10-K 1 rmcfd20210228_10k.htm FORM 10-K
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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 28, 2021
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
Trading Symbol
Common Stock, $0.001 Par Value per
Share
Preferred Stock Purchase Rights
RMCF
RMCF
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 every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
☐
☒
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 ☒
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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by
the registered public accounting firm that prepared or issued its audit report. ☐
The aggregate market value of the registrant’s common stock (based on the closing price as quoted on the Nasdaq Global Market on
August 31, 2020, the last business day of the registrant’s most recently completed second fiscal quarter) held by non-affiliates was
$15,569,088. For purposes of this calculation, shares of common stock held by each executive officer and director and by holders of
more than 10% of the registrant’s outstanding common stock have been excluded since those persons may under certain
circumstances be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for
other purposes.
As of May 11, 2021, there were 6,118,995 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement in connection with the 2021 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 registrant’s fiscal year ended February 28, 2021.
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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 ACCOUNTANT 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 Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe
harbor protection provided by those sections. These forward-looking statements involve various risks and uncertainties. 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: the impact of the novel coronavirus
(COVID-19) on our business, including, among other things, online sales, factory sales, retail sales and royalty and marketing fees,
our liquidity, our cost cutting and capital preservation measures, achievement of the anticipated potential benefits of the strategic
alliance and ecommerce agreements with Edible (as defined herein), our ability to provide products to Edible under the strategic
alliance, 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 and licensees 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, licensing, 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
section entitled “Risk Factors” contained in this Annual Report in Item 1A. Additional factors that might cause such differences
include, but are not limited to: the length and severity of the COVID-19 pandemic and its effect on among other things, achievement
of the anticipated potential benefits of the strategic alliance and ecommerce agreements with Edible (as defined herein), our ability
to provide products to Edible under the strategic alliance, factory sales, retail sales, royalty and marketing fees and operations, the
effect of any governmental action or mandated employer-paid benefits in response to the COVID-19 pandemic, our ability to
manage costs and reduce expenditures in the current economic environment and the availability of additional financing if and when
required. 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, we 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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General
PART I.
ITEM 1. BUSINESS
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company,” “Rocky
Mountain,” “we,” “us,” or “our”), including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc.,
a Colorado corporation (“RMCF”), 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 wholly-owned subsidiary, U-Swirl International, Inc. (“U-Swirl”), 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 select locations outside of our system
of retail stores and license the use of our brand with certain consumer products. We are also party to strategic alliance and
ecommerce agreeements with Edible Arrangements®, LLC and its affiliates (“Edible”), whereby we sell our candy in their store
locations and through their ecommerce platform. As of March 31, 2021, there were two Company-owned, 95 licensee-owned and
211 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, Canada, South Korea, Panama, and the Philippines.
As of March 31, 2021, U-Swirl operated three Company-owned cafés, 71 franchised and licensed in 23 states and Qatar. 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”.
In fiscal year (“FY”) 2021, approximately 48% of the products sold at Rocky Mountain Chocolate Factory stores were prepared on
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 select 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.
In FY 2020 and early FY 2021, we entered into a long-term strategic alliance and ecommerce agreements, respectively, with Edible,
whereby it is intended that we would become the exclusive provider of certain branded chocolate products to Edible, its affiliates
and its franchisees. Under the strategic alliance, Rocky Mountain Chocolate Factory branded products are intended to be available
for purchase both on Edible’s website as well as through over 1,000 franchised Edible locations nationwide. In addition, due to
Edible’s significant e-commerce expertise and scale, we have also executed an ecommerce licensing agreement with Edible,
whereby Edible is expected to sell a wide variety of chocolates, candies and other confectionery products produced by the Company
or its franchisees through Edible’s websites. There is no assurance that the strategic alliance and ecommerce agreements will be
deployed into our operations and to our satisfaction, or that we will achieve the expected full benefits from these agreements.
Subsequent to February 28, 2021, certain disagreements arose between RMCF and Edible related to the strategic alliance and
ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable. There can be no
assurance historical revenue levels will be indicative of future revenues.
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 approximately 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.
We believe that these characteristics provide U-Swirl with the ability to compete successfully in the retail frozen yogurt industry.
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 (74%-68%-70%); (ii) sales at Company-owned stores of
chocolates, other confectionery products and frozen yogurt (including products manufactured by us) (8%-10%-10%) and (iii) the
collection of initial franchise, royalties and marketing fees from franchisees (18%-22%-20%). For FY 2021, nearly all of our
revenues were derived from domestic sources, with less than 1% derived from international sources. The figures in parentheses
above show the percentage of total revenues attributable to each source for the FY 2021, 2020 and 2019, respectively.
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COVID-19 Update
As discussed in more detail throughout this Annual Report, we have experienced significant business disruptions resulting from
efforts to contain the rapid spread of the novel coronavirus (“COVID-19”), including the vast mandated self-quarantines of
customers and closures of non-essential business throughout the United States and internationally. Nearly all of the Company-
owned and franchise stores were directly and negatively impacted in FY 2021 by public health measures taken in response to
COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours
and store and mall closures. As a result, franchisees did not order products for their stores in line with historical amounts during FY
2021. This trend has negatively impacted, and is expected to continue to negatively impact, among other things, factory sales, retail
sales and royalty and marketing fees. Beginning in May 2020 and continuing through February 2021, most stores previously closed
for much of March 2020 and April 2020 in response to the COVID-19 pandemic, began to re-open. As of February 28, 2021,
approximately 53 stores have not re-opened and the future of these locations is uncertain. This is a closure rate significantly higher
than historical levels. By February 28, 2021, certain stores have met or exceeded pre-COVID-19 levels, however, many retail
environments have continued to be adversely impacted by changes to consumer behavior because of COVID-19. Most stores re-
opened subject to various local health restrictions and with reduced operations. It is unclear when or if store operations will return to
pre-COVID-19 levels.
In addition, as previously announced in May 2020, the Board of Directors suspended the Company’s first quarter cash dividend
payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-19 pandemic.
Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public
health crisis and economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the
best interest of the Company and its stockholders.
During this challenging time, the Company’s foremost priority is the safety and well-being of its employees, customers, franchisees
and communities. In addition to the already stringent practices for the quality and safety of the Company’s confections, the
Company is diligently following health and safety guidance issued by the World Health Organization, the Centers for Disease
Control and state and local governmental agencies. The COVID-19 pandemic has had an unprecedented impact on the retail
industry as containment measures continue to impact the Company’s operations and the retail industry. Numerous countries, states
and local governments have effected ordinances to protect the public through social distancing, which has caused, and we expect
will continue to cause, a significant decrease in, among other things, retail traffic and as a result, factory sales, retail sales and
royalty and marketing fees. With that said, Rocky Mountain Chocolate Factory products have remained available for sale online.
The Company’s current focus is on supporting its franchisees and licensees during this challenging time. The number of Company-
owned and franchise stores remaining open may change frequently and significantly due to the ever-changing nature of the COVID-
19 pandemic.
In these challenging and unprecedented times, management is taking all necessary and appropriate action to maximize liquidity as
the Company navigates the current landscape. These actions include significantly reducing operating expenses and production
volume to reflect reduced sales volumes as well as the elimination of all non-essential spending and capital expenditures. Further, in
an abundance of caution and to maintain ample financial flexibility, the Company drew down the full amount under its line of credit
in March 2020 and the Company received loans under the Paycheck Protection Program (the “PPP”) in April 2020. These
borrowings allowed the Company to temporarily avoid workforce reduction measures amidst a steep decline in revenue and
production volume. The Company subsequently repaid its line of credit in full and the loans received under the PPP were fully
forgiven. While the Company believes it has sufficient liquidity with its current cash position, the Company will continue to
monitor and evaluate all financing alternatives as necessary as these unprecedented events evolve. For more information, please see
Item 1A “Risk Factors—Risks Related to the Economy—The Novel Coronavirus (COVID-19) Pandemic Has, and May Continue
to, Materially and Adversely Affect our Sales, Earnings, Financial Condition and Liquidity.”
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 the 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.
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Store Atmosphere and Ambiance
We seek to establish a fun, enjoyable and inviting atmosphere in each of our store locations. Unlike most other confectionery 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 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 has developed easily replicable designs 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.
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 generally holds a biennial convention for
franchisees, however the COVID-19 pandemic delayed the convention normally scheduled for FY 2021.
Strategic Partnership with Edible Arrangements®, LLC
We entered into a long-term strategic alliance and ecommerce agreements with Edible, whereby it is intended that we would become
the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Under the strategic alliance,
Rocky Mountain Chocolate Factory branded products are intended to be available for purchase both on Edible’s website as well as
through over 1,000 franchised Edible locations nationwide. In addition, due to Edible’s significant e-commerce expertise and scale,
we have also executed an ecommerce licensing agreement with Edible, whereby Edible is expected to sell a wide variety of
chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites. There
is no assurance that the strategic alliance and ecommerce agreements will be deployed into our operations and to our satisfaction, or
that we will achieve the expected full benefits from these agreements.
Increase Same Store Retail Sales at Existing Rocky Mountain Chocolate Factory and U-Swirl 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:
2017
2018
2019
2020
2021
Changes in system wide domestic same store retail sales at frozen yogurt franchise locations are as follows:
2017
2018
2019
2020
2021
0.9%
(2.9)%
1.0%
0.5%
(24.8)%
(3.0)%
(4.3)%
(0.5)%
1.3%
(39.4)%
Same store sales declined during FY 2021 primarily as a result of nearly all of the franchise stores being directly and negatively
impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a
result of, among other things, modified business hours and store and mall closures. For additional information regarding the
COVID-19 pandemic, its impact on our operations, and our response, please see Item 1 “BUSINESS – COVID-19 Update.”
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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 frequent updates to our line
of packaging has had a positive impact on same store sales.
Same Store Pounds Purchased by Existing Franchised and Licensed Locations
In FY 2021, same store pounds purchased by franchisees and licensees decreased 30.0% 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 the decrease in same store pounds purchased for FY 2021 was primarily due to COVID-19 and the impact on
store operations. For additional information regarding the COVID-19 pandemic, its impact on our operations, and our response,
please see Item 1 “BUSINESS – COVID-19 Update.”
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 system for production scheduling, implementation of alternative manufacturing strategies, installation of enhanced
point-of-sale systems in all of our Company-owned stores and the majority of our franchised stores, and implementation of a
serial/lot tracking and warehouse management system. These measures have significantly improved our ability to deliver our
products to our stores safely, quickly and cost-effectively and positively impact store operations. Many efforts we have taken to
improve operating efficiencies have been more than offset by declines in production volume. Production volume decreased
approximately 30% from FY2017 to FY2020, the result of a decrease in customers, primarily franchisees and further decreased
24% during FY 2021, the result of COVID-19 and its impact on store operations. We are hopeful that our strategic agreement with
Edible will contribute positively to production volume and help us realize enhanced operating efficiencies through the utilization of
excess factory capacity. For additional information regarding the COVID-19 pandemic, its impact on our operations, and our
response, please see Item 1 “BUSINESS – COVID-19 Update.”
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, especially as a result
of the COVID-19 pandemic, 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.
High Traffic Environments
We currently establish franchised stores in the following environments: regional centers, outlet centers, tourist areas, 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. COVID-19 has had a significant impact on the operation of traditional
high traffic environments. We are unable to predict the long-term impact of COVID-19 on high traffic environments and if these
sites will continue to be attractive expansion opportunities in the future.
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. We believe that 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 and we believe it will also improve and benefit our entire store system.
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We seek to establish a fun, enjoyable and inviting atmosphere in each of our store locations. Unlike most other confectionery stores,
each Rocky Mountain Chocolate Factory store prepares numerous products, including fudge, barks 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. In
FY 2021, an average of approximately 48% of the revenues of franchised stores were generated by sales of products prepared on
premises. In-store preparation is designed to be both fun and entertaining for customers and 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 has developed easily replicable
designs 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, 2021,
Cold Stone Creamery franchisees operated 96 co-branded locations, our U-Swirl franchisees operated six co-branded 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, the Republic of Panama, South Korea, the Republic of the Philippines, Vietnam, Qatar 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, 2021:
Rocky Mountain Chocolate Factory
Canada
The Republic of Panama
The Republic of the Philippines
South Korea
U-Swirl Cafés (including all associated brands)
Qatar
Total
48
1
3
1
1
54
As noted in below in Part I. Item 1. Business – Franchising Program - International Franchising and Licensing, during FY 2021 the
Company initiated formal legal proceedings against Immaculate Confections, the operator of RMCF locations in Canada. In its
complaint, the Company is alleging, among other things, that Immaculate Confections has utilized the Company’s trademarks and
other intellectual property without authority to do so and that Immaculate Confections has been unjustly enriched by their use of the
Company’s trademarks and intellectual property.
Subsequent to the end of FY 2021, in May 2021, the Company and Immaculate Confections held a formal mediation session. While
the mediation is ongoing, the Company believes a likely result of the mediation is that the Company no longer has Rocky Mountain
Chocolate Factory branded locations operating in Canada.
Products and Packaging
We produce approximately 450 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, toffees, mints and truffles. These
products are offered for sale and also configured into approximately 250 varieties of packaged assortments. During the Christmas,
Easter and Valentine's Day holiday seasons, we may make as many as 100 items, including many candies offered in packages, that
are specially designed for such holidays. A typical Rocky Mountain Chocolate Factory store offers up to 100 of these approximately
450 chocolate candies and other confectionery products 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. In FY 2021,
approximately 49% of the revenues of Rocky Mountain Chocolate Factory stores are generated by products manufactured at our
factory, 48% by products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and
the remaining 3% by products such as ice cream, coffee and other sundries purchased from approved suppliers.
In FY 2021, approximately 37% of our factory sales resulted from the sale of products outside of our system of franchised and
licensed locations, which we refer to as specialty markets, compared with 19% of our factory sales resulting from specialty markets
customers in FY 2020. The majority of specialty markets sales during FY 2021 were the result of our strategic relationship with
Edible. For FY 2021, Edible represented approximately 55% of total shipments to specialty markets and approximately 15% of our
total revenues. See Item 1A “Risk Factors—Risks Related to Our Company and Strategy—Our Sales to Specialty Market
Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among a Small Number of Customers.” 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.
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Chocolate candies that we manufacture are sold at prices ranging from $20.00 to $29.99 per pound, with an average price of $24.11
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 to 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 $0.39 and $0.66 per ounce.
Operating Environment
Rocky Mountain Chocolate Factory
We currently establish Rocky Mountain Chocolate Factory stores in six primary environments: regional centers, outlet centers,
tourist areas, 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, 2021 include:
Outlet Centers
Regional Centers
Festival/Community Centers
Tourist Areas
Street Fronts
Airports
Other
21.5%
20.3%
18.4%
17.0%
7.6%
5.7%
9.5%
COVID-19 has had a significant impact on the operation of traditional high traffic environments. We are unable to predict the long-
term impact of COVID-19 on high traffic environments and if these operating environments will continue to be attractive expansion
opportunities in the future.
Outlet Centers
As of February 28, 2021, there were approximately 34 Rocky Mountain Chocolate Factory stores in 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.
Regional Centers
As of February 28, 2021, there were Rocky Mountain Chocolate Factory stores in approximately 32 regional centers, including a
location in the Mall of America in Bloomington, Minnesota. Although they often provide favorable levels of foot traffic, regional
centers typically involve more expensive rent structures and competing food and beverage concepts.
Festival and Community Centers
As of February 28, 2021, there were approximately 29 Rocky Mountain Chocolate Factory stores in festival and community centers.
