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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 29, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-36865
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
47-1535633
(I.R.S. Employer Identification No.)
265 Turner Drive
Durango, CO 81303
(Address of principal executive offices, including ZIP code)
(970) 259-0554
(Registrant’s telephone number, including area code)
Securities Registered Pursuant To Section 12(b) Of The Act:
Title of each class
Common Stock, $0.001 par value per share
Trading
Symbol(s)
RMCF
Name of each exchange on which registered
The 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 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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously
issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during
the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock (based on the closing price as quoted on the Nasdaq Global Market on August 31, 2023, the last business day of the registrant’s most recently
completed second fiscal quarter) held by non-affiliates was $27,685,881. For purposes of this calculation, shares of common stock beneficially owned 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 of the registrant. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of May 31, 2024, there were 6,332,506 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement in connection with the 2024 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 29, 2024.
Table of Contents
PART I.
ITEM 1.
ITEM 1.A
ITEM 1.B
ITEM 1.C
ITEM 2.
ITEM 3.
ITEM 4.
PART II.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 9C.
PART III.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV.
ITEM 15.
ITEM 16.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (this “Annual Report”) contains 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 (the "Securities Act"), 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. All statements other than statements of historical fact are “forward-
looking statements,” including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of
management, including for future operations, or capital expenditures; any statements concerning proposed new products, services, or developments; any statements regarding
future economic conditions or performance; any statements of belief or expectation; and any statements of assumptions underlying any of the foregoing or other future events.
Forward-looking statements may include, among others, words such as “will,” “may,” “would,” “could,” “might,” “likely,” “objective,” “predict,” “project,” “drive,” “seek,”
“aim,” “target,” “outlook,” “continue” “intend,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “potential,” or similar expressions. Forward-looking statements
involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify
all such risks and uncertainties, they include, but are not limited to, the factors discussed in Item 1A. “Risk Factors” of Part I of this Annual Report and as described elsewhere
in this Annual Report. All forward-looking statements are expressly qualified in their entirety by these and other cautionary statements that we make from time to time in our
other SEC filings and public communications. You should evaluate forward-looking statements in the context of these risks and uncertainties and are cautioned not to place
undue reliance on such statements. Forward-looking statements in this Annual Report are made only as of the date hereof, and we undertake no obligation to update or revise
any forward-looking statement except as may be required by law.
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PART I.
ITEM 1. BUSINESS
Our Company
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 producer
and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolate candies and other confectionery products
(“Durango Products”). Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionary
products. We also sell our candy in select locations outside of our system of retail stores. As of February 29, 2024, we operated 2 Company-owned and had 115 licensee-owned
and 152 Rocky Mountain Chocolate Factory franchised stores spread across 36 states and the Philippines.
In fiscal year (“FY”) 2024, roughly half of all retail store sales were of the products prepared on premises and the other half were of products purchased from our Durango plant.
We believe that in-store product preparation 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 advantage lies in our brand name recognition, and reputation for the quality, variety and taste of our products. Further, we believe the ambiance of our
stores, our expertise in the production of chocolate candy products, the merchandising and marketing of confectionary products, and the control and training infrastructures we
have implemented to ensure consistent customer service and execution of successful practices and techniques at our stores provides Rocky Mountain Chocolate Factory with a
unique franchise offering.
We believe our production 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, e-commerce, and private label (collectively “Specialty Markets”).
Our consolidated revenues in FY 2024 were primarily derived from three principal sources: (i) sales to franchisees and other third parties of chocolates and other confectionery
products produced by us (74%-77%-76% in 2024, 2023 and 2022 respectively); (ii) sales at Company-owned stores of chocolates and other confectionery products (including
products produced by us) (5%-3%-4%), and (iii) the collection of initial franchise, royalties and marketing fees from franchisees (21%-20%-20%). For FY 2024, nearly all of
our revenues were derived from domestic sources, with less than 1% derived from international sources. As described below, the Company sold its frozen yogurt business
subsequent to the end of FY 2023.
Sale of Frozen Yogurt Business
On May 1, 2023, subsequent to the end of FY 2023, we completed the sale of substantially all of the assets of its wholly-owned subsidiary and frozen yogurt business, U-Swirl
International, Inc. (“U-Swirl”). The aggregate sale price of U-Swirl was $2.75 million, consisting of (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year
secured promissory note. The business divestiture of the U-Swirl segment was preceded by a separate sale of our three owned U-Swirl locations on February 24, 2023. With the
sale of our frozen yogurt segment on May 1, 2023, we continue to focus on our confectionery business to further enhance our competitive position and operating margin,
simplify our business model, and deliver sustainable value to our stockholders. The consolidated financial statements present the historical financial results of the former U-
Swirl segment as discontinued operations for all periods presented. See Note 17 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and
Supplementary Data", of this Annual Report for information on this divestiture.
Business Strategy
Our updated long term strategic objective is to build upon the solid market position of our brand and high-quality products to create a world-class experience for consumers of
premium chocolate and confectionary products, whether in premium confection stores operated by our franchisees or by us, or purchased from us through a variety of other
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channels. We intend to lead this effort through the delivery of an exceptional store experience and development of category leadership through innovation. To accomplish this
objective, we will 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 products by using the finest chocolate and other wholesome ingredients. We use our proprietary recipes, primarily
developed by our master candy makers. A typical Rocky Mountain Chocolate Factory store offers up to 100 of our chocolate products throughout the year and as many as 200,
including many packaged products, during holiday seasons. Individual stores also offer numerous varieties of gourmet caramel apples as well as other products prepared in the
store from Company recipes. We continue to enhance our product development and innovation capabilities through the Company’s in-house R&D department.
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 caramel apples, in the store. In-store preparation is designed to be both fun and entertaining for customers. We believe the in-store
preparation and aroma of our products enhances the ambiance at Rocky Mountain Chocolate Factory stores, and conveys an image of freshness and homemade quality. We
have been, and are committed to, deploying increased resources to our retail store network to further improve the store experience and enhance profitability, all while
maintaining brand standards.
Site Selection
Careful selection of a new retail 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.
Increase Same Store Retail Sales at Existing Rocky Mountain Chocolate Factory Stores
We seek to increase profitability of our store system by increasing sales at existing store locations through a combination of offering the optimal product assortment to stores,
improving order fulfillment, facilitating increased product availability to stores through streamlined logistics, and providing Company personnel to help franchised locations
improve their sales and profitability. We estimate that a 10% system-wide increase in revenues from our existing store base would be the equivalent of opening 15 new stores.
