
-
148,494 $
349,010
81,340
(281,856)
148,494
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax benefit realized for the year ended February 29, 2016, compared to the tax expense in the prior years, is primarily due to the tax consequences of a
change in the controlling interest in U-Swirl and foreclosure upon the stock of U-Swirl International, Inc. In FY 2014 we did not realize a tax benefit from the
SWRL taxable loss causing our effective rate to increase for the year. During FY 2015 the taxable loss at SWRL was lower, resulting in a decrease to our
effective rate. During FY 2016 an income tax benefit of approximately $2,149,000 was recognized as a result of the company foreclosing upon the interest in U-
Swirl and recognizing deferred tax assets and loss carry forwards that previously had full valuation allowances when RMCF had less than an 80% ownership
interest. Resulting from this foreclosure, RMCF will consolidate U-Swirl International, Inc. resulting in realization of U-Swirl International, Inc. deferred tax assets
that previously had a full valuation allowance when filed with SWRL income tax returns. U-Swirl International, Inc. and RMCF will file consolidated income tax
returns beginning with FY 2017. SWRL will continue to file separate tax returns.
For the year ended February 29, 2016 and prior periods, the financial statements presented represent the consolidated statements of two separate consolidated
groups for income tax purposes. RMCF has filed income tax returns consolidating the results of Rocky Mountain Chocolate Factory and its wholly owned
subsidiary, Aspen Leaf Yogurt, LLC. U-Swirl Inc. has filed a separate consolidated income tax return for the results of U-Swirl, Inc. and its wholly owned
subsidiary, U-Swirl International, Inc. RMCF and SWRL have filed separate income tax returns because RMCF owned only 39% of SWRL. Beginning on March
1, 2016 the results of U-Swirl International, Inc. will be included in RMCF’s consolidated income tax return, and on the same date, will be removed from U-Swirl,
Inc.’s consolidated tax return. This is a result of the foreclosure of RMCF on the outstanding stock of U-Swirl in satisfaction of debt between RMCF and SWRL.
The consolidated tax return for RMCF for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods.
However, there are no remaining operating assets held by SWRL.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S.
federal and state tax examinations in its major tax jurisdictions for periods before FY 2012. The Company’s federal income tax returns have been examined for
the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years.
Realization of the Company's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the appropriate tax jurisdictions, in
future years to obtain benefit from the reversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to
adjustment in future periods if estimates of future taxable income are changed. Management believes that it is more likely than not that RMCF will realize the
benefits of its deferred tax assets as of February 28, 2017.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits
recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax
exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's
judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's
tax positions did not have an impact on the consolidated financial statements for the years ended February 28 or 29, 2016 or 2015. The Company does not have
any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months.
Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are
immaterial for years ended February 28 or 29, 2017 and 2016.
As of February 2 9, 2016 we had foreclosed on the outstanding equity of U-Swirl International, Inc. and U-Swirl International, Inc. was consolidated for income tax
purposes. SWRL, along with U-Swirl International, Inc., has historically filed its own consolidated federal income tax return and reported its own Federal net
operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets.
This full valuation allowance was eliminated as of February 29, 2016, in recognition of the likelihood that the loss carry forwards would be realized as a result of
RMCF and U-Swirl International, Inc. filing a consolidated income tax return.
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl International, Inc.’s Federal net operating loss carryovers may
be subject to annual limitation in the event of a change in control. We have performed a preliminary evaluation as to whether a change in control has taken place,
and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership
interest in January 2013. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl International Inc.’s net operating loss carryovers, but the
annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
We estimate that the potential future tax deductions of U-Swirl International, Inc.’s Federal net operating losses, limited by section 382, to be approximately
$443,000 with a resulting deferred tax asset of approximately $164,000. U-Swirl International Inc.’s Federal net operating loss carryovers will expire at various
dates beginning in 2026.
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid quarterly cash dividends of $0.12 per common share on March 11, 2016 , June 17, 2016, September 16, 2016 and December 9, 2016 to
stockholders of record on February 26, 2016, June 7, 2016, September 6, 2016 and November 25, 2016, respectively. The Company declared a quarterly cash
dividend of $0.12 per share of common stock on February 9, 2017 payable on March 10, 2017 to stockholders of record on February 24, 2017.