Festival and community centers offer retail shopping outside of traditional regional and outlet center shopping.
Tourist Areas, Street Fronts, Airports and Other Entertainment-Oriented Shopping Centers
As of February 28, 2021, there were approximately 27 Rocky Mountain Chocolate Factory stores in locations considered to be
tourist areas. 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. 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. As of February 28, 2021, there were 9 franchised Rocky Mountain Chocolate Factory stores at airport
locations.
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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) and since then has been ranked in the
Top 500 Franchises every year by Entrepreneur Magazine. As of March 31, 2021, there were 211 franchised stores in the Rocky
Mountain Chocolate Factory system and 71 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 to us by existing franchisees, to interested consumers who have
visited one of our domestic franchise locations 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
In 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, 2021, Immaculate Confections
operated 48 stores under this agreement.
During FY 2021, the Company initiated formal legal proceedings against Immaculate Confections. In its complaint, the Company is
alleging, among other things, that Immaculate Confections has utilized the Company’s trademarks and other intellectual property
without authority to do so and that Immaculate Confections has been unjustly enriched by their use of the Company’s trademarks
and intellectual property. The Company is seeking the recovery of damages associated with Immaculate Confections use of the
trademarks and a declaration that the use of the trademarks is without authority. The Company and Immaculate Confections are
currently in formal mediation in order to resolve the dispute. The Company intends to vigorously pursue these claims. The
Company is currently unable to anticipate a likely outcome from this litigation, and there is no assurance that the Company will be
successful in pursuing these claims.
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 include the following:
● In March 2013, we entered into a Licensing Agreement in the country of South Korea. As of March 31, 2021, one unit was
operating under this agreement.
● In October 2014, we entered into a Licensing Agreement in the Republic of the Philippines. As of March 31, 2021, three
units were operating under the agreement.
● In May 2017, we entered into a Licensing Agreement in the Republic of the Panama. As of March 31, 2021, one unit was
operating under the agreement.
● In May 2017, we entered into a Licensing Agreement in the Socialist Republic of Vietnam. As of March 31, 2021, there
were no units operating under the agreement.
● Through our U-Swirl subsidiary, we have additional international development agreements covering Canada and the State
of Qatar. As of March 31, 2021, no units were operating in Canada and one unit was operating in Qatar.
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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, 2021, Cold Stone Creamery franchisees operated 95 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, 2021, there were 9 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 store operating results with the franchisee 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 agreements for Rocky Mountain Chocolate Factory and U-Swirl brands franchisees require compliance with our
procedures of operation and food quality specifications and permits audits and inspections by us.
Operating standards for Rocky Mountain Chocolate Factory and U-Swirl brands 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 impacts of the COVID-19 pandemic have caused us to work closely with our franchisees and licensees to adapt our quality
standards and control procedures to new and developing requirements being placed on food service and retail operators by health
authorities. The COVID-19 pandemic is likely to cause frequent changes to operating standards for the foreseeable future.
The Franchise Agreement: Terms and Conditions
The domestic offer and sales 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 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 are
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 "Regulation" Below for additional information.
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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 for new or existing franchises, 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. In the normal course of business, we extend
credit to customers, primarily franchisees that satisfy pre-defined credit criteria, for inventory and other operational costs.
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, 2021, approximately $105,000 was
included in notes receivable as a result of this program. As of March 31, 2021, there were 17 units in operation by graduates of the
MWSU entrepreneurial program. The program with MWSU is no longer active though we continue to work with other colleges,
including Fort Lewis College in Durango, Colorado, to develop similar programs.
Company Store Program
As of March 31, 2021, there were two Company-owned Rocky Mountain Chocolate Factory stores and three 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 certain processes formerly performed by hand where it has become
cost-effective for us to do so without compromising product quality or appearance.
We also 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.
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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 nine 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 Care and Share Food Bank 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 exposure 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 brands and story in front of consumers in environments where they regularly shop but may
not be seeing our brands 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, which was manufactured, marketed, and distributed by Kellogg’s Company. Some of our specialty markets
customers have worked with us to offer licensed products alongside products we produce to further enhance brand placement and
awareness.
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Strategic Alliance with Edible
We entered into a long-term strategic alliance and ecommerce agreements with Edible, whereby it is intended that we would become
the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Under the strategic alliance,
Rocky Mountain Chocolate Factory branded products are intended to be available for purchase both on Edible’s website as well as
through over 1,000 franchised Edible locations nationwide. In addition, due to Edible’s significant e-commerce expertise and scale,
we have also executed an ecommerce licensing agreement with Edible, whereby Edible is expected to sell a wide variety of
chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites. There
is no assurance that the strategic alliance and ecommerce agreements will be deployed into our operations and to our satisfaction, or
that we will achieve the expected full benefits from these agreements.
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 offered by our stores. 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, other candy products and frozen yogurt; 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 trademark “Rocky Mountain Chocolate Factory” is registered in the
United States and Canada. Applications to register the Rocky Mountain Chocolate Factory trademark have been filed 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.
Seasonal Factors
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays, such as Christmas,
Easter and Valentine's Day, and the U.S. 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.
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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.
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, increase our capital expenditures and thereby decrease our earnings and negatively impact competitive position.
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.
Employees
At February 28, 2021, we employed approximately 202 people, including 149 full-time employees. Most employees, with the
exception of store management, factory management and corporate management, are paid on an hourly basis. We also employ some
individuals 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.
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 SEC also maintains a website that contains these reports, proxy and information statements and other information that can
be accessed, free of charge, 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
Risks Specific to Our Company and Strategy
Our Sales to Specialty Market Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among
a Small Number of Customers.
The Company has historically sold its product to relatively few customers outside its network of franchised and licensed locations
(specialty markets). Until 2019 much of the revenue generated from sales to specialty markets was derived from sales to FTD
Companies, Inc. In June 2019 FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11 bankruptcy
proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including the
divisions that the Company has historically sold product to, were sold through an auction to multiple buyers. The Company does not
expect future revenues from FTD to be significant.
Beginning in FY 2020 and continuing in FY 2021 the Company began selling its products to Edible under a strategic alliance. Sales
to Edible constituted much of our revenue derived from sales to specialty markets during FY 2021. Revenue from Edible
represented approximately $3.5 million or 15% of our total revenues during the year ended February 28, 2021, compared to revenue
of approximately $320,000 or 1% of our total revenues during the year ended February 29, 2020. The loss of Edible, or any other
specialty markets customer could have a material adverse effect on our revenue and profitability. There is no assurance that the
strategic alliance and ecommerce agreements will be deployed into our operations and to our satisfaction, or that we will achieve the
expected full benefits from these agreements. Subsequent to February 28, 2021, certain disagreements arose between RMCF and
Edible related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not
currently determinable. There can be no assurance historical revenue levels will be indicative of future revenues.
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 for franchised stores 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 in this environment at a cost that will allow such stores to be economically viable. There is also
no assurance that we will be able to obtain locations with suitable foot traffic as a result of the impacts of the COVID-19 pandemic
and the impact it has had on consumer’s ability to shop in person when compared to historical shopping patterns.
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 Rocky Mountain Chocolate Factory franchise stores have fluctuated as follows: (a) from (24.8%) to 1.0%
for annual results; and (b) from (29.3%) to 2.9% for quarterly results. During the past five fiscal years, same store sales results at U-
Swirl franchise stores have fluctuated as follows: (a) from (39.4%) to 1.3% for annual results; and (b) from (29.5%) to 8.7% 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. Same store sales declined during FY 2021 and established the large negative
percentage changes reflected above, primarily as a result of nearly all of the franchise stores being directly and negatively impacted
by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of,
among other things, modified business hours and store and mall closures.
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.
Price Increases May Not Be Sufficient To Offset Cost Increases And Maintain Profitability Or May Result In Sales Volume
Declines Associated With Pricing Elasticity.
We may be able to pass some or all raw materials, 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.
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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.
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.
Information Technology System Failures, Breaches of our Network Security or Inability to Upgrade or Expand our
Technological Capabilities Could Interrupt our Operations and Adversely Affect our Business.
We and our franchisees rely on our computer systems and network infrastructure across our operations, including point-of-sale
processing at our stores. Our and our franchisees’ operations depend upon our and our franchisees’ ability to protect our computer
equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic
events, as well as from internal and external cybersecurity breaches, viruses and other disruptive problems. Any damage or failure
of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect
on our business and subject us or our franchisees to litigation or to actions by regulatory authorities. Furthermore, the importance of
such information technology systems and networks increased in FY 2021 due to many of our employees working remotely as a
result of the COVID-19 pandemic.
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A party who is able to compromise the security measures on our networks or the security of our infrastructure could, among other
things, misappropriate our proprietary information and the personal information of our customers and employees, cause
interruptions or malfunctions in our or our franchisee’s operations, cause delays or interruptions to our ability to operate, cause us to
breach our legal, regulatory or contractual obligations, create an inability to access or rely upon critical business records or cause
other disruptions in our operations. These breaches may result from human errors, equipment failure, or fraud or malice on the part
of employees or third parties.
We expend financial resources to protect against such threats and may be required to further expend financial resources to alleviate
problems caused by physical, electronic, and cyber security breaches. As techniques used to breach security are growing in
frequency and sophistication and are generally not recognized until launched against a target, regardless of our expenditures and
protection efforts, we may not be able to implement security measures in a timely manner or, if and when implemented, these
measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, loss of existing or
potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on
our financial performance and operating results.
In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data
privacy or other laws, we may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks
despite not handling the data. Further, the regulatory framework around data custody, data privacy and breaches varies by
jurisdiction and is an evolving area of law. We may not be able to limit our liability or damages in the event of such a loss.
We are also continuing to expand, upgrade and develop our information technology capabilities, including our point-of-sale
systems, as well as the adoption of cloud services for e-mail, intranet, and file storage. If we are unable to successfully upgrade or
expand our technological capabilities, we may not be able to take advantage of market opportunities, manage our costs and
transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures.
Additionally, unforeseen problems with our point-of-sale system may affect our operational abilities and internal controls and we
may incur additional costs in connection with such upgrades and expansion.
If We, our Business Partners, or our Franchisees Are Unable to Protect our Customers’ Data, We Could Be Exposed to Data
Loss, Litigation, Liability and Reputational Damage.
In connection with credit and debit card sales, we and our franchisees transmit confidential credit and debit card information by way
of secure private retail networks. A number of retailers have experienced actual or potential security breaches in which credit and
debit card information may have been stolen. Although we and our franchisees use private networks, third parties may have the
technology or know-how to breach the security of the customer information transmitted in connection with credit and debit card
sales, and our and our franchisees’ security measures and those of our and our franchisees’ technology vendors may not effectively
prohibit others from obtaining improper access to this information. If a person were able to circumvent these security measures, he
or she could destroy or steal valuable information or disrupt our and our franchisees’ operations. Any security breach could expose
us and our franchisees to risks of data loss and liability and could seriously disrupt our and our franchisees’ operations and any
resulting negative publicity could significantly harm our reputation. We may also be subject to lawsuits or other proceedings in the
future relating to these types of incidents. Proceedings related to theft of credit and debit card information may be brought by
payment card providers, banks, and credit unions that issue cards, cardholders (either individually or as part of a class action
lawsuit), and federal and state regulators. Any such proceedings could harm our reputation, distract our management team members
from running our business and cause us to incur significant unplanned liabilities, losses and expenses.
We also sell and accept for payment gift cards, and our customer loyalty program provides rewards that can be redeemed for
purchases. Like credit and debit cards, gift cards, and rewards earned by our customers are vulnerable to theft, whether physical or
electronic. We believe that, due to their electronic nature, rewards earned through our customer loyalty program are primarily
vulnerable to hacking. Customers affected by any loss of data or funds could litigate against us, and security breaches or even
unsuccessful attempts at hacking could harm our reputation, and guarding against or responding to hacks could require significant
time and resources.
We also receive and maintain certain personal information about our customers, including information received through our
marketing programs, franchisees and business partners. The use of this information by us is regulated at the federal and state levels.
If our security and information systems are compromised or our employees fail to comply with these laws and regulations and this
information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as the
results of operations, and could result in litigation against us or the imposition of penalties. In addition, our ability to accept credit
and debit cards as payment in our stores and online depends on us maintaining our compliance status with standards set by the PCI
Security Standards Council. These standards, set by a consortium of the major credit card companies, require certain levels of
system security and procedures to protect our customers’ credit and debit card information as well as other personal information.
Privacy and information security laws and regulations change over time, and compliance with those changes may result in cost
increases due to necessary system and process changes.
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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. 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, 2021 and February 29, 2020 was $129,000 and $153,000, respectively.
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.
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.
If We Face Labor Shortages or Increased Labor Costs, our Results of Operations and our Growth Could Be Adversely
Affected.
Labor is a primary component of operating our business. If we experience labor shortages or increased labor costs because of
increased competition for employees, higher employee turnover rates, or increases in the federally-mandated or state-mandated
minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health
insurance coverage or workers’ compensation insurance), operating expenses could increase and our growth could be adversely
affected. The COVID-19 pandemic has resulted in a labor shortage and has also increased our labor cost as a result of limited
applicants for manufacturing jobs requiring on-site work. Labor shortages and increased labor costs may continue to be realized as a
result of the COVID-19 pandemic.
We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum
wage and increases in the minimum wage will increase our labor costs. The federal minimum wage has been $7.25 per hour since
July 24, 2009. Federally-mandated, state-mandated or locally-mandated minimum wages may be raised in the future. As of the date
hereof, many states and the District of Columbia have set a minimum wage level higher than the federal minimum wage, including
Colorado, where we employ the majority of our employees and minimum wage as of the date hereof is $12.32. We may be unable to
increase our prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively
affected.
Our Financial Results May Be Adversely Impacted By The Failure To Successfully Execute Or Integrate Acquisitions,
Divestitures And 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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Anti-Takeover Provisions In Our Certificate Of Incorporation And Bylaws May Delay Or Prevent A Third Party
Acquisition Of The Company, Which Could Decrease The Value Of Our Common Stock.
Our 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.
Our Common Stock Price May Be Volatile or May Decline Regardless of our Operating Performance.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you
paid for such shares. Many factors, which are outside our control, may cause the market price of our common stock to fluctuate
significantly, including those described elsewhere in this “Risk Factors” section and this Annual Report, as well as the following:
● our operating and financial performance and prospects;
● our quarterly or annual earnings or those of other companies in our industry compared to market expectations;
● conditions that impact demand at our stores and for our products;
● future announcements concerning our business or our competitors’ businesses;
● the public’s reaction to our press releases, other public announcements and filings with the SEC;
● the size of our public float, and the trading volume of our common stock;
● coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;
● market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
● strategic actions by us or our competitors, such as acquisitions or restructurings;
● changes in laws or regulations which adversely affect our industry or us;
● changes in accounting standards, policies, guidance, interpretations or principles;
● changes in senior management or key personnel;
● issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock;
● changes in our dividend policy;
● adverse resolution of new or pending litigation against us; and
● changes in general market, economic and political conditions in the United States and global economies or financial
markets, including those resulting from natural disasters, terrorist attacks, pandemics, public health crises, acts of war and
responses to such events.
As a result, volatility in the market price of our common stock may prevent investors from being able to sell their common stock at
or above the price they paid for such shares. These broad market and industry factors may materially reduce the market price of our
common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading
volume of our common stock is low. As a result, you may suffer a loss on your investment.
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Our Quarterly Dividend has Been Suspended and Our Decision to Pay Dividends on our Common Stock in the Future is
Subject to the Discretion of our Board of Directors.