Changes in system-wide domestic same store retail sales at Rocky Mountain Chocolate Factory locations are as follows:
FY 2020 compared to FY 2019
FY 2021 compared to FY 2020
FY 2022 compared to FY 2021
FY 2023 compared to FY 2022
FY 2024 compared to FY 2023
0.5 %
(24.8 )%
62.4 %
0.5 %
(1.9 )%
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. This
decline was offset by a same store sales increase during FY 2022 when store operations resumed normal operations following the initial impacts of COVID-19.
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Increased System-Wide Annual Unit Volume (“AUV”)
A critical part of success in selling new franchises is the attractiveness of store level economics, which include robust and expanding system-wide annual sales. For FY 2024
our AUV was approximately $570,000, which represents a 30% increase from the FY 2020 AUV of $437,000.
Enhanced Operating Efficiencies
We have added highly experienced production and supply chain talent in order to bring sustained operating efficiencies to our Durango plant. In addition to such actions as
investing in new and more efficient production equipment, we are rationalizing our portfolio of products and streamlining production lines to reduce labor costs as well as
improve product quality and consistency.
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 in locations where we have traditionally been successful, by improving and expanding our retail store concepts and product
portfolio, and by targeting high pedestrian traffic environments.
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 festival and community centers. We have established business relationships 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.
Multi-unit Operators
We have historically focused our franchise marketing efforts on single unit operators. By further enhancing our brand strength, product offering, and strong store experience,
coupled with enhanced economics, we believe we will be able to appeal more, and market to, multi-unit operators looking to expand their portfolio of franchised opportunities
into a premium chocolate franchise concept where we continue to identify substantial interest driven in large part by leased property owners.
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 currently is concentrated in the western and Rocky Mountain region of the United States, but growth
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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 our Specialty Market business 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.
We seek to establish a fun, enjoyable and inviting atmosphere in each of our store locations. Unlike many other confectionery stores, each Rocky Mountain Chocolate Factory
store prepares a variety of products, including caramel apples and fudge, in the store. In FY 2024, approximately one-half 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, conveys an image of freshness and homemade quality.
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.
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 develop 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 29, 2024, Cold
Stone Creamery franchisees operated 104 co-branded locations, and U-Swirl franchisees operated 11 co-branded locations. As of February 29, 2024, the Company had 3
international units in operation, all within the Republic of the Philippines.
Products and Packaging
We produce approximately 400 chocolates 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 other holiday seasons, we make a variety of seasonal items, including many candies offered in packages, that are specially
designed for holidays. A typical Rocky Mountain Chocolate Factory store offers up to 100 of these approximately 400 chocolate candies and other confectionery products
throughout the year and up to an additional 90 during the holiday seasons. Individual stores also offer more than 15 varieties of caramel apples and other products prepared in
the store. In FY 2024, approximately one-half of the revenues of Rocky Mountain Chocolate Factory stores were generated by products produced at our Durango production
facility, and one-half of products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and with a small amount of products such
as ice cream, coffee and other sundries purchased from approved suppliers.
In FY 2024, approximately 10% of our Durango plant sales resulted from the sale of products outside of our system of franchised and licensed locations, which we refer to as
Specialty Market customers, compared with 15% of our Durango plant sales resulting from Specialty Market customers in FY 2023. 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 production processes as the products sold in our network of retail stores.
We use the finest chocolates, nutmeats and other wholesome ingredients in our confectionary products and continually strive to offer new items in order to maintain the
excitement and appeal of our offerings. We develop special packaging for the holidays and seasonal offerings, and consumers can have their purchases packaged in decorative
boxes and fancy tins throughout the year.
Operating Environment
Rocky Mountain Chocolate Factory
We currently establish Rocky Mountain Chocolate Factory stores in six primary environments: outlet centers, festival and community centers, regional centers, tourist areas,
street fronts, airports and other entertainment-oriented
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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 29, 2024, include:
Outlet Centers
Festival/Community Centers
Regional Centers
Tourist Areas
Street Fronts
Airports
Other
Outlet Centers
19.4 %
20.8 %
19.5 %
20.8 %
10.1 %
5.4 %
4.0 %
As of February 29, 2024, there were approximately 29 Rocky Mountain Chocolate Factory stores in outlet centers. We have established business relationships with a number 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.
Festival and Community Centers
As of February 29, 2024, there were approximately 31 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.
Regional Centers
As of February 29, 2024, there were Rocky Mountain Chocolate Factory stores in approximately 29 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.
Tourist Areas, Street Fronts, Airports and Other Entertainment-Oriented Shopping Centers
As of February 29, 2024, there were approximately 31 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
casinos. As of February 29, 2024, there were 8 franchised Rocky Mountain Chocolate Factory stores at airport locations.
Franchising Program
General
We continue to attract qualified and experienced franchisees, whom we consider to be a vital part of our continued growth. We believe our relationship with our franchisees is
fundamental to the performance of our brand and we strive to maintain a collaborative relationship with our franchisees. 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. The Rocky Mountain Chocolate Factory concept has frequently been ranked in the Top 500 Franchises by
Entrepreneur Magazine.
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
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franchisees in national and regional newspapers and online as suitable potential store locations come to our attention. We are exploring the use of third-party franchise lead
generators to supplement our efforts. Franchisees are currently approved by a committee of the senior executive team based on the applicant's net worth and liquidity, business
acumen, and prior experience with franchising and/or fast moving consumer goods (“FMCG”), together with an assessment of work ethic and personality compatibility with
our operating philosophy.
International Franchising and Licensing
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 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. Active international license agreements in place
include the following:
•In October 2014, we entered into a Licensing Agreement in the Republic of the Philippines. As of February 29, 2024, 3 units were operating under the agreement.
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 February 29, 2024, Cold Stone Creamery franchisees operated 104 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 February 29, 2024,
there were 11 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. 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 operational 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 brand franchisees require compliance with our procedures of operation and food quality specifications and
permit audits and inspections by us.
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Operating standards for Rocky Mountain Chocolate Factory brand 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 brand
standards. We have the right to terminate any franchise agreement for non‑compliance with our operating standards. Products sold at the stores and ingredients used in the
preparation of products approved for on-site preparation must be purchased from us or from approved suppliers.
The Franchise Agreement: Terms and Conditions
The domestic offer and sales of our franchise concepts are made pursuant to the respective franchise disclosure document (FDD) 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 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 is likely to adversely affect the
network 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.
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 franchise agreements signed before July 1, 2023 is ten years, and franchisees have the right to renew for one additional ten-year term. The term of franchise
agreements signed after July 1, 2023 is ten years, and franchisees have the right to renew for two additional five-year terms. Our revised Franchise Agreement offers a flat
royalty payment on all retail stores sales ranging from 6% to as low as 4% based upon the retail sales mix of Durango produced product sold in comparison to all retail store
sales. These terms are only effective with Franchise Agreements entered into after July 1, 2023 or when a current franchise operator agrees to enter into a new agreement with
the Company
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.