Future 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 stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions,
whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its
common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the
purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the nine months ended November 30, 2016, the Company
repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the three
months ended February 28, 2017. As of February 28, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment of the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan allows awards of stock options, stock
appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards. The
following table summarizes stock awards under the 2007 Plan as of February 28, 2017:
Original share authorization:
Prior plan shares authorized and incorporated in the 2007 P lan:
Additional shares authorized through 2007 Plan amendment:
Available for award :
Cancelled/forfeited:
Shares awarded as unrestricted shares, stock options or restricted stock units :
Shares available for award:
300,000
85,340
300,000
685,340
194,325
(547,076)
332,589
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2017, and changes for the three years then ended was as
follows:
Outstanding stock options at beginning of year:
Granted
Exercised
Cancelled/forfeited
Outstanding stock options as of February 28 or 29:
Weighted average exercise price
Weighted average remaining contractual term (in years)
50
Twelve Months Ended
February 28 or 29:
2016
2017
2015
12,936
-
-
(12,936)
-
n/a $
n/a
12,936
-
-
-
12,936
12.94 $
0.04
155,880
-
(142,944)
-
12,936
12.94
1.04
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2017, and changes for the three years then ended was
as follows:
Outstanding non-vested restricted stock units at beginning of year:
Granted
Vested
Cancelled/forfeited
Outstanding non-vested restricted stock units as of February 28 or 29:
Weighted average grant date fair value
Weighted average remaining vesting period (in years)
$
NOTE 9 - OPERATING SEGMENTS
Twelve Months Ended
February 28 or 29:
2016
2017
2015
181,742
-
(48,084)
(10,000)
123,658
12.21 $
2.23
237,641
-
(55,899)
-
181,742
12.22 $
3.22
295,040
-
(56,199)
(1,200)
237,641
12.13
4.08
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores,
U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in
Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which
excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic
businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All
inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in
products and services:
FY 2017
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization
FY 2016
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization
FY 2015
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization
Franchising Manufacturing
5,951,055 $
(5,332)
5,945,723
2,495,709
1,216,241
15,480
54,053 $
26,678,514 $
(1,254,670)
25,423,844
5,609,957
12,900,070
966,619
463,996 $
Retail
1,710,734 $
-
1,710,734
128,024
1,101,461
17,047
14,755 $
U-Swirl
Other
5,216,076 $
-
5,216,076
1,017,395
9,124,822
40,924
622,654 $
- $
-
-
(3,855,380)
5,075,762
198,402
133,251 $
Franchising
Manufacturing
5,947,769 $
(5,185)
5,942,584
2,608,351
1,205,616
76,762
36,908 $
27,726,443 $
(1,370,684)
26,355,759
6,731,221
11,980,933
432,473
406,082 $
Franchising Manufacturing
5,976,964 $
(342)
5,976,622
2,783,734
1,193,407
28,806
41,228 $
27,459,828 $
(1,564,993)
25,894,835
6,993,693
12,155,004
378,060
395,864 $
Retail
1,622,906 $
-
1,622,906
(2,591)
1,008,783
3,306
18,236 $
Retail
2,134,976 $
-
2,134,976
(51,803)
1,157,674
41,361
35,531 $
U-Swirl
Other
6,535,646 $
-
6,535,646
(2,128,649)
10,126,209
66,476
802,953 $
- $
-
-
(3,663,201)
5,994,184
164,234
156,122 $
U-Swirl
Other
7,501,943 $
-
7,501,943
(245,546)
12,424,801
61,053
813,172 $
- $
-
-
(3,699,637)
7,207,327
117,464
154,653 $
$
$
$
$
$
$
Total
39,556,379
(1,260,002)
38,296,377
5,395,705
29,418,356
1,238,472
1,288,709
Total
41,832,764
(1,375,869)
40,456,895
3,545,131
30,315,725
743,251
1,420,301
Total
43,073,711
(1,565,335)
41,508,376
5,780,441
34,138,213
626,744
1,440,448
Revenue from one customer of the Company ’s Manufacturing segment represented approximately $4.1 million, or 10.6 percent, of the Company’s revenues
from external customers during the year ended February 28, 2017, compared to $5.2 million, or 12.8 percent of the Company’s revenues from external
customers during the year ended February 29, 2016.