We have in the past made a regular quarterly cash dividend to our common stockholders. However, the payment of future dividends
on our common stock will be subject to the discretion of our Board of Directors and will depend on, among other things, our results
of operations, financial condition, capital requirements, and on such other factors as our Board of Directors may in its discretion
consider relevant and in the best long-term interest of stockholders. Additionally, any change in the level of our dividends or the
suspension of the payment thereof could adversely affect the market price of our common stock. The Board of Directors has
suspended future quarterly dividends until the significant uncertainty of the current public health crisis and economic climate has
passed and the Board of Directors determines that resumption of dividend payments is in the best interest of us and our
stockholders. There is no assurance that we will resume dividend payments in the future, or if we do, at the same levels as declared
in the past. For additional information on our payments of dividends, see "Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities—Dividends" under Part II of this Annual Report.
Risks Related to the Economy
The Novel Coronavirus COVID-19 (COVID-19) Pandemic Has, and May Continue to, Materially and Adversely Affect our
Sales, Earnings, Financial Condition and Liquidity.
The COVID-19 pandemic, and restrictions imposed by federal, state and local governments in response to the pandemic, have
disrupted and will continue to disrupt our business. The pandemic has been, and we expect that it will continue to be, a serious
threat to public health and the economic well-being of our franchisees and other customers, our employees and our suppliers. The
COVID-19 pandemic has been, and may continue to cause a disruption to our business and potential associated financial impacts
include, but are not limited to, lower net sales in markets affected by the pandemic, including potential material shifts in, and
impacts to, demand, the inability of us or our franchisees to sell our products in stores to customers and further disruption to in-store
sales, the delay of, and potential increased costs related to, inventory production and fulfillment and potential incremental costs
associated with mitigating the effects of the pandemic, including increased raw materials, freight and logistics costs and other
expenses. Federal, state and local authorities have recommended social distancing and have imposed quarantine and isolation
measures on large portions of the population, including mandatory business closures for all non-essential businesses in certain
jurisdictions. Many of our franchisees are located in retail locations classified as non-essential, and, as a result, traffic to our
franchised stores and demand for our products have declined and our sales have materially decreased, sometimes to zero where
retail stores have been required to close. Consequently, our earnings and liquidity have been, and we expect that they will continue
to be, negatively impacted as a result. COVID-19 also impacted, and we expect that it will continue to impact, our supply chain,
particularly as a result of mandatory shutdowns in locations where our suppliers are located. We have also experienced difficulty
hiring and retaining manufacturing and store employees where on-site work is necessary. As a result, we have experienced and may
continue to experience out-of-stocks and lost sales. We may be forced to close additional locations, or extend the closure of
currently closed locations for reasons such as the health of our employees and further federal, state or local orders impacting our
operations.
Difficult macroeconomic conditions in our markets, such as further decreases in per capita income and level of disposable income,
increased and prolonged unemployment or a further decline in consumer confidence as a result of the COVID-19 pandemic, as well
as limited or significantly reduced points of access of our products, could continue to have a material adverse effect on the demand
for our products. Under difficult economic conditions, consumers may continue to seek to reduce discretionary spending by
forgoing purchases of our products or by shifting away from our premium products to lower-priced products offered by us or other
companies, negatively impacting our net sales and margins. Softer consumer demand for our products, particularly in the United
States, could reduce our profitability and could negatively affect our overall financial performance. A significant portion of our
consolidated revenues are concentrated in the United States, where the COVID-19 pandemic impacts have been significant.
Therefore, unfavorable macroeconomic conditions in the United States, including as a result of the COVID-19 pandemic and any
resulting recession or slowed economic growth, have had, and could continue to have, an outsized negative impact on us. In
addition, difficult economic conditions may have a negative impact on our ability to access capital markets and other funding
sources, on acceptable terms or at all, should we seek future financing. Additionally, we may have unexpected costs and liabilities;
revenue and cash provided by operations may decline; macroeconomic conditions may continue to weaken; prolonged and severe
levels of unemployment may negatively impact our consumers; and competitive pressures may increase, resulting in difficulty
maintaining adequate liquidity, which would adversely impact our business, including by increasing our costs of future borrowing,
if we are able to obtain additional financing on terms that are acceptable to us at all. Further, should the impacts of the pandemic
and resulting performance adversely affect our ability to remain compliant with our covenants in our line of credit and absent a
waiver or amendment from the lender, any outstanding borrowings on our line of credit may become immediately due.
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In addition, the COVID-19 pandemic and related efforts to mitigate its spread, have impacted, and may continue to impact for the
foreseeable future, customer traffic to our stores and our franchisees’ stores. Many governmental authorities in the United States
have required that restaurants and retailers close or cease onsite service, which has negatively impacted and we expect will continue
to negatively impact in-store sales of our and our franchisees’ products. Other locations have also implemented closures and/or
modified their hours, either voluntarily or as a result of governmental orders or quarantines. Additionally, these and other
governmental or societal impositions of restrictions on public gatherings, especially if prolonged in nature, will have adverse effects
on in-store traffic and, in turn, our business. Even if the pandemic subsides, fear of re-occurrence, the emergence or spread of
variants or the perceived risk of infection or health risk may adversely affect traffic to our and our franchisees’ stores and, in turn,
may have a material adverse effect on our business.
Moreover, our operations could be disrupted by our employees or employees of our business partners, including our supply chain
partners, being diagnosed with COVID-19 or suspected of having COVID-19 or other illnesses since this could require us or our
business partners to quarantine some or all such employees or close and disinfect our or their facilities. If a significant percentage of
our workforce or the workforce of our business partners are unable to work or if we or our business partners are required to close
our or their manufacturing facilities, including because of illness or travel or government restrictions in connection with the
COVID-19 pandemic, our operations, including manufacturing and distribution capabilities, may be negatively impacted,
potentially materially adversely affecting our business, liquidity, financial condition or results of operations.
In addition to the foregoing, we have experienced, or are likely to experience, the following adverse impacts from the COVID-19
pandemic:
● A large number of franchise store closures, with no assurance that franchise stores have the liquidity to maintain or resume
operations when it is safe and they are permitted to do so.
● We may not achieve the anticipated potential benefits of the strategic alliance and ecommerce agreements with Edible.
● “Shelter in place” and other similar mandated or suggested isolation protocols, which have disrupted, and could continue
to disrupt, our Company-owned stores and franchisees’ stores via store closures or reduced operating hours and decreased
retail traffic.
● An increase in costs associated with maintaining a safe workplace until at least such time as the public health crisis
subsides.
● All of our Company-owned stores have been closed or are operating under extreme restrictions.
● Our suppliers have faced similar impacts to their business.
● We have incurred approximately $1.3 million of bad debt expense related to uncollectable accounts and we may continue
to experience the failure of our customers to pay amounts owed to us on time, or at all, particularly if such customers are
significantly impacted by COVID-19.
● The impact of the pandemic on the economies and financial markets of the countries and regions in which we operate,
including a potential global recession, a decline in consumer confidence and spending, or a further increase in
unemployment levels, has resulted, and could continue to result, in consumers having less disposable income and, in turn,
decreased sales of our products.
● There may not be demand for the inventory we have on hand, which may spoil or expire before we are able to sell it.
● We incurred $476,000 of goodwill and intangible asset impairment expense and we may be unable to realize the expected
benefits of our tangible and intangible assets.
● Our success in attempting to reduce operating costs and conserve cash.
● Our franchisees’ inability to obtain rent and other relief from landlords with respect to closed stores, which may involve
litigation or other disruptions.
● The risk that even after the pandemic has initially subsided, fear of COVID-19 re-occurrence could cause customers to
avoid public places where our stores and those of our franchisees are located such as malls and outlets.
● We may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the
valuation of long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position
and results of operations.
The COVID-19 pandemic is ongoing and the extent of the impact of COVID-19 on our business and financial results will also
depend on future developments, including the duration and spread of the pandemic within the markets in which we operate, the
success of vaccination efforts including the rate of vaccination and effectiveness, related prolonged weakening of economic or other
negative conditions, such as a recession or slowed economic growth in our markets, which could impact consumer confidence and
spending and actions that may be taken by governmental authorities to contain the pandemic or to mitigate its impact, all of which
are highly uncertain and make it difficult to forecast any effects on our results of operations for FY 2022 and in subsequent years.
The nature of the COVID-19 pandemic makes it impossible to predict how our business and operations will be affected in the near
and long term.
General Economic Conditions Could Have a Material Adverse Effect on our Business, Results of Operations and Liquidity
or our Franchisees, with Adverse Consequences to Us.
Consumer purchases of discretionary items, including our products, generally decline during weak economic periods, such as the
current economic downturn caused by the COVID-19 pandemic, 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, public health, 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 discretionary
products altogether.
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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.
We rely in part on our franchisees and the manner in which they operate their stores to develop and promote our business. It is
possible, especially in light of the COVID-19 pandemic that additional franchisees could file for bankruptcy, become delinquent in
their payments to us, or simply shut down which could have a significant adverse impact on our business due to loss or delay in
payments of royalties, contributions to our marketing fund and other fees.
Although we have developed criteria to evaluate and screen prospective developers and franchisees, we cannot be certain that the
developers and franchisees we select will have the business acumen or financial resources necessary to open and operate successful
franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise
arrangements. Moreover, franchisees may not successfully operate stores in a manner consistent with our standards and
requirements, or may not hire and train qualified managers and other store personnel. The failure of developers and franchisees to
open and operate franchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to
attract prospective franchisees and could materially adversely affect our business, financial condition, results of operations and cash
flows.
The Financial Performance of Our Franchisees Can Negatively Impact Our Business.
Risks related to Our Franchisees
Our financial results are dependent in part upon the operational and financial success of our franchisees. We receive royalties,
franchise fees, contributions to our marketing fund, and other fees from our franchisees. We have established operational standards
and guidelines for our franchisees; however, we have limited control over how our franchisees’ businesses are run. While we are
responsible for ensuring the success of our entire system of stores and for taking a longer-term view with respect to system
improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our
franchisees may not be able to secure adequate financing to open or continue operating their Rocky Mountain Chocolate Factory
stores or U-Swirl cafés. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay
existing debt, our franchisees could experience financial distress or even bankruptcy. If a significant number of franchisees become
financially distressed, it could harm our operating results through reduced royalty revenues and the impact on our profitability could
be greater than the percentage decrease in the royalty revenues. Closure of franchised stores was higher during FY 2021 and could
continue to exceed levels experienced in recent years, especially as a result of the COVID-19 pandemic. This would reduce our
royalty revenues and could negatively impact margins, since we may not be able to reduce fixed costs which we continue to incur.
We Have Limited Control with Respect to the Operations of Our Franchisees, Which Could Have a Negative Impact on Our
Business.
Franchisees are independent business operators and are not our employees, and we do not exercise control over the day-to-day
operations of their stores. We provide training and support to franchisees, and set and monitor operational standards, but the quality
of franchised stores may be diminished by any number of factors beyond our control. Consequently, franchisees may not
successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers
and other store personnel. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation
of other franchisees, may suffer materially and system-wide sales could decline significantly, which would reduce our royalty
revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.
A Significant Shift by Franchisees from Company-Manufactured Products to Products Produced by Third Parties Could
Adversely Affect Our Operations.
In FY 2021, approximately 49% of franchised stores' revenues are generated by sales of products manufactured by and purchased
from us, 48% by sales of products made in the stores with ingredients purchased from us or approved suppliers and 3% 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 had 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.
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Risks Related to Our Supply Chain
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. The COVID-19 pandemic has resulted in pricing and
supply disruptions to our supply chain and has also impacted our ability to offset such disruptions through increased prices to our
customers. Increases in ingredient costs or supply chain disruptions may continue to be realized as a result of the COVID-19
pandemic.
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. Local State of Colorado health orders issued in response to COVID-19 have impacted, and are likely
to continue to impact, our manufacturing operations. Specifically, social distancing recommendations and requirements have had an
impact on how many employees can be engaged in production activities. If these requirements are in place for an extended period of
time we may realize additional constraints upon production capacity.
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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 2021, our factory produced approximately 1.47 million pounds of chocolate candies, which was a
decrease of approximately 23.8% from the approximately 1.93 million pounds produced in FY 2020. 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.
As of February 28, 2021, the Company had obligations for two non-cancelable leases of five to ten years for Rocky Mountain
Chocolate Factory Company-owned stores having varying expiration dates from July 2021 to January 2026, one 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 April 2024 to September 2024, some of which contain optional five or 10-year renewal rights. We currently have two
café leases in place, which range between $6,800 and $8,600 per month, exclusive of common area maintenance charges and taxes.
For information as to the amount of our rental obligations under leases on both Company-owned and franchised stores, see Note 10
“Leasing Arrangements” to our consolidated financial statements included in Item 8 of this Annual Report.
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ITEM 3. LEGAL PROCEEDINGS
The Company is party to various other 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 material adverse effect on the Company’s financial position, results of
operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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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.”
Holders
On May 10, 2021, there were approximately 420 record holders of our common stock. We believe that there are significantly more
beneficial owners of our common stock.
Dividends
The Company paid a quarterly cash dividend of $0.12 per common share on March 13, 2020 to stockholders of record on February
28, 2020. On May 11, 2020, the Company announced that the Board of Directors has decided to suspend its first quarter of FY 2021
cash dividend payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-19
pandemic. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the
current public health crisis and economic climate has passed and the Board of Directors determines that resumption of dividend
payments is in the best interest of us and our stockholders. There is no assurance that we will resume dividend payments in the
future, or if we do, at the same levels as declared in the past.
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.
Stock Repurchase Program
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. As of February 28, 2021, approximately $638,000
remains available under the repurchase plan for further stock repurchases.
Performance Graph
As a smaller reporting company, we are not required to provide the information required by this Item.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended February 28 or 29, 2017 through 2021, are derived from the
consolidated financial statements of the Company, which have been audited by Plante & Moran, PLLC, our independent registered
public accounting firm during the fiscal year ended February 28, 2019 through 2021, or EKS&H LLLP, our independent registered
public accounting firm for the fiscal years ended February 28, 2017 through 2018. 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
2021
Fiscal Years Ended February 28 or 29,
2018
2019
2020
Total revenues
Operating income
Net (loss) income
Basic Earnings per Common Share
Diluted Earnings per Common Share
Weighted average common shares
outstanding
Weighted average common shares
outstanding, assuming dilution
Selected Balance Sheet Data
Working capital
Total Assets
Long-term debt
Stockholders' equity
$
$
$
$
$
23,481 $
(3,474)
(900) $
31,850 $
1,392
1,034 $
34,545 $
3,006
2,239 $
38,075 $
5,221
2,964 $
2017
38,296
5,524
3,450
(0.16) $
(0.16) $
0.17 $
0.17 $
0.38 $
0.37 $
0.50 $
0.50 $
0.59
0.58
6,067
5,986
5,931
5,884
5,843
6,067
6,255
5,983
5,980
5,994
8,997 $
24,951
-
18,968
8,005 $
27,817
-
19,356
9,530 $
26,222
-
20,390
7,364 $
28,941
1,176
19,557
7,091
29,418
2,529
18,829
Cash Dividend Declared per Common Share
$
- $
0.48 $
0.48 $
0.48 $
0.48
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K. In addition to
historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking
statements. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk
Factors.”