In select instances, we have provided limited financing to franchisees. As a result, as of February 29, 2024, we have approximately $0.2 million of notes receivable as a result of
financing our franchisees. When we finance franchisees the notes are secured by the assets financed.
Company Store Operations
As of February 29, 2024, there were two Company-owned Rocky Mountain Chocolate Factory stores. Our flagship store, located in Durango, Colorado, (“Flagship Store”)
provides a training ground for Company personnel 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.
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Production Operations
General
We manufacture our chocolate and confectionary products at our production facility in Durango, Colorado. All products are produced consistent with our philosophy of using
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 production of our own chocolate products. By controlling operations and production, we are able to better maintain our high
quality standards, offer unique proprietary products, control production and shipment schedules and potentially pursue new or under-utilized distribution channels.
Production Processes
The production 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
production process. We use a combination of manual and automated processes at production facility. Although we believe that it is currently preferable to perform certain
production processes, such as the dipping of some large pieces by hand, automation increases the speed and efficiency of the production 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.
The production and sale of consumer food products is highly regulated. In the U.S., our activities are subject to regulation by various government agencies, including the Food
and Drug Administration (“FDA”), the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as
well as various state and local agencies. Similar agencies also regulate our businesses outside of the U.S.
We have a product quality and safety program. This program is integral to our supply chain platform and is intended to ensure that all products we purchase, produce, and
distribute are safe, are of high quality and comply with applicable laws and regulations. Through our product quality and safety program, we evaluate our supply chain including
ingredients, packaging, processes, products, distribution and the environment to determine where product quality and safety controls are necessary. We follow the FDA
mandated Hazard Analysis and Risk-based Preventive Controls which includes a 12-step process to determine risks based on individual processes. To support this hazard
analysis model, and in accordance with private and federal mandated requirements, we also adhere to all good manufacturing practices ("GMPs") including several supporting
policies and procedures that ensure all risks identified are in control. Various government agencies and third-party firms, as well as our quality assurance staff, conduct audits of
all facilities that produce our products to ensure effectiveness and compliance with our program and applicable laws and regulations.
Ingredients
The principal ingredients used in our products are chocolate, nuts, sugar, corn syrup, cream and butter. Our production facility 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 ensure 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 one 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. As a result of recent macro-economic inflationary trends and
disruptions to the global supply chain, we have experienced and may continue to experience higher raw material, labor, and freight costs.
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Trucking Operations
We operate eight trucks and ship a substantial portion of our products from the production facility 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 guides and materials.
We focus on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and brochures 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
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.
Internet and Social Media
We’ve initiated a program to leverage the marketing benefits of various social media outlets. These lower-cost marketing opportunities leverage the positive feedback of our
customers, expanding 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 tool to build brand recognition, increase repeat exposure, and enhance dialogue with consumers about their preferences and needs. The majority of stores have
location-specific Facebook® and Instagram® accounts dedicated to helping 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.
Competition
The retailing of confectionery products is highly competitive. We and our franchisees compete with numerous businesses that offer products similar to those offered by our
retail stores and Specialty Markets. 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 attractive commercial real estate sites suitable for Rocky Mountain Chocolate Factory stores, 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 ambiance of
our stores; our knowledge and experience in applying criteria for the selection of new store locations; our expertise in merchandising and marketing of chocolate and other
confectionary products; and the control and training infrastructures we have implemented to ensure execution of successful practices and techniques at our retail store locations.
In addition, by controlling the production of our own confectionary 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.
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Trade Name and Trademarks
The trade name “Rocky Mountain Chocolate Factory®,” the phrases, “The Peak of Perfection in Handmade Chocolates®”, “America'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 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.
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.
Environmental Matters
We are not aware of any federal, state, local or international environmental laws or regulations that we expect to materially affect our earnings or competitive position or result
in material capital expenditures. However, we cannot predict the effect of possible future environmental legislation or regulations on our operations. During FY 2024, we had no
material environmental compliance-related capital expenditures, and no such material expenditures are anticipated in FY 2025.
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
Our two current Company-owned and other franchised Rocky Mountain Chocolate Factory stores are subject to licensing and regulation by the health, sanitation, safety,
building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining the required licensing or approvals could delay or prevent the opening of
new stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises. We are also subject to the Federal
Trade Commission regulations relating to disclosure requirements in the sale of franchises and ongoing disclosure obligations.
Additionally, certain states have enacted and others may enact laws and regulations governing the termination or non-renewal of franchises and other aspects of the franchise
relationship that are intended to protect franchisees, including among other things, limitation on the duration and scope of non-competition provisions applicable to 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 the construction of new stores, increase our capital expenditures and thereby decrease our earnings and
negatively impact our competitive position.
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Companies engaged in the production, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of 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.
Human Capital Resources
As of February 29, 2024, we employed approximately 160 people, including 135 full-time employees. Most employees, with the exception of store management, production
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 ensure that participatory management processes, mutual respect and professionalism and high-performance expectations for the employees 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.
Our franchisees are independent business owners, their employees are not our employees and therefore are not included in our employee count.
Labor and Supply Chain
As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw
material, labor, and freight costs. We have seen labor and logistics challenges, which we believe have contributed to lower production facility, retail, and e-commerce sales of
our products due to the availability of material, labor, and freight. In addition, we could experience additional lost sales opportunities if our products are not available for
purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our
production facility, or if we or our franchisees experience delays in stocking our products. See “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for a discussion of recent business developments.
Our principal executive offices are located at 265 Turner Drive, Durango, Colorado 81303, and our telephone number is (970) 259-0554. We have retail store locations
throughout the Unites Stated and the Philippines. Our website address is www.rmcf.com. Information contained on or accessible through our websites is neither a part of this
Annual Report nor incorporated by reference herein.
Ethics and Governance
We have adopted the Rocky Mountain Chocolate Factory Code of Conduct, which qualifies as a code of ethics under Item 406 of Regulation S-K. The code applies to all of our
employees, officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions,
and directors. Our Code of Conduct is available free of charge on our website at https://ir.rmcf.com/corporate-governance/governance-documents. We will disclose any waiver
we grant to an executive officer or director under our code of ethics, or certain amendments to the Code of Conduct, on our website.
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In addition, we have adopted Code of Ethics for Senior Financial Officers, charters for each of the Board’s four standing committees and the Whistleblower/Complaint
Procedures for Accounting and Auditing Matters. All of these materials are available on our web site at https://ir.rmcf.com/corporate-governance/governance-documents.
Available Information
The Internet address of our website is www.rmcf.com. Additional websites specific to our franchise opportunities and investor relations are www.sweetfranchise.com and
https://ir.rmcf.com, respectively.
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, 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 electronically 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.