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28 or 29:
Cash paid (received) for:
Income taxes paid
Interest
Accrued Inventory
Non-Cash Financing Activities:
Dividend payable
Non-Cash Investing Activities:
Sale or distribution of assets in exchange for notes receivable
Long-lived assets
Other assets
NOTE 11 - EMPLOYEE BENEFIT PLAN
$
$
2017
2016
2015
1,997,751 $
129,927
531,017
1,383,805 $
170,709
298,032
1,896,274
193,022
245,183
702,525
700,728
721,536
20,989
- $
127,500
75,000 $
414,353
-
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to
statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’s contribution up to a
maximum of 1.5% of the employee’s compensation. During the years ended February 28 or 29, 2017, 2016 and 2015, the Company’s contribution was
approximately $66,000, $62,000, and $60,000, respectively, to the plan.
NOTE 12 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the f iscal years ended February 28 or 29, 2017 and 2016:
2017
Total revenue
Gross margin
Net income
Basic earnings per share
Dilute earnings per share
2016
Total revenue
Gross margin
Net income
Basic earnings per share
Diluted earnings per share
Fiscal Quarter
First
9,376,199 $
2,222,405
731,834
0.13
0.12 $
Fiscal Quarter
First
Second
Third
Fourth
Total
8,601,962 $
2,289,011
974,813
0.17
0.16 $
9,955,239 $
2,706,456
1,011,799
0.17
0.17 $
10,362,977 $
1,922,896
731,670
0.13
0.12 $
38,296,377
9,140,768
3,450,116
0.59
0.58
Second
Third
Fourth
Total
10,364,022 $
2,470,383
762,959
0.13
0.12 $
9,274,554 $
2,536,811
779,796
0.13
0.13 $
9,807,313 $
2,723,841
440,801
0.08
0.07 $
11,011,006 $
2,763,228
2,442,351
0.42
0.41 $
40,456,895
10,494,263
4,425,907
0.75
0.73
$
$
$
$
52
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28 or 29:
Intangible assets subject to amortization
Store design
Packaging licenses
Packaging design
Trademark/Non-competition agreements
Franchise Rights
Total
Intangible assets not subject to amortization
Franchising segment
Company stores goodwill
Franchising goodwill
Manufacturing segment-Goodwill
Trademark-indefinite life
Total
Amortization Period
(Years)
Gross Carrying
Value
Accumulated
Amortization
Gross Carrying
Value
Accumulated
Amortization
2017
2016
$
10
3 - 5
10
5 - 20
20
220,778 $
120,830
430,973
715,339
5,971,129
7,459,049
1,099,328
295,000
295,000
20,000
1,709,328
211,152 $
120,830
430,973
92,758
1,144,957
2,000,670
220,778 $
120,830
430,973
459,340
5,914,181
7,146,102
267,020
197,682
197,682
-
662,384
1,099,328
295,000
295,000
20,000
1,709,328
209,653
120,830
430,973
51,423
760,818
1,573,697
267,020
197,682
197,682
-
662,384
Total intangible assets
$
9,168,377 $
2,663,054 $
8,855,430 $
2,236,081
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to
intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
On February 29, 2016, RMCF foreclosed on all stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. As described in Note 1, this was the result
of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of
Goodwill recorded as a result of past business acquisitions. We performed a test of impairment in conjunction with the change in ownership and the result of our
test indicated a full impairment of the U-Swirl goodwill. We recognized an impairment loss of $1,930,529 to reduce the carrying value of Goodwill to the fair
value. In making this determination we reviewed the fair value of U-Swirl compared to its carrying value. In performing this testing we focused on the actual
performance of the acquired businesses that created the initial recognition of the goodwill, as well as U-Swirl’s past performance and future expected
performance. Because of the significant underperformance of the acquired businesses as well as U-Swirl we determined that the carrying value of the reporting
unit exceeded its fair value.