Overview
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the
same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”) (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 wholly-
owned subsidiary, U-Swirl International, Inc. (“U-Swirl”), 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 select locations outside of our system of retail stores and license the use of
our brand with certain consumer products. We are also party to strategic alliance and ecommerce agreements with Edible
Arrangements®, LLC and its affiliates (“Edible”), whereby we sell our candy in their store locations and through their ecommerce
platform. As of March 31, 2021, there were two Company-owned, 95 licensee-owned and 211 franchised Rocky Mountain
Chocolate Factory stores operating in 37 states, Canada, South Korea, Panama, and the Philippines. As of March 31, 2021, U-Swirl
operated three Company-owned stores and 72 franchised and licensed stores located in 23 states and Qatar. 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”.
In FY 2020 and early FY 2021, we entered into a long-term strategic alliance and ecommerce agreements, respectively, with Edible,
whereby it is intended that we would become the exclusive provider of certain branded chocolate products to Edible, its affiliates
and its franchisees. Under the strategic alliance, Rocky Mountain Chocolate Factory branded products are intended to be available
for purchase both on Edible’s website as well as through over 1,000 franchised Edible locations nationwide. In addition, due to
Edible’s significant e-commerce expertise and scale, we have also executed an ecommerce licensing agreement with Edible,
whereby Edible is expected to sell a wide variety of chocolates, candies and other confectionery products produced by the Company
or its franchisees through Edible’s websites. There is no assurance that the strategic alliance and ecommerce agreements will be
deployed into our operations and to our satisfaction, or that we will achieve the expected full benefits from these agreements.
Current Trends and Outlook
As discussed in more detail throughout this Annual Report, we have experienced significant business disruptions resulting from
efforts to contain the rapid spread of the novel coronavirus (“COVID-19”), including the vast mandated self-quarantines of
customers and closures of non-essential business throughout the United States and internationally. Nearly all of the Company-
owned and franchise stores were directly and negatively impacted in FY 2021 by public health measures taken in response to
COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours
and store and mall closures. As a result, franchisees did not order products for their stores during FY 2021 in line with historical
amounts. This trend has negatively impacted, and is expected to continue to negatively impact, among other things, factory sales,
retail sales and royalty and marketing fees. Beginning in May 2020 and continuing through February 2021, most stores previously
closed for much of March 2020 and April 2020 in response to the COVID-19 pandemic, began to re-open. As of February 28, 2021,
approximately 54 stores have not re-opened and the future of these locations is uncertain. This is a closure rate significantly higher
than historical levels. By February 28, 2021, certain stores have met or exceeded pre-COVID-19 levels, however, many retail
environments have continued to be adversely impacted by changes to consumer behavior because of COVID-19. Most stores re-
opened subject to various local health restrictions and with reduced operations. It is unclear when or if store operations will return to
pre-COVID-19 levels. As a result of the negative impacts of COVID-19 the Company incurred bad debt expense of approximately
$1.3 million, incurred expense associated with the impairment of goodwill and intangible assets of approximately $476,000 and
incurred expense associated with fixed asset impairments of approximately $57,000.
In addition, as previously announced in May 2020, the Board of Directors suspended the Company’s first quarter cash dividend
payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-19 pandemic.
Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public
health crisis and economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the
best interest of the Company and its stockholders.
During this challenging time, the Company’s foremost priority is the safety and well-being of its employees, customers, franchisees
and communities. In addition to the already stringent practices for the quality and safety of the Company’s confections, the
Company is diligently following health and safety guidance issued by the World Health Organization, the Centers for Disease
Control and state and local governmental agencies. The COVID-19 pandemic has had an unprecedented impact on the retail
industry as containment measures continue to impact the Company’s operations and the retail industry. Numerous countries, states
and local governments have effected ordinances to protect the public through social distancing, which has caused, and we expect
will continue to cause, a significant decrease in, among other things, retail traffic and as a result, factory sales, retail sales and
royalty and marketing fees. With that said, Rocky Mountain Chocolate Factory products have remained available for sale online.
The Company’s current focus is on supporting its franchisees and licensees during this challenging time and driving growth in
online sales, especially in light of the ecommerce licensing agreement with Edible, as discussed herein, while also sensibly
managing costs. The number of Company-owned and franchise stores remaining open may change frequently and significantly due
to the ever-changing nature of the COVID-19 pandemic.
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In these challenging and unprecedented times, management is taking all necessary and appropriate action to maximize liquidity as
the Company navigates the current landscape. These actions include significantly reducing operating expenses and production
volume to reflect reduced sales volumes as well as the elimination of all non-essential spending and capital expenditures. Further, in
an abundance of caution and to maintain ample financial flexibility, the Company drew down the full amount under its line of credit
in March 2020 and the Company received loans under the Paycheck Protection Program (the “PPP”) in April 2020. These
borrowings allowed the Company to temporarily avoid workforce reduction measures amidst a steep decline in revenue and
production volume. The Company subsequently repaid its line of credit in full and the loans received under the PPP were fully
forgiven. While the Company believes it has sufficient liquidity with its current cash position, the Company will continue to
monitor and evaluate all financing alternatives as necessary as these unprecedented events evolve. For more information, please see
Item 1A “Risk Factors—Risks Related to the Economy—The Novel Coronavirus (COVID-19) Pandemic Has, and May Continue
to, Materially and Adversely Affect our Sales, Earnings, Financial Condition and Liquidity.”
It is not possible to predict the consequences of current events on the outcome of results in the future. In addition to the steps
described above, the Company, Management and the Board of Directors may take additional actions as a result of current events
related to COVID-19. Continued or prolonged disruption to the economy may result in, among other things: an increase in expense
associated with obsolete inventory, an increase in bad debt expense, expense associated with the impairment of long-lived assets
and intangible assets, an increase in store closures, and a decrease in new store openings.
The Company has been focused on employee safety and implementing steps to improve safety. The Company has been monitoring
the frequently changing guidance on best safety practices and is rapidly integrating safety measures into the working environment.
Most of our office and administrative staff are working remotely. The nature of our production environment necessitates that most
production employees must be on site to perform their job duties. As a result of the COVID-19 pandemic we have implemented
COVID-19 testing procedures, contact tracing, quarantine procedures and employee vaccinations. The current trends have made it
and may continue to make it difficult for us to hire and retain production employees.
Limited financing alternatives for domestic franchise growth has 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 2021 and we expect to continue into the foreseeable future.
Going forward in FY 2022, 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 our strategic
alliance with Edible to reduce our dependence on domestic brick-and-mortar retail.
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 macroeconomic and retail sector post-COVID 19 recovery,
ongoing online revenue growth, a shift in consumer behavior as a result of the COVID-19 pandemic, unit growth, increased same
store sales and increased same store pounds purchased from the factory.
Our ability to successfully achieve growth as a result of our strategic alliance with Edible depends on many factors not within our
control, including customer receptiveness to our products, Edible franchisee’s receptiveness to our products, logistical
considerations and technological integration. 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.
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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 2021, same store pounds purchased from the factory by franchised and co-branded
licensed stores was significantly impacted by COVID-19 and the impact it had on store operations. During FY 2021, same store
pounds purchased from the factory by franchised and co-branded licensed stores decreased approximately 74.3% in the first quarter,
decreased approximately 27.7% in the second quarter, decreased approximately 16.9% in the third quarter, decreased approximately
7.5% in the fourth quarter, and decreased 30.0% overall in FY 2021 as compared to the same periods in FY 2020.
We have expanded co-branding as a way to offset low franchise growth through a relationship with Cold Stone Creamery. We have
additionally developed co-branded locations through U-Swirl 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, 2021, Cold Stone licensees operated
96 co-branded locations, our U-Swirl franchisees operated 6 co-branded locations and we have co-branded 3 of our Company-
owned cafés.
Results of Operations
Fiscal 2021 Compared To Fiscal 2020
Results Summary
Basic earnings per share decreased from $0.17 per share in FY 2020 to a net loss of $(0.15) per share in FY 2021. Revenues
decreased 26.3% from $31.8 million for FY 2020 to $23.5 million for FY 2021. Operating income decreased from $1.4 million in
FY 2020 to an operating loss of $(3.5) million in FY 2021. Net income decreased from $1.0 million in FY 2020 to a net loss of
$(900,000) in FY 2021. The decreases in operating income and net income were due primarily to a decline in revenue associated
with the continued impacts from the COVID-19 pandemic, including its impact on our operations and the operations of our
franchised, licensed and Company-owned locations.
REVENUES
($'s in thousands)
Factory sales
Retail sales
Franchise fees
Royalty and marketing fees
Total
Factory Sales
For the Year Ended
February 28 or 29,
2020
2021
21,516.5 $
17,321.0 $
3,202.5
1,858.5
325.0
226.7
6,805.8
4,074.5
31,849.8 $
23,480.7 $
$
$
$
Change
%
Change
(4,195.5)
(1,344.0)
(98.3)
(2,731.3)
(8,369.1)
(19.5)%
(42.0)%
(30.2)%
(40.1)%
(26.3)%
The decrease in factory sales for FY 2021 versus FY 2020 was primarily due to a 37.3% decrease in sales of product to our network
of franchised and licensed retail stores, partially offset by a $2.3 million increase in shipments of product to customers outside our
network of franchised retail stores. The decrease in sales of product to our network of franchised and licensed retail stores was
primarily the result of the COVID-19 pandemic and the associated public health measures in place during FY 2021, which
significantly reduced traffic in our stores and caused most stores to close for a portion of FY 2021. The increase in shipments of
product to customers outside our network of franchise and licensed retail stores was primarily the result of sales associated with our
strategic alliance with Edible. Subsequent to February 28, 2021, certain disagreements arose between RMCF and Edible related to
the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not currently
determinable. There can be no assurance historical revenue levels will be indicative of future revenues.
Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 30.0% in
FY 2021, compared to FY 2020 as result of store closures, reduced operations and reduced demand in stores as a result of the
impacts of the COVID-19 pandemic.
Retail Sales
The decrease in retail sales was primarily due to store closures, reduced operations and reduced demand in stores as a result of the
impacts of the COVID-19 pandemic. As of February 28, 2021, all Company-owned stores had resumed limited operations
following COVID-19 related closures. Same store sales at all Company-owned stores and cafés decreased 36.5% during FY 2021
compared with FY 2020.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for FY 2021 compared to FY 2020 was primarily due to the COVID-19 pandemic and
the associated public health measures in place during FY 2021. Nearly all of our franchised locations experienced reduced
operations and periods of full closure during FY 2021. The average number of total domestic franchise stores in operation decreased
9.7% from 269 during FY 2020 to 243 during FY 2021. This decrease is the result of domestic store closures exceeding domestic
store openings, a trend which has accelerated as a result of the COVID-19 pandemic. Franchise fee revenues decreased in FY 2021
compared to FY 2020 primarily as a result of a decrease in revenue resulting from fewer franchise stores in operation and the
associated recognition of revenue over the term of the franchise agreement.
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COSTS AND EXPENSES
Cost of Sales
($'s in thousands)
Cost of sales - factory
Cost of sales - retail
Franchise costs
Sales and marketing
General and administrative
Retail operating
Total
Gross Margin
($'s in thousands)
Factory gross margin
Retail gross margin
Total
Gross Margin
(Percent)
Factory gross margin
Retail gross margin
Total
Adjusted Gross Margin
(a non-GAAP measure)
($'s in thousands)
Factory gross margin
Plus: depreciation and amortization
Factory adjusted gross margin
Retail gross margin
Total Adjusted Gross Margin
Factory adjusted gross margin
Retail gross margin
Total Adjusted Gross Margin
For the Year Ended
February 28 or 29,
2020
2021
$
Change
%
Change
$
$
15,473.8 $
644.8
1,715.6
1,712.8
5,258.0
1,381.8
26,186.8 $
17,091.1 $
1,123.8
1,882.2
1,922.6
5,736.0
1,791.7
29,547.4 $
(1,617.3)
(479.0)
(166.6)
(209.8)
(478.0)
(409.9)
(3,360.6)
(9.5)%
(42.6)%
(8.9)%
(10.9)%
(8.3)%
(22.9)%
(11.4)%
For the Year Ended
February 28 or 29,
2020
2021
$
Change
%
Change
$
$
1,847.2 $
1,213.7
3,060.9 $
4,425.4 $
2,078.7
6,504.1 $
(2,578.2)
(865.0)
(3,443.2)
(58.3)%
(41.6)%
(52.9)%
For the Year Ended
February 28 or 29,
2021
2020
%
Change
%
Change
10.7%
65.3%
16.0%
20.6%
64.9%
26.3%
(9.9)%
0.4%
(10.3)%
(48.1)%
0.6%
(39.2)%
For the Year Ended
February 28 or 29,
2021
2020
$
Change
%
Change
1,847.2
625.5
2,472.7
1,213.7
3,686.4
$
$
4,425.4
597.4
5,022.8
2,078.7
7,101.5
$
$
(2,578.2)
28.1
(2,550.1)
(865.0)
(3,415.1)
14.3%
65.3%
19.2%
23.3%
64.9%
28.7%
(9.0)%
0.4%
(9.5)%
(58.3)%
4.7%
(50.8)%
(41.6)%
(48.1)%
(38.6)%
0.6%
(33.1)%
$
$
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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.
Cost of Sales and Gross Margin
Factory gross margin decreased 9.0% during FY 2021 compared to FY 2020 due primarily to lower production volume. During FY
2021, production volume decreased 23.8% in response to a 19.5% decrease in factory sales, primarily due to the impacts of the
COVID-19 pandemic. During FY 2021, the Company also incurred approximately $280,000 of production labor costs associated
with paying employees who abided by local stay at home orders related to COVID-19 public health measures. This excess capacity
cost, in the form of idle labor, was included in cost of sales.
Franchise Costs
The decrease in franchise costs for FY 2021 compared to FY 2020 was due primarily to lower travel costs, the result of COVID-19
related travel restrictions. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to
39.9% during FY 2021 from 26.4% during FY 2020. This increase as a percentage of royalty, marketing and franchise fees is
primarily a result of the decrease in franchise revenue.
Sales and Marketing
The decrease in sales and marketing costs during FY 2021 compared to FY 2020 was primarily due to lower advertising and
promotion costs, partially offset by an increase in online advertising cost.
General and Administrative
The decrease in general and administrative costs during FY 2021 compared to FY 2020 was due to lower professional fees
associated with the Company’s process to explore and review strategic alternatives and costs associated with a stockholder’s
contested solicitation of proxies during FY 2020, with no comparable costs incurred during FY 2021. These decreases were
partially offset by an increase in bad debt expense and the impairment of certain intangible assets during FY 2021. During FY 2020,
the Company incurred approximately $2,271,000 of one-time costs associated with the review of strategic alternatives and the
contested solicitation of proxies, compared with no comparable costs incurred during FY 2021. Bad debt expense during FY 2021
was primarily the result of management’s assessment of the likelihood of collecting accounts and notes receivable. As a result of
this assessment total allowances for potentially uncollectable accounts and notes receivable increased to $1,454,140 at February 28,
2021, compared to $638,907 at February 29, 2020. This cost was a direct result of public health measures in place due to responses
to COVID-19 and the financial burden experienced by the majority of our network of franchised and licensed locations. As a
percentage of total revenues, general and administrative expenses increased to 22.4% in FY 2021 compared to 18.0% in FY 2020.
Retail Operating Expenses
Retail operating expenses decreased during FY 2021 compared to FY 2020, as a result of the temporary closure of all of our
Company-owned stores for much of the three months ended May 31, 2020. The closure of our Company-owned stores was the
result of COVID-19 and the associated public health measures in place. Retail operating expenses, as a percentage of retail sales,
increased to 74.4% during FY 2021 from 55.9% during FY 2020.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $711,000 during FY 2021,
a decrease of 20.6% from $895,000 incurred during FY 2020. This decrease was the result of a decrease in frozen yogurt cafés in
operation and lower amortization of the associated franchise rights. See Note 7 to the financial statements for a summary of annual
amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization
included in cost of sales increased 4.7% from $597,000 during FY 2020 to $626,000 during FY 2021. This increase was the result
of an increase in production assets in service primarily resulting from the replacement of obsolete equipment or equipment at the
end of its operating life.