ITEM 1A. RISK FACTORS
Our business, results of operations and financial position are subject to various risks, including those discussed below, which may affect the value of our common stock. The
following risk factors, which we believe represent the most significant factors that may make an investment in our common stock risky, may cause our actual results to differ
materially from those projected in any forward-looking statement. You should carefully consider these factors, as well as the other information contained in this Annual Report,
including the information set forth in “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Results of Operations and
Financial Position,” when evaluating an investment in our common stock.
Risks Specific to Our Company and the Industry in Which We Operate
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 Market customers).
During FY 2024 our sales to Specialty Market customers were approximately $2.7 million or 10% of our total revenue.
The Divestiture Of Our U-Swirl Business May Have Material Adverse Effects On Our Financial Condition, Results Of Operations Or Cash Flows.
In May 2023, subsequent to our fiscal year-end, we announced that we had completed the sale of substantially all of the assets of U-Swirl, our wholly-owned subsidiary and
frozen yogurt business. The consummation of the sale of the U-Swirl business involves risks, including retention of uncertain contingent liabilities related to the divested
business and risks associated with the collection of notes receivable contemplated in the sale, any of which could result in a material adverse effect to our financial condition,
results of operations or cash flows. We cannot be certain that we will be successful in managing these or any other significant risks that we encounter as a result of divesting the
U-Swirl business.
Our Growth Is Dependent Upon Attracting And Retaining Qualified Franchisees And Their Ability To Operate Their Franchised Stores Successfully.
Our continued growth and success are 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. As a result, we may realize a reduction in number of units in
operation or fail to achieve our opening targets.
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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 or that our customers will continue to
purchase at historical levels in the event that we pass along cost increases in the form of higher prices. If we are unable to pass along cost increases we may realize a decrease in
gross margin on products we sell and produce.
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.
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.
Same Store Sales Have Fluctuated and Will Continue to Fluctuate.
Our same store sales, defined as year-over-year sales for a store that has been open for at least one year, have fluctuated in the past on an annual and quarterly basis and are
expected to continue to fluctuate in the future. 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. Same store sales increased during FY 2022 and established the large
positive percentage changes reflected above, primarily as a result of nearly all of the franchise stores being directly and positively impacted by a resurgence in consumer
demand following the relaxing of many public health measures taken in response to COVID-19. If same store sales decline, we may experience a decrease in demand for
products we sell and a decrease in revenue from royalty and marketing fees.
Higher Labor Costs, Increased Competition For Qualified Team Members And Ensuring Adequate Staffing Increases The Cost Of Doing Business. Additionally,
Changes In Employment And Labor Laws, Including Health Care Legislation And Minimum Wage Increases, Could Increase Costs For Our System-Wide
Operations.
Our success depends in part on our and our franchisees’ ability to recruit, motivate, train and retain a qualified workforce to work in our stores in an intensely competitive
environment. We and our franchisees have experienced, and could continue to experience, a shortage of labor for stores positions due to job market trends and conditions, which
could decrease the pool of available qualified talent for key functions. Our ability to attract and retain hourly employees in our stores and factory has been impacted by these
trends and conditions, and we expect staffing and labor challenges to continue into 2025. Increased costs associated with recruiting, motivating and retaining qualified
employees to work in the Company-owned stores, franchised stores and our production facility have had, and may in the future have, a negative impact on our Company-owned
store and production margins and the margins of franchised stores. Competition for qualified drivers for both our stores and supply-chain function also continues to increase as
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more companies compete for drivers or enter the delivery space, including third party aggregators. Additionally, economic actions, such as boycotts, protests, work stoppages or
campaigns by labor organizations, could adversely affect us (including our ability to recruit and retain talent) or our franchisees and suppliers. Social media may be used to
foster negative perceptions of employment with our Company in particular or in our industry generally, and to promote strikes or boycotts.
We are also subject to federal, state and foreign laws governing such matters as minimum wage requirements, overtime compensation, benefits, working conditions, citizenship
requirements and discrimination and family and medical leave and employee related litigation. Labor costs and labor-related benefits are primary components in the cost of
operation. Labor shortages, increased employee turnover and health care mandates could increase our system-wide labor costs.
A significant number of hourly personnel are paid at rates at or above the federal and state minimum wage requirements. Accordingly, the enactment of additional state or local
minimum wage increases above federal wage rates or regulations related to exempt employees has increased and could continue to increase labor costs for our domestic system-
wide operations. A significant increase in the federal minimum wage requirement could adversely impact our financial condition and results of operations.
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 Products Is Highly Competitive And Many Of Our Competitors Have Competitive Advantages Over Us.
The retailing of confectionery 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 health concerns, including views regarding the consumption of chocolate. 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 Regulations.
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
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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 state 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 production, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of 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 (POS) 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 and
continued into FY 2022, FY 2023 and FY 2024 due to many of our employees working remotely as a result of the COVID-19 pandemic.
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, 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 an 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.
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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 the 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. Our collection, storage, handling, use, disclosure and security of this information is regulated by U.S. federal, state and local and foreign laws and regulations. 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.
We Are Subject To Periodic Litigation, Which Could Result In Unexpected Expenses 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 Expansion Into New Markets May Present Increased Risks Due To Our Unfamiliarity With Those Areas And Our Target Customers’ Unfamiliarity With Our
Brands.
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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 new 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.
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.
Provisions In Our Organizational Documents, As Well As Provisions Of Delaware Law, Could Make It More Difficult Or Costly For A Third Party To Acquire Us,
Even If Doing So Would Benefit Our Stockholders, And Could Limit Attempts To Make Changes In Our Management.
Our amended and restated certificate of incorporation and bylaws, as well as Delaware law, 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 include the following:
•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;
•Prohibit stockholder actions by written consent, which means all stockholder actions must be taken at a meeting of our stockholders; and
•Require super-majority voting to amend some provisions in our certificate of incorporation and to amend our bylaws.
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
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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, 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.
Our Auditor’s Opinion on Our Audited Consolidated Financial Statements for the Year Ended February 29, 2024, included in this Annual Report, Contains an
Explanatory Paragraph Relating to our Ability to Continue as a Going Concern.
During the year ended February 29, 2024, we incurred a net loss of $4.2 million and used cash in operating activities of $2.4 million. In addition, at February 29, 2024, we were
in violation of a debt covenant for our $1.25 million outstanding line of credit where the lender can demand repayment. These factors raise substantial doubts about our ability
to continue as a going concern within one year of the date that the consolidated financial statements included
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in this Annual Report are issued. Our auditor’s opinion on our audited consolidated financial statements for the year ended February 29, 2024 includes an explanatory
paragraph stating that our losses and negative cash flows from operations and uncertainty in generating sufficient cash to meet our operating obligations raise substantial doubt
about our ability to continue as a going concern. While we are considering a variety of funding sources and transactions that could raise capital, there can be no assurances that
we will be successful in these efforts or will be able to resolve our liquidity issues or eliminate our operating losses. If we are unable to obtain sufficient funding, we would need
to significantly reduce our operating plans and curtail some or all of our strategic plans. Accordingly, our business, prospects, financial condition, and results of operations will
be materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets
and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their
investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern,
investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.