The following are events that have indicated that it is more likely than not that the fair value of goodwill is less than the carrying amount
:
•
•
•
•
SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of
U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement.
The loan covenant for SWRL required that SWRL maintain adjusted EBITDA of $1,804,000 and during the term of the loan SWRL reported trailing
twelve month adjusted EBITDA of between $1,532,000 and $1,284,000.
SWRL franchise stores in operation has declined from a peak of 28 7 franchise cafés in operation at August 31, 2014 to 210 franchise cafés in operation
at February 28, 2016.
During the three and six months ended August 31, 2015, SWRL disclosed in its separate financial statements that there was substantial doubt about its
ability to continue as a going concern.
Amortization expense related to intangible assets totaled $427,840, $378,373, and $361,723 during the fiscal years ended February 28 or 29, 2017, 2016 and
2015, respectively.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 28, 2017, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the
following:
2018
2019
2020
2021
2022
Thereafter
Total
$
$
445,214
451,644
438,487
426,778
403,596
3,292,660
5,458,379
NOTE 14 – IMPAIRMENT OF LONG-LIVED RETAIL ASSETS, RESTRUCTURING AND ACQUISITION RELATED CHARGES
In 2014, SWRL entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as
“CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, SWRL purchased certain assets of CherryBerry used in its business of franchising frozen
yogurt stores, including all of its franchise rights and one company-owned store. SWRL also entered into an Asset Purchase Agreement with Yogli Mogli, which
was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, SWRL purchased certain
assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February
20, 2014, SWRL entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual
property and worldwide franchise and license rights includes the rights associated with 17 Fuzzy Peach Frozen Yogurt stores. Associated with these
transactions, the Company recorded net restructuring charges of $124,551 during the year ended February 28, 2015. No restructuring charges were incurred
during the year ended February 29, 2016.
On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of SWRL. In addition, Messrs. Conte, H. Cartwright
and T. Cartwright resigned as officers of U-Swirl. Also on September 4, 2014, the SWRL Board of Directors appointed Bryan J. Merryman as the Chairman of
the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.
In connection with these management changes, SWRL announced an operational restructuring designed to enhance SWRL’s operating efficiencies, improve its
franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements
with the named officers, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement,
property and equipment. The Company recorded restructuring charges of $503,526 during year ended February 28, 2015 associated with this operational
restructuring.
As described in Note 1 above, e ffective March 1, 2015, the Company was reorganized to create a holding company structure pursuant to the Agreement and
Plan of Merger, dated as of November 10, 2014, among Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, Rocky Mountain Chocolate Factory,
Inc., a Delaware corporation, and RKB Merger Corp. In connection with the holding company reorganization, the Company recorded restructuring fees of
$179,399 during the year ended February 28, 2015.
During the year ended February 29, 2016 , we closed an underperforming Company-owned café resulting in an impairment charge of $39,933. As described in
Note 1, on February 29, 2016 the Company foreclosed on 100% of the outstanding equity of U-Swirl in full satisfaction of the obligations owed under the SWRL
Loan Agreement. The Company reviewed all operating assets possessed as a part of this transaction and made the determination to offer for sale certain retail
assets below their carrying value. This determination was made after a review of expected future cash flow. As a result of this review and determination an
impairment charge of $356,280 was recorded to reflect these assets at their fair value.
Impairment of long-lived assets and goodwill, r estructuring and acquisition charges incurred at February 28 or 29, 2017, 2016 and 2015 were comprised of the
following:
Professional fees
Severance/transitional compensation
Leasehold improvements, property and equipment impairment
of long-lived assets and goodwill
Provision for termination of contractual obligations
Acceleration of restricted stock unit vesting
Other
$
2017
2016
2015
- $
-
-
60,000
-
-
- $
-
2,326,742
-
-
-
284,275
212,027
243,000
-
65,049
3,125
Total
$
60,000 $
2,326,742 $
807,476
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – RELATED PARTY TRANSACTIONS
Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have,
on occasion, provided services to the Company and may provide services in the future. For the year ended February 28, 2017, the Company paid $47,822 and
no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of
operations.