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Other Income (Expense)
Other income was $1.7 million during FY 2021 compared to other income of $10,700 during FY 2020. This change was primarily
the result of a gain on insurance recovery and the forgiveness of debt partially offset by higher interest expense resulting from the
Company’s increased debt as a result of measures taken during FY 2021 to ensure adequate liquidity during the COVID-19
pandemic. In early FY 2021 the Company borrowed $3.4 million from its line of credit (subsequently the line of credit was repaid
in February 2021) and borrowed $1.5 million of loans under the Paycheck Protection Program which have been forgiven along with
associated interest.
The Company recognized a gain on insurance recovery of $210,500 and recognized forgiveness of debt in the amount of $1.5
million during FY 2021, compared with no similar amounts recognized during FY 2020. The debt forgiveness was the result of the
Company’s PPP loans being forgiven.
Income Tax Expense
Our effective income tax rate for FY 2021 was 49.8%, compared to 26.3% FY 2020. This change was primarily the result of debt
forgiveness income being realized with no associated income tax expense and the revaluation of a portion of deferred tax assets as a
result of the Company realizing a taxable loss during FY 2021 that can be carried back to prior periods with a higher effective
income tax rate.
Fiscal 2020 Compared To Fiscal 2019
A discussion of our results of operations for FY 2020 in comparison to FY 2019 has been omitted from this Annual Report, but can
be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual
Report on Form 10-K for the fiscal year ended February 29, 2020, filed with the SEC on May 29, 2020, as amended by our Annual
Report on Form 10-K/A for the fiscal year ended February 29, 2020, filed with the SEC on June 29, 2020, which are available free
of charge on the SEC’s website at www.sec.gov and our corporate website (www.rmcf.com).
Liquidity and Capital Resources
As discussed below, we have taken several defensive measures to maximize liquidity in response to the COVID-19 pandemic,
including the suspension of our cash dividend, reducing expenses, extending payment terms with vendors, reducing production
volume and deferring discretionary capital expenditures. Based on these actions, we believe that cash flows from operations and our
cash and cash equivalents on hand, will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at
least the next twelve months. Additional future financing may be necessary to fund our operations, and there can be no assurance
that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all, especially in light of
the market volatility and uncertainty as a result of the COVID-19 pandemic. Although we believe we have adequate sources of
liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our
markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors,
could impact our business and liquidity.
As of February 28, 2021, working capital was $9.0 million compared with $8.0 million as of February 29, 2020. The increase in
working capital was due primarily to our efforts to preserve liquidity during the COVID-19 pandemic, including the receipt of PPP
funds and the suspension of our quarterly dividend. 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.
Cash and cash equivalent balances increased from $4.8 million as of February 29, 2020 to $5.6 million as of February 28, 2021 as a
result of cash flows generated by financing activities. Our current ratio was 3.4 to 1.0 at February 28, 2021 compared to 2.4 to 1.0 at
February 29, 2020. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated
operating, financing and investing requirements.
During FY 2021, we had a net loss of $900,000. Operating activities provided cash of $67,000, with the principal adjustment to
reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock
compensation expense of $512,000. During FY 2020, we had net income of $1.0 million. Operating activities provided cash of $4.4
million, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and
amortization of $1.5 million, an increase in accounts payable of $1.2 million and stock compensation expense of $809,000.
During FY 2021, investing activities used cash of $71,000, primarily due to the purchases of property and equipment, intangible
assets and deposits on future asset purchases of $461,000, partially offset by proceeds received from an insurance recovery of
$305,000. In comparison, investing activities used cash of $911,000 during FY 2020 primarily due to the purchases of property and
equipment of $984,000 the result of investment in factory infrastructure improvements, partially offset by proceeds received on
notes receivable of $146,000.
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Financing activities provided cash of $815,000 during FY 2021 and used cash of $4.0 million during the prior year. The decrease in
cash used in financing activities was primarily due to the receipt of PPP proceeds and the suspension of the Company’s quarterly
cash dividend.
Revolving Credit Line
The Company has a $5.0 million credit line for general corporate and working capital purposes, of which $5.0 million was available
for borrowing (subject to certain borrowing base limitations) as of February 28, 2021. On March 16, 2020, as a precautionary
measure in light of the COVID-19 pandemic and the related economic impacts, the Company drew the maximum amount available
on the credit line in an amount equal to $3.4 million (the full amount of $5.0 million under the credit line, subject to the borrowing
base of 50% of eligible accounts receivable plus 50% of eligible inventories). In February 2021, the Company repaid the credit line
in full as a result of improving economic conditions and the full forgiveness of PPP loans. The credit line is secured by substantially
all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (2.4% at February 28, 2021).
Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2021, the Company was
in compliance with all such covenants. The credit line is subject to renewal in September 2021 and the Company believes it is likely
to be renewed on terms similar to the current terms.
PPP Loan
On April 13, 2020 and April 20, 2020, the Company entered into a Loan Agreements and Promissory Notes (collectively the “SBA
Loans”) with 1st SOURCE BANK pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The
Company received total proceeds of $1.5 million from the SBA Loans. These loans were forgiven during FY 2021 and no amount
was outstanding as of February 28, 2021.
Contractual Obligations
The table below presents significant contractual obligations of the Company at February 28, 2021.
(Amounts in thousands)
Contractual Obligations
Total
Less than 1
year
2-3 Years
4-5 years
More Than 5
years
Operating leases
Purchase contracts
Other long-term obligations
Total
$
$
1,991 $
377
174
2,542 $
635 $
377
60
1,072 $
688 $
-
65
753 $
179 $
-
49
228 $
489
-
-
489
The Company made an average of $584,000 per year in capital expenditures during the three fiscal years ended February 28, 2021.
For FY 2022 the Company anticipates making approximately $775,000 of capital expenditures.
Off-Balance Sheet Arrangements
As of February 28, 2021, we had purchase obligations of approximately $377,000. These purchase obligations primarily consist of
contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the
Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of
which are subject to inflation. Additionally, the Company’s future lease cost for new facilities may include potentially escalating
costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would
be if it were based on 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.
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.
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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 may experience the failure of our wholesale customers, including our franchisees, to
whom we extend credit to pay amounts owed to us on time, or at all, particularly if such customers are significantly impacted by
COVID-19.
We recorded an average expense of approximately $533,000 per year for potential uncollectible accounts over the three fiscal years
ended February 28, 2021. Write-offs of uncollectible accounts net of recoveries averaged approximately $217,000 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 fiscal years, the allowances for doubtful notes and accounts have ranged from 10.0% to 40.1% of gross
receivables. As a result of COVID-19 and the associated impact on the liquidity of our customers, we recorded higher expense for
potentially uncollectable accounts and a higher allowance as a percentage of gross receivables.
Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery.
Beginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of
the associated agreement, which is generally a period of 10-15 years. Prior to FY 2019, franchise fee revenue was recognized upon
opening of the franchise store, or upon execution of an international license agreement. 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. The Company recognizes no royalty on franchised stores’ retail sales of products purchased from the
Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. Royalty fees for U-
Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail
sales. 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.
Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced for slow-moving, excess,
discontinued and shelf-life expired inventories. Our estimate for such reduction 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, further inventory 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 fiscal years ended February 28, 2021,
the Company recorded expense averaging $324,400 per year for potential inventory losses, or approximately 1.8% of total cost of
sales for that period.
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. We previously entered into a loan
and security agreement with SWRL to cover the purchase price and other costs associated with acquisitions of SWRL (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. As a result of certain defaults under the SWRL Loan Agreement, we
issued a demand for payment of all obligations under the SWRL Loan Agreement. On February 29, 2016, RMCF repossessed all
stock in U-Swirl pledged as collateral on the SWRL Loan Agreement. Our testing and impairment is described in Note 7 to the
financial statements. We may be required to revise certain accounting estimates and judgments related to Goodwill as a result of the
COVID-19 pandemic and its impact on economic conditions.
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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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
38
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39
41
42
43
44
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of
February 28, 2021 and February 29, 2020; 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, 2021; and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of February 28, 2021 and February 29, 2020 and the results of its operations and its cash flows for each
of the years in the three-year period ended February 28, 2021 in conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinion on the critical audit matters or on the accounts or
disclosures to which they relate.
Accounts Receivable and Related Reserves
As described in Note 1 to the consolidated financial statements, in the normal course of business, the Company extends credit to
customers, primarily franchisees, that satisfy pre-defined credit criteria. 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. Estimates with regard to the collectability of accounts receivable are reasonably likely
to change in the future. The Company may experience the failure of its wholesale customers and franchisees, to whom it extends
credit to pay amounts owed on time, or at all, particularly if such customers are significantly impacted by COVID-19.
We identified the Company's valuation of accounts receivable reserve as a critical audit matter. The principal considerations for our
determination include management's analysis of determining the reserve for customer and franchisee accounts receivable is complex
and highly subjective and the Company has significant balances that age significantly longer than normal payment terms. Further,
the Company's customers and franchisees may be significantly impacted by COVID-19, making the estimates especially challenging
as a result of market conditions.
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The primary procedures we performed to audit this critical audit matter included the following:
● We obtained an understanding of the Company's accounting and control procedures for accounts receivable
reserves within both IT and manual systems by which those transactions are initiated, authorized, recorded,
processed, corrected as necessary, transferred to the general ledger, and reported in the financial statements.
● We performed a retrospective review of the prior year allowance for doubtful accounts to determine whether
management judgments and assumptions relating to the estimates indicate possible bias on the part of management.
● We confirmed year-end account balances directly with a sample of customers. We also reviewed year-end account
balances for which subsequent cash receipts were not received through fieldwork dates. For those balances, we
inquired of management regarding any collectability issues of any uncollected accounts receivable outside the
normal payment cycle.
● We obtained the accounts receivable aging and compared the balances to the general ledger. We performed
analytical procedures on the accounts receivable aging and evaluated the reserve for bad debts. We also performed
other analytical procedures related to bad debt expense and the allowance for accounts receivable.
● We inquired of the client regarding any receivables with collectability concerns and concluded on whether such
circumstances have been taken into account in the recorded receivables balance.
Intangible Asset and Goodwill Impairments
As described in Notes 1 and 8 to the consolidated financial statements, the Company reviews its amortized intangible assets
whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. 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. The Company assessed the changes in circumstances related to
COVID-19 during the Company’s first quarter to determine if an impairment occurred, and if so, the amount of impairment
necessary.
We identified the Company's impairment assessment of intangible assets and goodwill as a critical audit matter. The principal
considerations for our determination include the high degree of auditor judgment and subjectivity in applying procedures relating to
the assessment and impairment of the Company's intangible assets and goodwill. This was driven by significant management
judgment when determining fair value, including (1) the fair value approaches, (2) the future cash flows used in the impairment
tests, and (3) other inputs used in the valuation including comparable company multiples, discount rates, and return on equity. In
addition, the audit effort involved the use of fair value specialists to assist in performing audit procedures over these assumptions
and evaluating the audit evidence obtained.
The primary procedures we performed to audit this critical audit matter included the following:
● We obtained an understanding of management’s accounting and control procedures over the impairment tests,
including validation of the assumptions included in the impairment analysis for both the intangible assets and
goodwill and the evaluation of the methodology used in determining the magnitude of impairment charges.
● We evaluated the inputs used in the intangible assets and goodwill impairment tests, including cash flow
projections, scenario analysis, discount rates, a multi-period excess earning model, a relief from royalty method,
return on equity assumptions, and comparable company multiples.
● We compared the undiscounted cash flows used in the intangible assets impairment test to the carrying value of the
assets to evaluate whether an impairment existed. Further, we recalculated the difference between the carrying
value and the fair value to validate the amount of computed impairment.
● With the assistance of our fair value specialists, we evaluated the reasonableness of the calculated amount of fair
value of the intangible assets and goodwill.
● We evaluated the reasonableness of the fair value calculated under the combination of income and market
approaches.
● We evaluated the Company’s disclosures related to the impairment charges.
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor since 2004.
Boulder, Colorado
June 1, 2021
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues
Sales
Franchise and royalty fees
Total Revenue
Costs and Expenses
FOR THE YEARS ENDED FEBRUARY 28 OR 29,
2021
2020
2019
$
19,179,447 $
4,301,258
23,480,705
24,718,968 $
7,130,828
31,849,796
27,563,794
6,981,653
34,545,447
Cost of sales
Franchise costs
Sales and marketing
General and administrative
Retail operating
Depreciation and amortization, exclusive of depreciation and
amortization expense of $625,526, $597,430, and $555,926,
respectively, included in cost of sales
Costs associated with Company-owned store closures
Total costs and expenses
16,118,625
1,715,588
1,712,834
5,258,035
1,381,754
18,214,896
1,882,185
1,922,650
5,735,971
1,791,689
20,599,551
1,980,781
2,210,800
3,432,618
1,934,891
710,656
57,100
26,954,592
895,395
15,400
30,458,186
1,153,873
226,981
31,539,495
Income (Loss) from Operations
(3,473,887)
1,391,610
3,005,952
Other Income (Expense)
Interest expense
Interest income
Gain on insurance recovery
Paycheck Protection Program
Other income (expense), net
(94,506)
17,662
210,464
1,548,576
1,682,196
(19,016)
29,738
-
-
10,722
(70,787)
20,496
-
-
(50,291)
Income Before Income Taxes
(1,791,691)
1,402,332
2,955,661
Income Tax Provision
Consolidated Net Income (Loss)
Basic Earnings per Common Share
Diluted Earnings per Common Share
(891,914)
368,500
716,862
(899,777) $
1,033,832 $
2,238,799
(0.15) $
(0.15) $
0.17 $
0.17 $
0.38
0.37
$
$
$
Weighted Average Common Shares Outstanding - Basic
Dilutive Effect of Employee Stock Awards
Weighted Average Common Shares Outstanding - Diluted
6,067,461
-
6,067,461
5,986,371
268,972
6,255,343
5,931,431
51,207
5,982,638
The accompanying notes are an integral part of these consolidated financial statements.