Our Inability to Meet a Financial Covenant Contained in our Revolving Credit Facility May Adversely Affect our Liquidity, Financial Condition and Results of
Operations.
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and
working capital purposes, of which $2.75 million was available for borrowing (subject to certain borrowing-based limitations) as of February 29, 2024 (the “Credit Line”). The
Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.69% at
February 29, 2024 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants.
As of February 29, 2024, we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at
least 1.5 to 1. Our current ratio as of February 29, 2024 was 1.19 to 1. In the past, we have requested, and the Lender has granted, waivers of our compliance with this
requirement. We have requested a waiver from the Lender, but we have not yet received approval. There can be no assurance that the Lender will grant us a waiver for our
current noncompliance or waivers for future noncompliance.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds
drawn down under the Credit Line. As of the date of this Annual Report, we do not have enough cash on hand to satisfy our obligations under the Credit Line if the Lender
exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the future, however, we may not have sufficient funds
available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which
secure our borrowings under the Credit Agreement which would have an adverse effect on our liquidity, financial condition and results of operations.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and
instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as we may not have sufficient facilities or sufficient cash on hand at
that time to satisfy these obligations.
Risks Related to the Economy
Global Or Regional Health Pandemics Or Epidemics Could Negatively Impact Our Business Operations, Financial Performance And Results Of Operations.
Our business and financial results could be negatively impacted by pandemics or epidemics. The severity, magnitude and duration of global or regional pandemics or epidemics
are uncertain and hard to predict. COVID-19 significantly impacted economic activity and markets around the world, and resulted in broader supply, transportation and labor
disruptions resulting in inflation and generally higher operating costs in our business. Relatedly, commodity and transportation costs have become more volatile and generally
increased since the COVID-19 pandemic, as have supply chain disruptions, and transportation and labor shortages. Additionally, government or regulatory responses to
pandemics could negatively impact our business. Mandatory lockdowns or other restrictions on operations in some
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countries temporarily disrupted our ability to distribute our products in some markets. Resumption, continuation or expansion of these disruptions could materially adversely
impact our operations and results.
These and other impacts of global or regional health pandemics or epidemics could have the effect of heightening many of the other risks described in the risk factors presented
in this filing, including but not limited to those relating to our reputation, brands, consumer preferences, supply chain, product sales, pricing actions, results of operations or
financial condition. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. The ultimate impact
of these disruptions also depends on events beyond our knowledge or control, including the duration and severity of other pandemics or epidemics and actions taken by parties
other than us to respond to them. Any of these disruptions could have a negative impact on our business operations, financial performance, results of operations and stock price,
and this impact could be material.
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, often decline during weak economic 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, the 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.
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 large part on our franchisees and the manner in which they operate their stores to develop and promote our business. It is possible 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 of factory sales
and loss or delay in payments of royalties, contributions to our marketing fund and other fees. Additionally, the availability of credit to our small business franchisees may be
curtailed due to tighter credit conditions in the marketplace, and as a result could delay or preclude franchisees from making required store upgrades.
Although we have developed, and continue to develop, evolving 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.
We Currently, And May In The Future, Have Assets Held At Financial Institutions That May Exceed The Insurance Coverage Offered By The Federal Deposit
Insurance Corporation (“FDIC”), The Loss Of Which Would Have A Severe Negative Affect On Our Operations And Liquidity.
We may maintain our cash assets at financial institutions in the U.S. in amounts that may be in excess of the FDIC insurance limit of $250,000. In the event of a failure or
liquidity issues at any of the financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance
limitation, which could have a material adverse effect upon our liquidity, financial condition and our results of operations. Similarly, if our customers or partners experience
liquidity issues as a result of financial institution defaults or non-performance where they hold cash assets, their ability to pay us may become impaired and could have a
material adverse effect on our results of operations, including the collection of accounts receivable and cash flows.
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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. Franchisees purchase product from us and 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. 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. 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 2024, approximately one-half of the revenues of Rocky Mountain Chocolate Factory stores were generated by products produced at our Durango production facility, and
one-half of products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and with a small amount of products such as ice cream,
coffee and other sundries purchased from approved suppliers. Franchisees' sales of products produced 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 has 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.
Risks Related to Our Supply Chain
Increase In Ingredient And Other Operating Costs, Including Those Caused By Weather And Food Safety, Could Adversely Affect Our Results Of Operations.
Our Company-owned and franchised stores could also be harmed by supply chain interruptions including those caused by factors beyond our control or the control of our
suppliers. However, prolonged disruption in the supply of products from or to our manufacturing facility due to weather, natural disasters, food safety incidents, regulatory
compliance, labor dispute or interruption of service by carriers could increase costs, limit the availability of ingredients critical to our store operations and have a significant
impact on results. Increasing weather volatility or other long-term changes in global weather patterns could have a significant impact on the price or availability of some of our
ingredients, energy and other materials throughout our supply chain. In particular, adverse weather or cocoa beans or nuts shortages could disrupt the supply of key ingredients
to our and our franchisees’ stores. Insolvency of key suppliers could also cause similar business interruptions and negatively impact our business.
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Disruption To Our Manufacturing Facility 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 facility or to our supply chain could result from a number of factors,
including natural disasters, pandemics, 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 facility or supply chain, our financial condition
and results of operations could be negatively impacted.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Our Board of Directors is responsible for exercising oversight of management’s identification and management of, and planning for, risks from cybersecurity threats.
We are developing processes, that seek to assess, identify, and manage material risks from cybersecurity threats to the IT systems and information that we use or will use,
transmit, receive, and maintain. The processes for assessing, identifying, and managing material risks from cybersecurity threats include our efforts to identify the relevant
assets that could be affected, determine possible threat sources and threat events, assess threats based on their potential likelihood and impact, and identify controls that are in
place or necessary to manage and/or mitigate such risks.