NOTE 16 – SUBSEQUENT EVENTS
On May 22, 2017, the Company announced that its Board of Directors has declared a first quarter FY2018 cash dividend of $0.12 per common share
outstanding. The cash dividend will be payable June 16, 2017 to shareholders of record at the close of business June 6, 2017.
NOTE 17 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income
tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the
interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company ’s prior annual consolidated financial statements and therefore, amendments of
previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior
periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233
and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting
(collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of
any evaluation of the effectiveness of the Company’s Control Systems to future periods are subject to the risk that such controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s
Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all errors or all
fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control
System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. These reports by management, including the CEO and CFO, on the effectiveness of the
Company’s Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that material information relating to the Company is made
known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors. These disclosure
controls and procedures are designed to ensure that information required to be disclosed in the Company’s reports that are filed or submitted under the
Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files
or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management, with the participation of the CEO and CFO, has evaluated the effect iveness, as of February 28, 2017, of the Company’s disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of February
28, 2017.
Management’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a
process designed under supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the
reliability of financial reporting and preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted
accounting principles. Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2017, of the Company’s
internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in its publication Internal Control-Integrated Framework (2013). Based on that evaluation, management has concluded that the
Company’s internal control over financial reporting was effective as of February 28, 2017.
Changes in Internal Control over Financial Reporting —There were no changes in the Company’s internal control over financial reporting that occurred during
the quarter ended February 28, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
56
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III.
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 2017 Annual Meeting of Stockholders, to be
filed no later than 120 days after February 28, 2017.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 2017 Annual Meeting of Stockholders, to be
filed no later than 120 days after February 28, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below, the information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 2017
Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2017.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to the Company ’s equity compensation plans as of February 28, 2017, which consists solely of the
Company’s 2007 Equity Incentive Plan.
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights (1)
(a)
Weighted-average exercise
price of outstanding options,
warrants and rights (1)
(b)
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column(a)) (2)
(c)
123,658
-0-
123,658
n/a
-0-
n/a
332,589
-0-
332,589
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
(1) Awards outstanding under the 2007 Equity Incentive Plan as of February 28, 2017 consist of 123,658 unvested restricted stock units. The weighted-average
exercise price is calculated solely with respect to the outstanding stock options.
(2) Represents shares remaining available under the Company’s 2007 Equity Incentive Plan. Shares available for future issuances under the 2007 Equity
Incentive Plan may be issued in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and performance units,
and other stock- and cash-based awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS , AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 2017 Annual Meeting of Stockholders, to be
filed no later than 120 days after February 28, 2017.
ITEM 14. PRINCIPAL ACCOUNT ING FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 2017 Annual Meeting of Stockholders, to be
filed no later than 120 days after February 28, 2017.
57
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report:
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
SCHEDULE II - Valuation and Qualifying Accounts
Page
34
35
36
37
38
39
Year Ended February 2 8, 2017
Valuation Allowance for Accounts and Notes Receivable
Year Ended February 2 9, 2016
Valuation Allowance for Accounts and Notes Receivable
Year Ended February 2 8, 2015
Valuation Allowance for Accounts and Notes Receivable
Balance at
Beginning of Period
Additions Charged
to Costs & Exp.
Deductions
Balance at End of
Period
670,471
137,316
271,694
536,093
729,060
171,000
229,589
670,471
600,930
214,600
86,470
729,060
58
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
3. Exhibits
The exhibits listed in the Exhibit Index are filed with, or incorporated by reference, in this Annual Report.
ITEM 16. FORM 10-K SUMMARY
None.