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Assets
Current Assets
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28 OR 29,
2021
2020
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,341,853 and
$638,907, respectively
$
5,633,279 $
4,822,071
2,007,502
4,049,959
Notes receivable, current portion, less current portion of the valuation allowance of
$32,571 and $0, respectively
Refundable income taxes
Inventories
Other
Total current assets
Property and Equipment, Net
Other Assets
Notes receivable, less current portion and valuation allowance of $79,716 and $0,
respectively
Goodwill, net
Franchise rights, net
Intangible assets, net
Deferred income taxes
Lease right of use asset
Other
Total other assets
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable
Accrued salaries and wages
Gift card liabilities
Other accrued expenses
Dividend payable
Contract liabilities
Lease liability
Total current liabilities
Lease Liability, Less Current Portion
Contract Liabilities, Less Current Portion
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and
outstanding
Series A Junior Participating Preferred Stock; 50,000 authorized; -0- shares issued
and outstanding
Undesignated series; 200,000 shares authorized; -0- shares issued and outstanding
Common stock, $.001 par value, 46,000,000 shares authorized, 6,074,293 shares and
6,019,532 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Total stockholders' equity
Total Liabilities and Stockholders' Equity
84,819
774,527
4,062,885
213,811
12,776,823
5,152,015
42,525
729,701
2,519,764
395,946
1,144,764
1,925,591
264,023
7,022,314
24,951,152 $
1,297,211 $
735,241
617,438
253,345
-
194,737
682,348
3,780,320
1,278,354
924,909
160,700
418,319
3,750,978
409,703
13,611,730
5,938,013
289,515
1,046,944
3,047,688
498,393
630,078
2,698,765
56,262
8,267,645
27,817,388
2,241,506
716,860
609,842
316,751
722,344
195,658
803,861
5,606,822
1,894,904
960,151
$
$
-
-
-
-
6,074
7,971,712
10,989,783
18,967,569
24,951,152 $
6,020
7,459,931
11,889,560
19,355,511
27,817,388
$
The accompanying notes are an integral part of these consolidated financial statements.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
Balance at beginning of year
Issuance of common stock
Equity compensation, restricted stock units
Balance at end of year
Additional Paid-In Capital
Balance at beginning of year
Issuance of common stock
Equity compensation, restricted stock units
Balance at end of year
Retained Earnings
Balance at beginning of year
Net (loss) income attributable to RMCF stockholders
Cash dividends declared
Adoption of ASC 6061
Balance at end of year
Total Stockholders' Equity
Common Shares
Balance at beginning of year
Issuance of common stock
Equity compensation, restricted stock units
Balance at end of year
1 Refer to Note 3 for information on the adoption of ASC 606.
FOR THE YEARS ENDED FEBRUARY 28 OR 29,
2021
2020
2019
$
6,020 $
-
54
6,074
5,958 $
23
39
6,020
5,903
6
49
5,958
7,459,931
-
511,781
7,971,712
6,650,864
210,951
598,116
7,459,931
6,131,147
55,971
463,746
6,650,864
11,889,560
(899,777)
-
-
10,989,783
13,733,010
1,033,832
(2,877,282)
-
11,889,560
13,419,553
2,238,799
(2,851,271)
925,929
13,733,010
18,967,569
19,355,511
20,389,832
6,019,532
-
54,761
6,074,293
5,957,827
22,870
38,835
6,019,532
5,903,436
5,333
49,058
5,957,827
The accompanying notes are an integral part of these consolidated financial statements.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities
Net (Loss) Income
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization
Provision for obsolete inventory
Provision for loss on accounts and notes receivable
Asset impairment and store closure losses
(Gain) Loss on sale or disposal of property and equipment
Forgiveness of Paycheck Protection Program
Expense recorded for stock compensation
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Refundable income taxes
Inventories
Other current assets
Accounts payable
Accrued liabilities
Contract liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Proceeds received on notes receivable
Purchase of intangible assets
Proceeds from insurance recovery
Proceeds from the sale or distribution of assets
Purchases of property and equipment
(Increase) decrease in other assets
Net cash used in investing activities
Cash Flows from Financing Activities
Payments on long-term debt
Proceeds from Paycheck Protection Program
Dividends paid
Net cash provided by (used in) financing activities
FOR THE YEARS ENDED FEBRUARY 28 OR 29,
2021
2020
2019
$
(899,777) $
1,033,832 $
2,238,799
1,336,182
262,156
1,257,010
532,602
(197,037)
(1,537,200)
511,835
(514,685)
1,022,975
(356,209)
(617,268)
195,891
(901,090)
(2,318)
(25,721)
67,346
85,345
(99,048)
304,962
-
(154,492)
(207,761)
(70,994)
1,492,825
360,614
197,830
15,400
11,174
-
809,129
(22,657)
(453,816)
(228,118)
297,306
(91,577)
1,205,891
(47,783)
(184,232)
4,395,818
146,455
(75,000)
-
763
(983,941)
314
(911,409)
1,709,799
325,478
155,600
67,822
36,024
-
519,772
(78,934)
(390,663)
157,544
41,310
(8,225)
(545,588)
(84,191)
(129,527)
4,015,020
102,256
-
-
13,498
(613,786)
(8,140)
(506,172)
-
1,537,200
(722,344)
814,856
(1,176,488)
-
(2,869,877)
(4,046,365)
(1,352,821)
-
(2,844,984)
(4,197,805)
Net Increase (Decrease) in Cash and Cash Equivalents
811,208
(561,956)
(688,957)
Cash and Cash Equivalents, Beginning of Period
4,822,071
5,384,027
6,072,984
Cash and Cash Equivalents, End of Period
$
5,633,279 $
4,822,071 $
5,384,027
The accompanying notes are an integral part of these consolidated financial statements.
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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), Aspen Leaf Yogurt,
LLC (“ALY”), and U-Swirl International, Inc. (“U-Swirl”), and its 46%-owned subsidiary, U-Swirl, Inc. (“SWRL”) (collectively,
the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is
headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery
products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in select locations
outside of its system of retail stores and licenses the use of its brand with certain consumer products.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen
Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt.”
The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other
confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales;
and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
In FY 2020 and early FY 2021 we entered into a long-term strategic alliance and ecommerce agreements, respectively, with Edible
Arrangements®, LLC and its affiliates (“Edible”), whereby it is intended that we would become the exclusive provider of certain
branded chocolate products to Edible, its affiliates and its franchisees. Under the strategic alliance, Rocky Mountain Chocolate
Factory branded products are intended to be available for purchase both on Edible’s website as well as through over 1,000
franchised Edible locations nationwide. In addition, due to Edible’s significant e-commerce expertise and scale, we have also
executed an ecommerce licensing agreement with Edible, whereby Edible is expected to sell a wide variety of chocolates, candies
and other confectionery products produced by the Company or its franchisees through Edible’s websites. There is no assurance that
the strategic alliance and ecommerce agreements will be deployed into our operations and to our satisfaction, or that we will achieve
the expected full benefits from these agreements.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its
subsidiaries at February 28, 2021:
Rocky Mountain Chocolate Factory
Company-owned stores
Franchise stores - Domestic stores and kiosks
International license stores
Cold Stone Creamery - co-branded
U-Swirl (Including all associated brands)
Company-owned stores - co-branded
Franchise stores - Domestic stores
Franchise stores - Domestic - co-branded
International license stores
Total
Consolidation
Sold, Not Yet
Open
Open
Total
-
3
1
5
-
1
-
-
10
2
158
53
96
3
65
6
1
384
2
161
54
101
3
66
6
1
394
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. 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 three 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 $5.1 million at February 28, 2021.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business, the Company extends credit to customers, primarily franchisees that satisfy pre-defined credit
criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the
assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and
inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of
collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process
by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes
into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer
specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts
receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely
changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are
reasonably likely to change in the future. At February 28, 2021, the Company had $239,631 of notes receivable outstanding and an
allowance for doubtful accounts of $112,287 associated with these notes, compared to $450,215 of notes receivable outstanding and
an allowance for doubtful accounts of $0 at February 29, 2020. The notes require monthly payments and bear interest rates ranging
from 4.5% to 6%. The notes mature through November 2023 and approximately $135,000 of notes receivable are secured by the
assets financed. The Company may experience the failure of its wholesale customers, including its franchisees, to whom it extends
credit to pay amounts owed to the Company on time, or at all, particularly if such customers are significantly impacted by COVID-
19. As of March 1, 2020 and 2019 the Company had $4,049,959 and $3,993,262, respectively, of accounts receivable.
Inventories
Inventories are stated at the lower of cost or net realizable value, which is adjusted for obsolete, damaged and excess inventories to
the lower of cost or net realizable value based on actual differences. The inventory value is determined through analysis of items
held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to
its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes
into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-
in, first-out method.
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon
the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the
straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets,
whenever events or changes indicate the carrying amount of such assets may not be recoverable.
Income Taxes
The Company provides for income taxes pursuant to the liability method. The liability method requires recognition of deferred
income taxes based on temporary differences between financial reporting and income tax basis of assets and liabilities, using current
enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the
reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when
these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward prior
to its expiration, is more likely than not. Due to historical U-Swirl losses, prior to FY 2016 the Company established a full valuation
allowance on the Company’s deferred tax assets. During FY 2016 the Company took possession of the outstanding equity in U-
Swirl. As a result of the Company’s ownership increasing to 100%, the Company began filing consolidated income tax returns in
FY 2017. Because of this change, the Company has recognized the full value of deferred tax assets that had full valuation
allowances prior to FY 2016. During the fourth quarter of FY 2017 the Company further evaluated the value of deferred tax assets
and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382
of the Internal Revenue Code as a result of the foreclosure transaction. The Company's temporary differences are listed in Note 14.
Gift Card Breakage
The Company and its franchisees sell gift cards that are redeemable for product in stores. The Company manages the gift card
program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards
in their stores. A liability for unredeemed gift cards is included current liabilities in the balance sheets.
There are no expiration dates on the Company’s gift cards, and the Company does not charge any service fees. While the
Company’s franchisees continue to honor all gift cards presented for payment, the Company may determine the likelihood of
redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card
liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE
FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for
recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing
breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card
being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon
Company-specific historical redemption patterns. Accrued gift card liability was $617,438 and $609,842 at February 28, 2021 and
February 29, 2020, respectively. The Company recognized breakage of $53,160 and $168,090 during FY 2021 and FY 2020,
respectively. See Note 3 to the financial statements for a complete description of the adjustments recorded upon the adoption of
ASC 606.
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Goodwill
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill arose primarily from two transaction types. The first 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. The second type was 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. During FY 2021, as a result of the impact of
the COVID-19 pandemic, the impairment test was completed during the three months ended May 31, 2020 (the first quarter).
Recoverability of goodwill is evaluated through comparison of the fair value of each of the Company’s reporting units with its
carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss
is recognized. The Company’s goodwill is further described in Note 7 to the financial statements.
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry,
Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’
compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health
care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical
claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions
are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ
from these assumptions and historical trends.
Sales
The Company has performance obligations to sell products to franchisees and other customers, and revenue is recognized at a point
in time. Control is transferred when the order has been shipped to a customer, utilizing a third party, or at the time of delivery when
shipped on the Company’s trucks. Revenue is measured based on the amount of consideration that is expected to be received by the
Company for providing goods or services under a contract with a customer. Sales of products to franchisees and other customers are
made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the
time of sale.
Rebates
Rebates received from purveyors that supply products to the Company’s franchisees are included in franchise royalties and fees.
Product rebates are recognized in the period in which they are earned. Rebates related to Company-owned locations are offset
against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’s trucking department are reported as sales. Shipping costs incurred by the
Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
Beginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated
franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue was recognized upon
opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee
of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. The Company recognizes no
royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all
other sales of product sold at franchise locations. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired
contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
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.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vulnerability Due to Certain Concentrations
In June 2019, the Company’s largest customer, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11
bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including
the divisions that the Company has historically sold product to, were sold through an auction to multiple buyers.
Revenue from FTD represented approximately $243,000 or 1% or our total revenues during the year ended February 28, 2021,
approximately $1.5 million or 5% of our total revenues during the year ended February 29, 2020 and revenue of approximately $3.1
million or 9% of our total revenues during the year ended February 28, 2019. Our future results may be adversely impacted by
further decreases in the purchases of this customer or the loss of this customer entirely.
As described above, In FY 2020, we entered into a long-term strategic alliance whereby we intend to become the exclusive provider
of certain branded chocolate products to Edible. Also in FY 2020, the founder of Edible was elected to the Company’s Board of
Directors, but subsequently resigned his position on the Board of Directors in January 2021. During the year ended February 28,
2021, the Company recognized approximately $3.5 million or 15% of our total revenue from revenue related to purchases by
Edible. Subsequent to February 28, 2021, certain disagreements arose between RMCF and Edible related to the strategic alliance
and ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable. There can be no
assurance historical revenue levels will be indicative of future revenues.
Stock-Based Compensation
At February 28, 2021, the Company had one stock-based compensation plan, the Company’s 2007 Equity Incentive Plan (as
amended and restated), for employees and non-employee directors which authorized the granting of equity awards.
The Company recognized $511,835, $866,177, and $519,772 related to equity-based compensation expense during the years ended
February 28 or 29, 2021, 2020 and 2019, respectively. Compensation costs related to share-based compensation are generally
recognized over the vesting period.
During FY 2021, the Company did not grant any restricted stock units to employees or non-employee directors. During FY 2020,
the Company granted 280,000 restricted stock units to employees and non-employee directors. There were no stock options granted
to employees during FY 2021 or FY 2020. The restricted stock unit grants generally vest 17 to 20% annually, or 5% per quarter
over a period of five to six years. The Company recognized $511,835 of consolidated stock-based compensation expense related to
restricted stock unit grants during FY 2021 compared with $598,155 in FY 2020 and $463,795 in FY 2019. Total unrecognized
stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 2021 was $1,614,140, which is
expected to be recognized over the weighted average period of 3.7 years.
The Company did not issue any fully vested, unrestricted shares of stock to non-employee directors during the year ended February
28, 2021 compared to 14,078 shares issued during the year ended February 29, 2020 and 2,000 shares issued during the year ended
February 28, 2019. In connection with these non-employee director stock issuances, the Company recognized $0, $130,172 and
$24,480 of stock-based compensation expense during year ended February 28 or 29, 2021, 2020 and 2019, respectively.
The Company issued 15,000 fully vested, unrestricted shares of stock as bonus compensation to its Chief Executive Officer during
the year ended February 29, 2020 in consideration of the entry into a strategic alliance with Edible, as discussed below. Associated
with this unrestricted stock award, the Company recognized $137,850 in stock-based compensation expense during the year ended
February 29, 2020.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during
each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock
options and restricted stock units. Following the expiration of all outstanding options, during FY 2017, no stock options were
excluded from diluted shares.
The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include
outstanding common shares issuable if their effect would be anti-dilutive. During the year ended February 28, 2021, 960,677 shares
of common stock warrants and 217,103 shares of unvested restricted stock units were excluded from the computation of diluted
earnings per share because their effect would have been anti-dilutive.
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $265,285, $276,602, and
$275,441 for the fiscal years ended February 28 or 29, 2021, 2020 and 2019, respectively. Total advertising expense for U-Swirl and
its brands amounted to $95,215, $203,004, and $168,000 for the fiscal years ended February 28 or 29, 2021, 2020 and 2019,
respectively.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable and notes
receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these
instruments.
Recent Accounting Pronouncements
Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to
have a material impact on our consolidated financial statements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13
significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require
immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will
generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is
effective for the Company's fiscal year beginning March 1, 2023 and subsequent interim periods. The Company is currently
evaluating the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step
2 from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 requires any
reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. We adopted ASU 2017-04
effective March 1, 2020 (the first quarter of our 2021 fiscal year). The adoption of ASU 2017-04 contributed to the impairment
calculations contained within Note 8.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,
which simplifies the accounting for income taxes. This guidance will be effective for entities for the fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt
ASU 2019-12 effective March 1, 2021 and do not expect the adoption of this guidance to have a material impact on our
consolidated financial statements.
Related Party Transactions
As described above, in FY 2020 and early FY 2021, the Company entered into a long-term strategic alliance and ecommerce
agreement, respectively, with Edible whereby the Company is intended to become the exclusive provider of certain branded
chocolate products to Edible. Also in FY 2020 the founder of Edible was elected to the Company’s Board of Directors, but
subsequently resigned his position on the Board of Directors in January 2021. During the year ended February 28, 2021, the
Company recognized approximately $3.5 million of revenue related to purchases from Edible, its affiliates and its franchisees.