We have not experienced any material cybersecurity incidents, and the expenses incurred from any security incidents have been immaterial. However, as discussed under “Risk
Factors” in Part I, Item 1A of this Annual Report, cybersecurity threats pose multiple and potentially material risks to us, including potentially to our results of operations and
financial condition. We rely extensively on information technology systems and could face cybersecurity risk. As cybersecurity threats become more frequent, sophisticated,
and coordinated, it is reasonably likely that we may expend greater resources to continue to modify and enhance protective measures against such security risks
ITEM 2. PROPERTIES
Our production operations and corporate headquarters are located at 265 Turner Drive, Durango, Colorado 81303, which is a 53,000 square foot manufacturing facility that we
own. During FY 2024, our manufacturing operations produced approximately 1.61 million pounds of chocolate products, which was a decrease of approximately 4.7% from the
approximately 1.69 million pounds produced in FY 2023. In addition to our production facility, we own a two-acre parcel adjacent to our production facility.
As of February 29, 2024, the Company had obligations for one non-cancelable lease for our Flagship Store having an expiration date of January 31, 2026, which contains an
optional ten-year renewal right. We do not deem this store lease to be material in relation to our overall operations.
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.
ITEM 3. LEGAL PROCEEDINGS
Item 1. Legal Proceedings
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
We may, from time to time, become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially
susceptible to litigation, such as asserting violations of
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securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result
in any future proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
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 is listed on the Nasdaq Global Market tier of the Nasdaq Stock Market LLC under the symbol “RMCF.”
Holders
On May 31, 2024, there were approximately 442 record holders of our common stock. This figure does not include an estimate of the number of beneficial holders whose
shares are held of record by banks, broker or other nominees.
Dividends
Although we have previously paid cash dividends on our common stock, we have no present intention of paying a cash dividend on our common stock. Any determination to
pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of
operations, projections, liquidity, earnings, legal requirements, restrictions in our existing and any future debt and other factors that our board of directors deems relevant.
Unregistered sales of equity securities
In connection with the appointment of Scott Ouellet as Senior Vice President, Manufacturing and Supply Chain, the Compensation Committee of the Board of Directors
approved an inducement award, in accordance with Nasdaq Listing Rule 5635(c)(4), to Mr. Ouellet, granted on September 18, 2023, consisting of an aggregate of 19,591
restricted stock units ("RSUs”). The RSUs were granted as an inducement material to Mr. Ouellet’s acceptance of employment as Senior Vice President, Manufacturing and
Supply Chain, and were granted outside of the Company’s 2007 Equity Incentive Plan (as amended and restated).
The issuance of the above securities was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act as a transaction by
an issuer not involving any public offering.
ITEM 6. RESERVED
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) is intended to assist in an understanding of our financial
condition and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in Item 8 of this Annual Report. The following
discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report, 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”) (referred to as the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery producer and retail operator.
Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolate products and other confectionery products (“Durango
Products”). Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionary products
including gourmet caramel apples. We also sell our confectionary products in select locations outside of our system of retail stores and license the use of our brand with certain
consumer products. As of February 29, 2024, there was 2 Company-owned, 115 licensee-owned and 152 franchised Rocky Mountain Chocolate Factory stores operating in 36
states and the Philippines.
Recent Developments
On November 10, 2023, our board of directors adopted stock ownership guidelines for our non-employee directors and executive officers. Under the guidelines, non-employee
directors are required to own certain eligible securities (“Eligible Shares”) of the Company worth three (3) times the cash portion of their annual directors’ base fees paid in
cash, not including any retainers for service as the Board Chair or as a Board Committee Chair. Our Chief Executive Officer is required to own Eligible Shares worth three (3)
times their base salary. Other executive officers of the Company are required to own Eligible Shares worth one (1) times their base salary. Non-employee directors elected prior
to November 16, 2021 will have five (5) years from November 16, 2021 to meet the holding requirements. Non-employee directors elected after November 16, 2021 and up to
November 10, 2023, will have five (5) years from the date of his or her election to meet the holding requirements. Executive officers serving as of November 10, 2023 will have
five (5) years from that date to meet the minimum ownership requirement. All directors and executive officers who are elected or appointed after November 10, 2023 will have
five (5) years from the time they are elected or appointed to meet the minimum ownership requirement.
On May 1, 2023, subsequent to the end of FY 2023, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiary and frozen yogurt
business, U-Swirl International, Inc. The aggregate sale price of U-Swirl was $2.75 million, consisting of (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-
year secured promissory note. The business divestiture of the U-Swirl segment was preceded by a separate sale of the Company’s three owned U-Swirl locations on February
24, 2023. The consolidated financial statements present the historical financial results of the former U-Swirl segment as discontinued operations for all periods presented. See
Note 17 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data“, of this Annual Report for information on this
divestiture.
With the sale of U-Swirl, we continue to focus on our confectionery business to further enhance our competitive position and operating margin, simplify our business model,
and deliver sustainable value to our stockholders.
Current Trends Affecting Our Business and Outlook
As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw
material, labor, and freight costs. We have seen labor and logistics challenges, which we believe have contributed to lower factory, retail and e-commerce sales of our products
due to the availability of material, labor and freight. In addition, we could experience additional lost sale opportunities
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if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges
at our logistics providers or our production facility, or if we or our franchisees experience delays in stocking our products.
During FY 2023, the Company incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of
stockholders. During FY 2023, the Company incurred approximately $4.1 million of costs associated with the contested solicitation of proxies, however there were no such
comparable costs in FY 2024. The Company also incurred $1.2 million of severance and retirement related costs for certain of our executives in FY 2024, compared to $1.1
million in FY 2023.
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. 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 our ability to increase the sales of premium chocolate products produced in our Durango production facility,
the ability to produce more efficiently, supporting our franchisees in increasing the frequency and average value of customer transactions, ongoing online revenue growth, and
franchise store growth.
Our ability to successfully achieve expansion of our franchise systems depends on many factors not within our control including the availability of suitable sites for new store
establishment and the availability of qualified franchisees to support such expansion.
Efforts to reverse the decline in same store pounds purchased from our production facility by franchised stores and to increase total Durango production depend on many
factors, including new store openings, competition, the receptivity of our franchise system to our product introductions and promotional programs.
Results of Continuing Operations
Fiscal 2024 Compared To Fiscal 2023
Results Summary
Basic loss per share decreased from a loss from continuing operations of $(0.88) per share in FY 2023 to a loss from continuing operations of $(0.77) per share in FY 2024.
Revenues decreased by 8.2% from $30.4 million for FY 2023 to $28.0 million for FY 2024. Operating loss was $4.9 million in FY 2023 compared to an operating loss of $4.9
million in FY 2024. Loss from continuing operations decreased from a loss of $5.5 million in FY 2023 to a loss of $4.9 million in FY 2024.