59
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SIGNATURES
Date: May 23, 2017
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
/s/ Bryan J. Merryman
BRYAN J. MERRYMAN
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: May 23, 2017
Date: May 23, 2017
Date: May 23, 2017
Date: May 23, 2017
Date: May 23, 2017
Date: May 23, 2017
/s/ Franklin E. Crail
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Bryan J. Merryman
BRYAN J. MERRYMAN
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Director
(Principal Financial and
Accounting Officer)
/s/ Brett P. Seabert
Brett P. Seabert, Director
/s/ Lee N. Mortenson
LEE N. MORTENSON, Director
/s/ Clyde Wm. Engle
CLYDE Wm. ENGLE, Director
/s/ Scott G. Capdevielle
SCOTT G. CAPDEVIELLE, Director
60
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT INDEX
Exhibit Number
Description
2.1#
Asset Purchase Agreement, dated January 14, 2013, among
Inc. and Yogurtini
Ulysses Asset Acquisition, LLC, YHI
International, LLC
Incorporated by Reference to
Exhibit 99.1 to the Current Report on Form 8-K filed
January 14, 2013 (File No. 000-14749)
2.2#
Asset Purchase Agreement, dated January 14, 2013, between U-
Exhibit 99.2 to the Current Report on Form 8-K filed
Swirl, Inc. and Aspen Leaf Yogurt, LLC
January 14, 2013 (File No. 000-14749)
2.3#
2.4
3.1
3.2
Membership Interest Purchase Agreement, dated January 14,
2013, between U-Swirl, Inc. and Rocky Mountain Chocolate
Factory, Inc., a Colorado corporation
Exhibit 99.3 to the Current Report on Form 8-K filed
January 14, 2013 (File No. 000-14749)
Agreement and Plan of Merger, dated November 10, 2014,
among Rocky Mountain Chocolate Factory, Inc., a Colorado
corporation, Rocky Mountain Chocolate Factory, Inc., a Delaware
corporation, and RKB Merger Corp.
Exhibit 2.1 to the Registration Statement on Form S-4
filed on November 10, 2014 (File No. 333-200063)
Amended and Restated Certificate of Incorporation of Rocky
Mountain Chocolate Factory, Inc., a Delaware corporation
Exhibit 3.1 to the Current Report on Form 8-K filed on
March 2, 2015
Certificate of Designations of Series A Junior Participating
Preferred Stock, Par Value $0.001 Per Share, of Rocky Mountain
Chocolate Factory, Inc., a Delaware corporation
Exhibit 3.2 to the Current Report on Form 8-K filed on
March 2, 2015
3.3
Amended and Restated Bylaws of Rocky Mountain Chocolate
Exhibit 3.3 to the Current Report on Form 8-K filed on
Factory, Inc., a Delaware corporation
March 2, 2015
4.1
Rights Agreement, dated March 1, 2015, between Rocky
Mountain Chocolate Factory, Inc., a Delaware corporation, and
Computershare Trust Company, N.A., as Rights Agent
Exhibit 4.1 to the Registration Statement on Form 8-A
filed on March 2, 2015
10.1**
Form of Employment Agreement (Officers)
10.2
Form of Franchise Agreement for Rocky Mountain Chocolate
Factory
Exhibit 10.1 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2007 (File No. 000-
14749)
Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the quarter ended May 31, 2010 (File No. 000-14749)
10.3**
2007 Equity Incentive Plan (As Amended and Restated)
Exhibit 10.1 to the Current Report on Form 8-K filed on
10.4**
Form of Indemnification Agreement (Directors)
10.5**
Form of Indemnification Agreement (Officers)
August 9, 2013 (File No. 000-14749)
Exhibit 10.7 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2007 (File No. 000-
14749)
Exhibit 10.8 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2007 (File No. 000-
14749)
61
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
10.6*
10.7
10.8
10.9
10.10*
10.11
10.12
Description
Incorporated by Reference to
Master License Agreement, dated August 17, 2009, between Kahala
Franchise Corp. and Rocky Mountain Chocolate Factory, Inc., a
Colorado corporation
Exhibit 10.3 to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended August 31, 2009 (File No.