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28 or 29:
Cash paid (received) for:
Interest
Income taxes
Non-cash Operating Activities
Accrued Inventory
Non-cash Financing Activities
Dividend payable
2021
2020
2019
76,803 $
(21,021)
20,610 $
619,276
72,619
638,252
148,254
191,459
52,918
- $
722,344 $
714,939
$
$
NOTE 3 –REVENUE FROM CONTRACTS WITH CUSTOMERS
Effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be recognized when control of
promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those
goods or services. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to the
Company’s franchisees and others, or in its Company-owned stores as those sales are recognized at the time of the underlying sale
and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees
from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard
does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and
renewals that affect the term of the franchise agreement. The Company generally receives a fee associated with the Franchise
Agreement or License Agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These
Customer Contracts have a term of up to 20 years, however the majority of Customer Contracts have a term of 10 years. During the
term of the Customer Contract the Company is obligated to many performance obligations that the Company has not determined are
distinct. The resulting treatment of revenue from Customer Contracts is that the revenue is recognized proportionately over the life
of the Customer Contract.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018 was to recognize initial
franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance
with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of
the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are
being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally
10-15 years.
The following table summarizes contract liabilities as of February 28, 2021 and February 29, 2020:
Contract liabilities at the beginning of the year:
Revenue recognized
Contract fees received
Amortized gain on the financed sale of equipment
Contract liabilities at the end of the year:
Twelve Months Ended
February 29 or 28:
2021
2020
1,155,809 $
(226,720)
201,000
(10,443)
1,119,646 $
1,352,572
(324,982)
140,750
(12,531)
1,155,809
$
$
At February 28, 2021, annual revenue expected to be recognized in the future, related to performance obligations that are not yet
fully satisfied, are estimated to be the following:
2022
2023
2024
2025
2026
Thereafter
Total
Gift Cards
$
$
194,737
184,224
151,856
136,780
124,489
327,560
1,119,646
The Company’s franchisees sell gift cards, which do not have expiration dates or non-usage fees. The proceeds from the sale of gift
cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. The Company
has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption
of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically
utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by
the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card
breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2021
Revenues recognized over time under ASC 606:
Franchise fees
$
178,042 $
- $
- $
48,678 $
226,720
Franchising Manufacturing
Retail
U-Swirl
Total
Revenues recognized at a point in time:
Factory sales
Retail sales
Royalty and marketing fees
Total
Franchising Manufacturing
17,321,001
-
-
-
-
3,367,345
3,545,387 $ 17,321,001 $
$
For the Year Ended February 29, 2020
Revenues recognized over time under ASC 606:
Retail
U-Swirl
-
896,793
-
896,793 $
Total
- 17,321,001
1,858,446
4,074,538
1,717,524 $ 23,480,705
961,653
707,193
Franchising Manufacturing
Retail
U-Swirl
Total
Revenues recognized over time under ASC 606:
Franchise fees
$
Revenues recognized at a point in time:
230,543 $
- $
- $
94,439 $
324,982
Franchising Manufacturing
21,516,530
-
-
-
5,300,089
-
5,530,632 $ 21,516,530 $
$
Factory sales
Retail sales
Royalty and marketing fees
Total
NOTE 5 - INVENTORIES
Retail
U-Swirl
-
1,104,171
-
1,104,171 $
Total
- 21,516,530
3,202,438
2,098,267
1,505,757
6,805,846
3,698,463 $ 31,849,796
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
2021
2020
2,464,123 $
1,888,818
39,518
(329,574)
4,062,885 $
2,186,652
1,827,767
56,708
(320,149)
3,750,978
$
$
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - 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
Less accumulated depreciation
Property and equipment, net
$
2021
513,618 $
4,827,807
10,129,508
797,303
985,407
429,789
17,683,432
2020
513,618
5,031,395
10,664,396
852,557
1,154,396
440,989
18,657,351
(12,531,417)
5,152,015 $
(12,719,338)
5,938,013
$
Depreciation expense related to property and equipment totaled $765,764, $786,648, and $865,479 during the fiscal years ended
February 28 or 29, 2021, 2020 and 2019, respectively.
NOTE 7 – 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
Total goodwill
2021
2020
Amortization
Period (in
Years)
Gross
Carrying
Value
Accumulated
Amortization
Gross
Carrying
Value
Accumulated
Amortization
$
10
3 - 5
10
5 - 20
20
394,826 $
120,830
430,973
556,339
5,979,637
7,482,605
221,504 $
120,830
430,973
333,715
3,459,873
4,566,895
295,779 $
120,830
430,973
715,339
5,979,637
7,542,558
215,653
120,830
430,973
297,072
2,931,949
3,996,477
$
515,065
97,318
97,318
20,000
729,701
$
832,308
97,318
97,318
20,000
1,046,944
Total Intangible Assets
$ 8,212,306 $ 4,566,895 $ 8,589,502 $ 3,996,477
Amortization expense related to intangible assets totaled $570,418, $706,177, and $844,320 during the fiscal years ended February
28 or 29, 2021, 2020 and 2019, respectively.
At February 28, 2021, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current
useful lives, is estimated to be the following:
2022
2023
$
483,959
409,393
2024
2025
2026
Thereafter
Total
346,672
294,427
251,342
1,129,917
2,915,710
$
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During FY 2020, the Company initiated a store design project. The initiative added approximately $174,000 of intangible assets
during FY 2021. This project will be amortized over a life of 10 years.
NOTE 8 – IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
We assess the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances
indicate the carrying value of the assets or asset group may not be recoverable. Due to the significant impact of the COVID-19
pandemic on our operations, we determined it was necessary to perform an interim test of our long-lived assets during the three
months ended May 31, 2020 as we believe that the COVID-19 pandemic was a triggering event. For the remainder of FY 2021, the
Company does not believe there were any triggering events. Based on the results of these assessments, we recorded $476,243 of
goodwill and intangible impairment expense. This expense is presented within general and administrative expense on the
Consolidated Statements of Operations. No additional tests for impairment were determined to be necessary during FY 2021.
The assessment of our goodwill, trademark and long-lived asset fair values includes many assumptions that are subject to risk and
uncertainties. The primary assumptions, which are all Level 3 inputs of the fair value hierarchy (inputs to the valuation
methodology that are unobservable and significant to the fair value measurement), used in our impairment testing consist of:
● Expected future cash flows from operation of our Company-owned units.
● Forecasted future royalty revenue, marketing revenue and associated expenses.
● Projected rate of royalty savings on trademarks.
● Our cost of capital.
As of February 28, 2021, costs associated with the impairment of long-lived and intangible assets consist of the following:
Company store goodwill impairment
Trademark intangible asset impairment
Company-owned store impairment of long-lived assets
Total
$
$
317,243
159,000
57,100
533,343
Certain interim tests conducted during the three months ended May 31, 2020 did not indicate a need for impairment. Franchise
rights, store design, manufacturing segment goodwill and franchising goodwill tests succeeded during the interim period. We
believe we have made reasonable estimates and judgements, however, further COVID-19-related impacts could cause interim
testing to be performed in future periods and further impairments recorded if testing of impairments are not successful in future
periods. Following the three months ended May 31, 2020 there have been no further events that would trigger subsequent testing for
impairment.
NOTE 9 – NOTES PAYABLE
Paycheck Protection Program
During FY 2021 the Company received promissory notes pursuant to the Paycheck Protection Program (“PPP”), under the recently
enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business
Administration (the “SBA Loans”). The Company received total proceeds of $1.5 million from SBA Loans. During the three
months ended November 30, 2020, approximately $108,000 of the original loan proceeds was forgiven by the SBA and during the
three months ended February 28, 2021 the remaining approximately $1.4 million of the original loan proceeds was forgiven.
The amount of loan proceeds eligible for forgiveness was based on a formula based on a number of factors, including the amount of
loan proceeds used by the Company during the period after the loan origination for certain purposes, including payroll costs, interest
on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that, among other
things, at least 60-75% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and
maintaining salaries at a certain level. In accordance with the requirements of the CARES Act and the PPP, the Company believes it
has used the proceeds from the SBA Loans for qualifying expenses.
Revolving Credit Line
The Company has a $5.0 million credit line for general corporate and working capital purposes, of which $5.0 million was available
for borrowing (subject to certain borrowing base limitations) as of February 28, 2021. The credit line is secured by substantially all
of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (2.4% at February 28, 2021).
Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2021, the Company was
in compliance with all such covenants. The credit line is subject to renewal in September 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCK COMPENSATION PLANS
In FY 2021, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (as amended and restated, the
“2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock
units, performance shares and performance units, and other stock- or cash-based awards.
The following table summarizes stock awards under the 2007 Plan as of February 28, 2021:
Original share authorization:
Prior plan shares authorized and incorporated in the 2007 Plan:
Additional shares authorized through 2007 Plan amendments:
Available for award:
Cancelled/forfeited:
Shares awarded as unrestricted shares, stock options or restricted stock units:
Shares available for award:
300,000
85,340
600,000
985,340
201,815
(866,487)
320,668
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2021, and changes for the
three years then ended was as follows:
Twelve Months Ended
February 28 or 29:
2020
2021
2019
Outstanding non-vested restricted stock units at beginning of year:
Granted
Vested
Cancelled/forfeited
Outstanding non-vested restricted stock units as of February 28:
265,555
-
(54,761)
(1,344)
209,450
25,002
280,000
(38,835)
(612)
265,555
Weighted average grant date fair value
Weighted average remaining vesting period (in years)
$
9.40 $
3.68
9.39 $
4.56
77,594
-
(49,058)
(3,534)
25,002
12.05
0.38
The Company has no outstanding stock options as of February 28, 2021, February 29, 2020, or February 28, 2019.
NOTE 11 – LEASING ARRANGEMENTS
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain
leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for
contingent rentals based on sales in excess of predetermined base levels.
The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the
majority of existing franchised locations are leased by the franchisee directly.
In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the
Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent
and other obligations under the lease.
The 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
$
2021
2020
428,421 $
(113,515)
27,803
733,190 $
(318,000)
21,600
2019
1,030,536
(572,000)
22,800
The Company also leases trucking equipment and warehouse space in support of its manufacturing operations. Expense associated
with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.
$
342,708 $
436,790 $
481,336
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29:
2021
2020
2019
340,731
342,297
325,229
ASU 2016-02 allows, as a practical expedient, the retention of the classification of existing leases as operating or financing. All of
the Company’s leases are classified as operating leases and that classification has been retained upon adoption. The Company does
not believe the utilization of this practical expedient has a material impact on lease classifications.
The amount of the ‘Right of Use Asset’ and ‘Lease Liability’ recorded in the Consolidated Balance Sheets upon the adoption of
ASU 2016-02 was $3.3 million. The lease liability reflects the present value of the Company’s estimated future minimum lease
payments over the life of its leases. This includes known escalations and renewal option periods reasonably assured of being
exercised. Typically, renewal options are considered reasonably assured of being exercised if the sales performance of the location
remains strong. Therefore, the ‘Right of Use Asset’ and ‘Lease Liability’ include an assumption on renewal options that have not
yet been exercised by the Company, and are not currently a future obligation. The Company has separated non-lease components
from lease components in the recognition of the ‘Right of Use Asset’ and ‘Lease Liability’ except in instances where such costs
were not practical to separate. To the extent that occupancy costs, such as site maintenance, are included in the ‘Right of Use Asset’
and ‘Lease Liability,’ the impact is immaterial. For franchised locations, the related occupancy costs including property taxes,
insurance and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement. In addition,
the Company is the lessee under non-store related leases such as storage facilities and trucking equipment. For leases where the
implicit rate is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that
represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease. The
weighted average discount rate used for operating leases was 3.4% as of February 28, 2021. The total estimated future minimum
lease payments is $2.2 million.
As of February 28, 2021, maturities of lease liabilities for the Company’s operating leases were as follows:
FYE 22
FYE 23
FYE 24
FYE 25
FYE 26
Thereafter
Total
Less: Imputed interest
Present value of lease liabilities:
Weighted average lease term
$
$
$
694,755
437,445
315,962
164,223
63,727
489,090
2,165,202
(204,500)
1,960,702
6.9
The Company did not have any leases categorized as finance leases as of February 28, 2021.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
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, 2021, the Company was contracted for approximately $377,000 of raw materials under such agreements. The
Company has designated these contracts as normal under the normal purchase and sale exception under the accounting standards for
derivatives. These contracts are not entered into for speculative purposes.
Litigation
From time to time, the Company is involved in litigation relating to claims arising out of its operations. The Company records
accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably
estimated. At February 28, 2021, the Company was not a party to any legal proceedings that were expected, individually or in the
aggregate, to have a material adverse effect on our business, financial condition or operating results.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash dividend of $0.12 per common share on March 13, 2020 to stockholders of record on February
28, 2020.
Future declarations of dividends will depend on, among other things, the Company's results of operations, financial condition,
capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in
the best long-term interest of the Company’s stockholders.
As previously announced in May 2020, the Board of Directors suspended the Company’s first quarter cash dividend payment to
preserve cash and provide additional flexibility in the current environment as a result of the economic impact of COVID-19.
Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public
health crisis and global economic climate has passed, and the Board of Directors determines that resumption of dividend payments
is in the best interest of the Company and its 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. As of February 28, 2021, approximately $638,000
remains available under the repurchase plan for further stock repurchases.
Warrants
In consideration of Edible entering into the exclusive supplier agreement and the performance of its obligations therein, on
December 20, 2019, the Company issued Edible a warrant (the “Warrant”) to purchase up to 960,677 shares of the Company’s
common stock (the “Warrant Shares”) at an exercise price of $8.76 per share. The Warrant Shares vest in annual tranches in varying
amounts following each contract year under the exclusive supplier agreement, subject to, and only upon, Edible’s achievement of
certain revenue thresholds on an annual or cumulative five-year basis in connection with its performance under the exclusive
supplier agreement. The Warrant expires six months after the final and conclusive determination of revenue thresholds for the fifth
contract year and the cumulative revenue determination in accordance with the terms of the Warrant.
The Company determined that the grant date fair value of the warrants was de minimis and did not record any amount in
consideration of the warrants. The Company utilized a Monte Carlo model for purposes of determining the grant date fair value.
NOTE 14 - 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
2021
2020
2019
(398,303) $
21,074
(377,229)
(441,734)
(72,951)
(514,685)
(891,914) $
306,000 $
85,157
391,157
(19,350)
(3,307)
(22,657)
368,500 $
653,226
142,570
795,796
(67,410)
(11,524)
(78,934)
716,862
$
$
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the
years ended February 28 or 29:
Statutory rate
State income taxes, net of federal benefit
Paycheck Protection Program debt forgiveness
Work opportunity tax credits
Equity compensation tax expense
Other
Impact of CARES act
Effective tax rate
2021
2020
2019
21.0%
4.0%
18.0%
0.2%
(1.7)%
0.1%
8.2%
49.8%
21.0%
4.6%
0.0%
(1.1)%
1.4%
0.4%
0.0%
26.3%
21.0%
3.4%
0.0%
(0.7)%
0.0%
0.5%
0.0%
24.2%
During FY 2021 the Company’s effective tax rate resulted in recognition of an income tax benefit as a result of a pretax loss being
recognized for the year, compared with income tax expense being recognized on pretax income during FY 2020 and FY 2019.