REVENUES
($'s in thousands)
Durango product and retail sales
Franchise fees
Royalty and marketing fees
Total
Durango Product and Retail Sales
For the Year Ended
February 29 or 28,
2024
2023
$
%
Change
Change
$
$
22,022.3
167.8
5,760.6
27,950.7
$
$
24,456.9
204.7
5,770.8
30,432.4 $
(2,434.6 )
(36.9 )
(10.2 )
(2,481.7 )
(10.0 )%
(18.0 )%
(0.2 )%
(8.2 )%
The decrease in total sales for FY 2024 compared to FY 2023 was primarily due to a 10%, or $2.4 million, decrease in sales of product to our network of franchised and licensed
retail stores resulting from disruptions in our consumer
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packaged product availability to our franchise system due to a relocation of our packaging line to Salt Lake City, Utah in October as part of our plan to address labor shortages
in the Durango area
In FY 2024, same store pounds purchased by franchisees and licensees declined slightly compared to the prior fiscal year. We continue to add new products and focus our
existing product lines in an effort to increase same store pounds purchased by existing locations.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees were approximately unchanged during FY 2024 compared to FY 2023. The slight decrease in franchise fee revenue during FY 2024 compared to FY
2023 was primarily the result of store closures offset by the acceleration of unrecognized franchise fee revenue.
COSTS AND EXPENSES
Cost of Sales
($'s in thousands)
Total cost of sales
Franchise costs
Sales and marketing
General and administrative
Retail operating
Total
Gross Margin
($'s in thousands)
Total gross margin
Gross margin percentage
Adjusted Gross Margin
(a non-GAAP measure)
($'s in thousands)
Total gross margin
Plus: depreciation and amortization
Total Adjusted Gross Margin (non-GAAP measure)
For the Year Ended
February 29 or 28,
2024
2023
$
Change
%
Change
$
20,655.6
$
20,455.4 $
200.2
2,582.4
2,131.7
6,673.9
671.5
32,715.1
$
1,825.8
2,060.2
10,325.7
537.5
35,204.6 $
756.6
71.5
(3,651.8 )
134.0
(2,489.5 )
$
$
$
$
For the Year Ended
February 29 or 28,
2024
2023
$
Change
%
Change
1,366.7
$
6.2 %
4,001.5 $
16.4 %
(2,634.8 )
(10.2 )%
(65.8 )%
(62.1 )%
For the Year Ended
February 29 or 28,
2024
2023
$
Change
%
Change
1,366.7
749.6
2,116.3
$
$
4,001.5 $
646.4 $
4,647.9 $
(2,634.8 )
103.2
(2,531.6 )
1.0 %
41.4 %
3.5 %
(35.4 )%
24.9 %
(7.1 )%
(65.8 )%
16.0 %
(54.5 )%
(49.4 )%
Total Adjusted Gross Margin (non-GAAP measure)
9.6 %
19.0 %
(9.4 )%
Non-GAAP Measures
In addition to the results provided in accordance with U.S. GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental
measures of performance that are not required by or presented in accordance with U.S. GAAP. Adjusted gross margin is a non-GAAP measure. Adjusted gross margin is equal
to the sum of our total gross margin plus depreciation and amortization calculated in accordance with GAAP. We believe adjusted gross margin is helpful in understanding our
past performance as a supplement to gross margin, and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin is 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 rather than gross margin to make incremental pricing decisions. Adjusted gross margin has 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
29
Table of Contents
element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin as measures of performance only in conjunction with GAAP
measures of performance such as gross margin.
Cost of Sales and Gross Margin
Total gross margin decreased to 6.2% in FY 2024 compared to a gross margin of 16.4% during FY 2023, due primarily to an increase in overhead costs, a sharp increase in the
cost of cocoa as a raw material as well as other inflationary pressures we were unable to capture through price increases, and a reduction in production volume. Additionally,
production volume decreased and expense incurred increased as a result of the Company undertaking actions to relocated its consumer packaging operations to Salt Lake City,
Utah in response to limited labor ability in the Durango labor pool, which lead to delays in order fulfillment going into our busy holiday sales season.
Franchise Costs
The increase in franchise costs in FY 2024 compared to FY 2023 was due primarily to investments in human capital and the ongoing brand update and store redesign expense.
As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 43.6% in FY 2024 from 30.6% in FY 2023. This increase as a
percentage of royalty, marketing and franchise fees is primarily a result of higher royalty fees partially offset by higher costs.
Sales and Marketing
The increase in sales and marketing costs during FY 2024 compared to FY 2023 was due primarily to an increase in equity compensation costs and contract labor associated
with the retirement of our former Senior Vice President of Sales and Marketing, and an increase in advertising costs.
General and Administrative
The decrease in general and administrative costs during FY 2024, compared to FY 2023, was due primarily to costs associated with a stockholder’s contested solicitation of
proxies in connection with our 2023 annual meeting of stockholders. During FY 2024, the Company did not incur material costs associated with the contested solicitation of
proxies, compared with $4.1 million of costs associated with a contested solicitation of proxies during FY 2023. The Company also incurred increased professional fees related
to legal support for our Board of Directors and legal costs associated with compensation agreements for our former Chief Executive Officer and Chief Financial Officer and
legal and professional costs associated with the search for, and appointment of, a new Chief Executive Officer and a new Chief Financial Officer. Additionally, due to a
stockholder's contested solicitation of proxies in connection with our 2021 annual meeting of stockholders, the Company had become contingently liable for certain change in
control severance payments to our former Senior Vice President of Sales and Marketing if a triggering termination was to occur. As a result of our former Senior Vice President
of Sales and Marketing's retirement in September 2022, the Company incurred $1.1 million of associated severance costs. As a percentage of total revenues, general and
administrative expenses decreased to 23.9% during FY 2024, compared to 33.9% during FY 2023.
Retail Operating Expenses
Retail operating expenses increased 24.9% during FY 2024 compared to FY 2023. This increase is primarily the result of the Company's new Corpus Christi, TX location. In
November 2022 we sold a Company-owned store located in Peoria, Illinois, to a franchisee. The result is that as of February 29, 2024, we operated two Company-owned
locations.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales was $0.1 million during FY 2024, relatively unchanged from $0.1 million
during FY 2023. Depreciation and amortization included in cost of sales increased 16.0% from $0.6 million during FY 2023 to $0.7 million during FY 2024. This increase was
the result of investment in production equipment.
Other Income (Expense)
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Table of Contents
Other income was $26,400 during FY 2024, compared to other income of $16,500 during FY 2023. This represents interest income of $79,836 during FY 2024 compared to
$26,921 during FY 2023, and interest expense of $53,397 during FY 2024 compared to $10,431 during FY 2023.
Income Tax Expense
During FY 2024, we did not incur any income tax expense on a loss from continuing operations before income taxes of $4.9 million compared to an income tax expense of $0.6
million on a loss from continuing operations before income taxes of $4.9 million during FY 2023. The FY 2023 expense was the result of recording a full valuation allowance
on our deferred income tax assets. See Note 13 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.