000-14749)
Revolving Line of Credit Note, dated October 30, 2015, between
Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank,
National Association
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended November 30, 2015
Business Loan Agreement, dated August 2, 201 3, between Wells
Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a
Colorado corporation
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
quarter ended August 31, 2013 (File No. 000-14749)
Business Loan Agreement, dated December 27, 2013, between
Wells Fargo Bank and Rocky Mountain Chocolate Factory, Inc., a
Colorado corporation
Exhibit 99.3 to the Current Report on Form 8-K filed on
January 22, 2014 (File No. 000-14749)
Master License Agreement, dated April 27, 2012, between RMCF
Asia, Ltd. and Rocky Mountain Chocolate Factory, Inc., a Colorado
corporation
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended May 31, 2012 (File No. 000-14749)
Voting Agreement, dated January 14, 2013, among U-Swirl, Inc.,
Henry Cartwright, Ulderico Conte, Terry Cartwright, Rocky Mountain
Chocolate Factory, Inc., a Colorado corporation, and Aspen Leaf
Yogurt, LLC
Exhibit 99.4 to the Current Report on Form 8-K filed
January 14, 2013 (File No. 000-14749)
Investor Rights Agreement, dated January 14, 2013, between U-
Swirl, Inc. and Rocky Mountain Chocolate Factory, Inc., a Colorado
corporation
Exhibit 99.5 to the Current Report on Form 8-K filed
January 14, 2013 (File No. 000-14749)
10.13
Investor Rights Agreement, dated January 14, 2013 between U-
Exhibit 99.6 to the Current Report on Form 8-K filed
Swirl, Inc. and Aspen Leaf Yogurt, LLC
January 14, 2013 (File No. 000-14749)
21.1
23.1
31.1
Subsidiaries of the Registrant
Filed herewith
Consent of Independent Registered Public Accounting Firm
Filed herewith
Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of
Filed herewith
2002, Chief Executive Officer
31.2
Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of
Filed herewith
2002, Chief Financial Officer
32.1
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of
Furnished herewith
2002, Chief Executive Officer
62
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
32.2
Description
Incorporated by Reference to
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of
Furnished herewith
2002, Chief Financial Officer
101.INS
XBRL Instance Document
Filed herewith
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
* Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with
the SEC.
** Management contract or compensatory plan .
# Schedules and similar attachments have been omitted pursuant to Item 601(b) (2) of Regulation S-K under the Securities Act of 1934, as
amended. We hereby undertake to supplementally furnish copies of any omitted schedules to the SEC upon request.
63
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 21.1
Subsidiary
Rocky Mountain Chocolate Factory, Inc.
Jurisdiction of Incorporation
Colorado
SUBSIDIARIES OF THE REGISTRANT
Aspen Leaf Yogurt, LLC
U-Swirl, Inc. (1)
U-Swirl International, Inc.
Colorado
Nevada
Nevada
(1) As of February 28, 2017, Rocky Mountain Chocolate Factory, Inc. holds a 39% interest in U-Swirl, Inc.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Rocky Mountain Chocolate Factory, Inc.' s Registration Statement on Form S-8 (File Nos. 333-145986, 333-
191729, and 333-206534) of our report dated May 23, 2017, relating to the consolidated financial statements, which appears in this Annual Report on Form 10-
K.
Exhibit 23.1
/s/ EKS&H LLLP
May 23, 2017
Denver, Colorado
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 , CHIEF EXECUTIVE OFFICER
I, Franklin E. Crail, certify that:
1. I have reviewed this Annual Report on Form 10-K of Rocky Mountain Chocolate Factory, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 23, 2017
/s/ Franklin E. Crail
Franklin E. Crail, President, Chief Executive Officer and Chairman of the Board of
Directors
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 , CHIEF FINANCIAL OFFICER
I, Bryan J. Merryman, certify that:
1. I have reviewed this Annual Report on Form 10-K of Rocky Mountain Chocolate Factory, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 23, 2017
/s/ Bryan J. Merryman
Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer, Treasurer
and Director
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350), CHIEF EXECUTIVE OFFICER
In connection with the Annual Report of Rocky Mountain Chocolate Factory, Inc. (the "Company") on Form 10-K for the fiscal year ended February 2 8,
2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: May 23, 2017
/s/ Franklin E. Crail
Franklin E. Crail, President, Chief Executive Officer and Chairman of the
Board of Directors
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350), CHIEF FINANCIAL OFFICER
Exhibit 32.2
In connection with the Annual Report of Rocky Mountain Chocolate Factory, Inc. (the "Company") on Form 10-K for the fiscal year ended February 2 8,
2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: May 23, 2017
/s/ Bryan J. Merryman
Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer,
Treasurer and Director
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.