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
Accumulated net losses
Valuation allowance
Net deferred tax assets
Deferred Tax Liabilities
Depreciation and amortization
Prepaid expenses
Deferred Tax Liabilities
2021
2020
$
$
357,573 $
81,042
140,702
389,858
31,721
396,195
98,693
445,414
(98,693)
1,842,505 $
157,107
78,724
137,786
397,535
37,623
299,373
98,693
401,699
(98,693)
1,509,847
(653,798)
(43,943)
(697,741)
(779,023)
(100,746)
(879,769)
Net deferred tax assets
$
1,144,764 $
630,078
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
Impact of tax reform
Valuation allowance at end of period
$
$
98,693 $
-
-
-
98,693 $
98,693
-
-
-
98,693
2021
2020
The effective income tax rate for the year ended February 28, 2021 increased from the years ended February 29, 2020 and February
28, 2019, primarily as a result of debt forgiveness income being realized with no associated income tax expense and the revaluation
of a portion of deferred tax assets as a result of the Company realizing a taxable loss during FY 2021 that can be carried back to
prior periods with a higher effective income tax rate.
Under the recently enacted CARES Act a net operating loss (“NOL”) arising during the Company’s fiscal year 2021 can be carried
back for five years to offset the Company’s taxable income for fiscal years 2016-2020. This five-year period spans Federal effective
tax rates for the Company ranging from 21% to 34%, the result of the Tax Cuts and Jobs Act enacted during the Company’s fiscal
year ended February 28, 2018.
The Company’s deferred tax assets are valued at the current federally enacted rate of 21%. The loss carryback provisions of the
CARES Act will enable the Company to offset taxable income from prior years when federally enacted tax rates were higher than
21%. As a result, the Company incurred a gain associated with the revaluation of the Company’s deferred tax assets in the amount
of $148,000 during FY 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2020 the Consolidated Appropriations Act, 2021 (bill) inclusive of additional coronavirus aid was signed into law.
Among the many provisions of the bill, expenses related to the receipt of paychecks protection program funds (“PPP) that were
previously determined to be non-deductible by the Internal Revenue Service (“IRS”) may now be deducted for federal income tax
purposes. As a result, the Company realized debt forgiveness income of $1.5 million during FY 2021 with no associated income
taxes.
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 2016. The
Company’s federal income tax returns have been examined for the years ended February 28 or 29, 2017, 2016, 2015 and 2014 and
the examinations 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, with the exception of the deferred tax asset related to restructuring charges, it is more likely
than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2021.
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, 2021 or 2020. 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, 2021 and 2020.
As of February 29, 2016, the Company foreclosed on the outstanding equity of U-Swirl and U-Swirl was consolidated for income
tax purposes. SWRL, along with U-Swirl had historically filed its own consolidated federal income tax return and reported its own
Federal net operating loss carry forward. In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s
and U-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. The
Company has performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there
was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership
interest in January 2013 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations
will continue to limit deductibility of SWRL’s and U-Swirl’s net operating loss carryovers, but the annual loss limitation will be
deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
The Company estimates that the potential future tax deductions of U-Swirl’s Federal net operating losses, limited by section 382, to
be approximately $1,811,000 with a resulting deferred tax asset of approximately $445,000. U-Swirl’s Federal net operating loss
carryovers will expire at various dates beginning in 2026.
NOTE 15 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted
to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period,
and is 25% of the employee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended
February 28 or 29, 2021, 2020 and 2019, the Company’s contribution was approximately $62,000, $61,000, and $70,000,
respectively, to the plan.
58
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising,
Manufacturing, Retail Stores, U-Swirl operations and Other, which is the basis upon which the Company’s chief operating decision
maker evaluates the Company’s performance. 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 2021
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization $
Franchising Manufacturing
$ 3,549,055 $
(3,668)
3,545,387
846,039
1,338,990
150
42,579 $
18,316,165 $
(995,164)
17,321,001
1,422,491
9,330,194
103,003
642,806 $
Retail
U-Swirl
896,793 $ 1,717,524 $
-
1,717,524
(636,474)
4,907,029
4,975
557,735 $
-
896,793
(309,799)
634,124
4,505
14,150 $
Other
Total
- $ 24,479,537
-
(998,832)
- 23,480,705
(3,113,948)
(1,791,691)
8,740,815 24,951,152
41,859
154,492
78,912 $ 1,336,182
FY 2020
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization $
Franchising Manufacturing
$ 5,535,564 $
(4,932)
5,530,632
2,530,449
1,221,975
24,422
44,166 $
22,570,723 $ 1,104,171 $ 3,698,463 $
-
(1,054,193)
3,698,463
21,516,530
4,009,282
485,185
6,026,394
11,796,822
3,997
840,459
726,615 $
615,162 $
-
1,104,171
42,433
1,006,320
28,443
12,983 $
- $ 32,908,921
(1,059,125)
-
- 31,849,796
(5,665,017)
1,402,332
7,765,877 27,817,388
983,941
86,620
93,899 $ 1,492,825
Retail
U-Swirl
Other
Total
FY 2019
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization $
Franchising Manufacturing
$ 5,361,528 $
(5,236)
5,356,292
2,288,871
1,182,355
3,548
46,369 $
25,324,024 $ 1,272,009 $ 3,737,606 $
(1,144,484)
-
3,737,606
24,179,540
4,310,722
(32,391)
5,264,989
12,267,458
16,512
526,402
952,178 $
573,846 $
-
1,272,009
(52,009)
1,001,419
9,617
32,762 $
- $ 35,695,167
-
(1,149,720)
- 34,545,447
(3,559,532)
2,955,661
6,505,920 26,222,141
57,707
613,786
104,644 $ 1,709,799
Retail
U-Swirl
Other
Total
59
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscal years ended February 28 or 29, 2021 and 2020:
2021
Total revenue
Gross margin
Net (loss) income
Basic earnings per share
Diluted earnings per share
2020
Total revenue
Gross margin
Net (loss) income
Basic earnings per share
Diluted earnings per share
Fiscal Quarter
First
2,702,437 $
(561,005)
(3,667,397)
(0.61)
(0.61) $
Second
5,327,402 $
940,589
76,132
0.01
0.01 $
Third
7,228,867 $
1,413,765
523,695
0.09
0.08 $
Total
Fourth
8,221,999 $ 23,480,705
3,060,822
1,267,473
(899,777)
2,167,793
(0.15)
0.36
(0.15)
0.35
Fiscal Quarter
First
8,425,999 $
1,845,867
711,609
0.12
0.11 $
Second
7,385,270 $
1,645,605
918,088
0.15
0.15 $
Third
7,913,252 $
1,534,424
(71,637)
(0.01)
(0.01) $
Total
Fourth
8,125,275 $ 31,849,796
6,504,072
1,478,176
1,033,832
(524,228)
0.17
(0.09)
0.17
(0.08) $
$
$
$
$
NOTE 18 – COSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
Costs associated with Company-owned store closures at February 28 or 29, 2021, 2020 and 2019 were comprised of the following:
Loss on distribution of assets
Lease settlement costs
Total
$
$
2021
2020
2019
57,100 $
-
15,400 $
-
81,981
145,000
57,100 $
15,400 $
226,981
60
Table of Contents
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 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 in the reports that the Company files or submits under the
Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial
officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management, under the supervision and with the participation of the CEO and CFO, has conducted an evaluation (pursuant to Rule
13a-15(b) of the Exchange Act), as of February 28, 2021, 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, 2021.
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,
2021, 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, 2021.
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, 2021 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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Table of Contents
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 2021 Annual
Meeting of Stockholders, to be filed no later than 120 days after February 28, 2021.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 2021 Annual
Meeting of Stockholders, to be filed no later than 120 days after February 28, 2021.
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 2021 Annual Meeting of Stockholders, to be filed no later than 120 days after February 28, 2021.
Equity Compensation Plan Information
The following table provides information with respect to the Company’s equity compensation plan, as of February 28, 2021,
which consists solely of the Company’s 2007 Equity Incentive Plan:
Number of securities
remaining available
for
future issuance
under
equity compensation
plans (excluding
securities
reflected in
column(a)) (2)
320,668
Weighted-average
exercise price of
outstanding options,
warrants and rights
(1)
n/a
Number of securities
to be
issued upon exercise
of
outstanding options,
warrants and rights
(1)
209,450
-0-
209,450
-0-
n/a
-0-
320,668
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, 2021 consist of 209,450 unvested restricted
stock units. The Company had no outstanding stock options as of February 28, 2021.
(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 2021 Annual
Meeting of Stockholders, to be filed no later than 120 days after February 28, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Definitive Proxy Statement for our 2021 Annual
Meeting of Stockholders, to be filed no later than 120 days after February 28, 2021.
62
Table of Contents
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 Operations
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
39
41
42
43
44
45
Year Ended February 28, 2021
Valuation Allowance for Accounts and Notes
Receivable
Year Ended February 29, 2020
Valuation Allowance for Accounts and Notes
Receivable
Year Ended February 28, 2019
Valuation Allowance for Accounts and Notes
Receivable
Balance at
Beginning of
Period
Additions
Charged to
Costs & Exp.
Deductions
Balance at End
of
Period
638,907
1,257,010
441,777
1,454,140
489,502
197,830
48,425
638,907
505,972
143,214
159,684
489,502
63
Table of Contents
3. Exhibits
Exhibit
Number
The following exhibits are filed with, or incorporated by reference, in this Annual Report.
Description
Incorporated by Reference to
3.1
3.2
3.3
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 (File No. 001-36865)
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 (File No. 001-36865)
Second Amended and Restated Bylaws of Rocky
Mountain Chocolate Factory, Inc., a Delaware
corporation
Exhibit 3.1 to the Current Report on Form 8-K filed on
December 6, 2019 (File No. 001-36865)
4.1
Description of Securities
4.2
4.3
4.4†
Rights Agreement, dated March 1, 2015,
between Rocky Mountain Chocolate Factory,
Inc., a Delaware corporation, and Computershare
Trust Company, N.A., as Rights Agent
Amendment to Rights Agreement, dated as of
December 20, 2019, by and between Rocky
Mountain Chocolate
and
Computershare Trust Company, N.A., as rights
agent.
Factory,
Inc.
Common Stock Purchase Warrant, dated as of
to Edible
2019,
issued
December
Arrangements, LLC.
20,
Exhibit 4.1 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2019 (File No. 001-
36865)
Exhibit 4.1 to the Registration Statement on Form 8-A
filed on March 2, 2015 (File No. 001-36865)
Exhibit 4.2 to the Current Report on Form 8-K filed on
December 23, 2019 (File No. 001-36865)
Exhibit 4.1 to the Current Report on Form 8-K filed on
December 23, 2019 (File No. 001-36865)
10.1**
Form of Employment Agreement (Officers)
Exhibit 10.1 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2007 (File No. 000-
14749)
10.2
10.3**
Form of Franchise Agreement
Mountain Chocolate Factory
for Rocky
Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the quarter ended May 31, 2010 (File No. 000-14749)
Rocky Mountain Chocolate Factory, Inc. 2007
(as Amended and
Incentive Plan
Equity
Restated).
10.4**
Form of Indemnification Agreement (Directors)
Exhibit 10.1 to the Current Report on Form 8-K filed on
September 18, 2020 (File No. 001-36865)
Exhibit 10.7 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2007 (File No. 000-
14749)
10.5**
Form of Indemnification Agreement (Officers)
Exhibit 10.8 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2007 (File No. 000-
14749)
10.6*
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)
64
Table of Contents
Exhibit
Number
Description
10.7
10.8*
10.9**
10.10**
10.11
10.12†
10.13†
10.14
10.15
10.16
10.17
21.1
23.1
Revolving Line of Credit Note, dated September
30, 2019, between Rocky Mountain Chocolate
Factory, Inc. and Wells Fargo Bank, National
Association
Incorporated by Reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the quarter ended August 31, 2019 (File No. 001-36865)
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)
Second Restated Employment Agreement, dated
February 26, 2019, between Rocky Mountain
Chocolate Factory, Inc., a Delaware corporation,
and Bryan J. Merryman.
Exhibit 10.14 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2019 (File No. 001-
36865)
Retirement Separation and General Release
Agreement, dated February 26, 2019, between
Rocky Mountain Chocolate Factory, Inc., a
Delaware corporation, and Franklin E. Crail.
Exhibit 10.15 to the Annual Report on Form 10-K for the
fiscal year ended February 28, 2019 (File No. 001-
36865)
Cooperation Agreement, dated December 3,
2019, between AB Value Management LLC and
Rocky Mountain Chocolate Factory, Inc.
Exhibit 10.1 to the Current Report on Form 8-K filed
December 5, 2019 (File No. 001-36865)
Exclusive Supplier Operating Agreement, dated
as of December 20, 2019, by and between Rocky
Mountain Chocolate Factory, Inc. and Edible
Arrangements, LLC
Strategic Alliance Agreement, dated as of
December 20, 2019, by and among Rocky
Mountain Chocolate Factory, Inc., Farids & Co.
LLC and Edible Arrangements, LLC
ECommerce Licensing Agreement, effective
March 16, 2020, by and between Rocky
Mountain Chocolate Factory, Inc. and Edible
Arrangements, LLC
Indemnification Letter Agreement, effective
March 16, 2020, by and between Rocky
Mountain Chocolate Factory, Inc. and Edible
Arrangements, LLC
Exhibit 10.1 to the Current Report on Form 8-K filed on
December 23, 2019 (File No. 001-36865)
Exhibit 10.2 to the Current Report on Form 8-K filed on
December 23, 2019 (File No. 001-36865)
Exhibit 10.1 to the Current Report on Form 8-K filed on
March 23, 2020 (File No. 001-36865)
Exhibit 10.2 to the Current Report on Form 8-K filed on
March 23, 2020 (File No. 001-36865)
Loan Agreement, dated April 13, 2020, between
Rocky Mountain Chocolate Factory, Inc. and 1st
SOURCE BANK
Exhibit 10.1 to the Current Report on Form 8-K filed on
April 16, 2020 (File No. 001-36865)
Promissory Note Agreement, dated April 13,
2020, between Rocky Mountain Chocolate
Factory, Inc. and 1st SOURCE BANK
Exhibit 10.2 to the Current Report on Form 8-K filed on
April 16, 2020 (File No. 001-36865)
Subsidiaries of the Registrant
Filed herewith
Consent of
Independent Registered Public
Filed herewith
Accounting Firm
65
Table of Contents
Exhibit
Number
Description
31.1
Certification Pursuant To Section 302 of the
Sarbanes-Oxley Act of 2002
Incorporated by Reference to
Filed herewith
32.1
Certification Pursuant To Section 906 Of The
Furnished herewith
Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
Filed herewith
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
XBRL Taxonomy Extension Calculation
Filed herewith
Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Filed herewith
Document
101.LAB
XBRL Taxonomy Extension Label Linkbase
Filed herewith
Document
101.PRE
XBRL Taxonomy Extension Presentation
Filed herewith
Linkbase Document
* 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.
† Certain portions of the exhibit have been omitted pursuant to Rule 601(b)(10) of Regulation S-K. The omitted
information is (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed.
ITEM 16. FORM 10-K SUMMARY
None.
66
Table of Contents
SIGNATURES
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.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
Date: June 1, 2021
/s/ Bryan J. Merryman
BRYAN J. MERRYMAN
Chief Executive 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: June 1, 2021
Date: June 1, 2021
Date: June 1, 2021
Date: June 1, 2021
Date: June 1, 2021
Date: June 1, 2021
/s/ Bryan J. Merryman
BRYAN J. MERRYMAN
Chief Executive Officer, Chief
Financial Officer, Treasurer and
Director
(Principal Executive, Financial and
Accounting Officer)
/s/ Brett P. Seabert
BRETT P. SEABERT, Director
/s/ Scott G. Capdevielle
SCOTT G. CAPDEVIELLE, Director
/s/ Franklin E. Crail
FRANKLIN E. CRAIL, Director
/s/ Andrew T. Berger
ANDREW T. BERGER, Director
/s/ Mary K. Thompson
MARY K. THOMPSON, Director
67