Liquidity and Capital Resources
As of February 29, 2024, working capital was $1.5 million compared with $6.2 million as of February 28, 2023. The decrease in working capital was due primarily to a strategic
reduction of inventory on hand commensurate with the current product assortments actively marketed by us and our franchisees, and continued capital investment in the
Durango production facility. We have historically generated excess operating cash flow.
Cash and cash equivalent balances decreased from $4.7 million as of February 28, 2023 to $2.1 million as of February 29, 2024 primarily as a result of cash used by operating
and investing activities. Our current ratio was 1.19 to 1.0 on February 29, 2024 compared to 2.24 to 1.0 on February 28, 2023. We monitor current and anticipated future levels
of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2024, we had a consolidated net loss of $4.2 million, less net loss from discontinued operations of $0.7 million. Operating activities used cash of $2.4 million, with
the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $0.9 million, provision for obsolete inventory
of $0.2 million and stock compensation expense of $0.4 million. During FY 2023, we had a consolidated net loss of $5.7 million. Operating activities used cash of $2.1 million,
with the principal adjustment to reconcile net income to net cash provided by operating activities being expense associated with establishing a full reserve of deferred tax assets
of $0.7 million, depreciation and amortization of $0.8 million, provision for obsolete inventory of $0.7 million and stock compensation expense of $0.7 million.
During FY 2024, investing activities used cash of $1.45 million, primarily due to the purchases of property and equipment of $3.0 million, partially offset by investing cash
flow from discontinued operations (the result of the sale of U-Swirl assets) of $1.4 million. In comparison, investing activities used cash of $0.8 million during FY 2023
primarily due to the purchases of property and equipment of $1.0 million, partially offset by investing cash flow from discontinued operations of $0.2 million.
There were $1.25 million cash flows from financing activities during FY 2024 compared to no cash flows from financing activities during the prior year. The Company drew
down $1.25 million on its revolving line of credit during FY 2024 as discussed further below.
The conditions above raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial
statements. In addition, our independent registered public accounting firm, in their report on the Company’s February 29, 2024, audited financial statements, raised substantial
doubt about the Company’s ability to continue as a going concern.
Revolving Line of Credit
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and
working capital purposes, of which $2.75 million was available for borrowing (subject to certain borrowing-based limitations) as of February 29, 2024 (the “Credit Line”). The
Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.69% at
February 29, 2024 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to various financial ratio and leverage covenants. Per the Credit Agreement, the
maturity date is September 30, 2024.
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Table of Contents
As of February 29, 2024 we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at
least 1.5 to 1. Our current ratio as of February 29, 2024 was 1.19 to 1. We have requested a waiver from the Lender and received approval as of the date of this Annual Report.
We were in compliance, however, with all other aspects of the Credit Agreement.
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds
drawn down under the Credit Line. As of the date of this Annual Report, we do not have enough cash on hand to satisfy our obligations under the Credit Line if the Lender
exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the future, however, we may not have sufficient funds
available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which
secure our borrowings under the Credit Agreement.
In addition, the Lender retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and
instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash
on hand at that time to satisfy these obligations.
The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of
waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities which could give us the
ability to repay the Credit Line as needed.
Contractual Obligations
The table below presents significant contractual obligations of the Company at February 29, 2024.
(Amounts in thousands)
Contractual Obligations
Operating leases
Purchase contracts
Total
Total
Less than
1 year
2-3 Years
4-5 years
More
Than
5 years
$
$
1,874,640
269,808
2,144,448
$
$
514,169
269,808
783,977
$
$
781,133 $
-
781,133 $
238,208 $
-
238,208 $
341,130
-
341,130
The Company made an average of $1.7 million per year in capital expenditures during FY 2022 to FY 2024. For FY 2025 the Company anticipates making similar levels of
capital expenditures. The planned increase is the result of expected investment in an updated Enterprise Resource Planning (ERP) management system, and machinery and
equipment to replace equipment that has reached the end of its useful life.
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 the 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 Estimates
32
Table of Contents
Our discussion and analysis of our financial condition and results of operations are 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, 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. The Company did not identify any critical estimates used in the preparation of our consolidated financial
statements for the year ended February 29, 2024.
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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Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (CohnReznick, LLP, New York, NY, PCAOB ID No. 596)
Report of Independent Registered Public Accounting Firm (Plante & Moran, PLLC, Cleveland, Ohio, PCAOB No. 166)
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
34
Page
35
37
38
39
40
41
Table of Contents
To the Stockholders and Board of Directors
Rocky Mountain Chocolate Factory, Inc.
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 29, 2024, and the related
consolidated statements of operations, changes in stockholders' equity, and cash flows for the fiscal year then ended, and the related notes and financial statement schedule
listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of February 29, 2024, and the results of its operations and its cash flows for the fiscal year then ended, in conformity with accounting
principles generally accepted in the United States of America.
Substantial Doubt about the Company's ability to continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note 1 to the financial statements, the
Company has incurred recurring losses and negative cash flows from operations in recent years and is dependent on debt financing to fund its operations, all of which raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these
matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters 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. We determined that there are no critical audit matters.
/s/ CohnReznick LLP
We have served as the Company’s auditor since 2023.
New York, New York
June 13, 2024
35
Table of Contents
To the Stockholders and Board of Directors
Rocky Mountain Chocolate Factory, Inc.
Opinion on the Financial Statements
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28, 2023, the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2023, 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, 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended February 28, 2023, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ PLANTE & MORAN, PLLC
We served as the Company’s auditor from 2004 to 2023.
Cleveland, Ohio
May 30, 2023
36
Table of Contents
Revenues
Sales
Franchise and royalty fees
Total Revenue
Costs and Expenses
Cost of sales
Franchise costs
Sales and marketing
General and administrative
Retail operating
Depreciation and amortization, exclusive of depreciation
and amortization expense of $749,606, $646,394, and $620,798,
respectively, included in cost of sales
Total costs and expenses
Loss from Operations
Other Income (Expense)
Interest expense
Interest income
Gain on insurance recovery
Other income, net
Loss Before Income Taxes
Income Tax Provision (Benefit)
Loss from Continuing Operations
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 29 or 28,
2023
2024
2022
$
$
22,022,310
5,928,377
27,950,687
$
24,456,910
5,975,442
30,432,352
20,655,629
2,582,371
2,131,734
6,673,929
671,487
137,693
32,852,843
20,455,373
1,825,783
2,060,215
10,325,633
537,482
118,869
35,323,355
23,534,470
5,954,078
29,488,548
18,610,739
1,914,944
1,474,807
7,456,314
606,889
119,377
30,183,070
(4,902,156 )
(4,891,003 )
(694,522 )
(53,397 )
79,836
-
26,439
(10,431 )
26,921
-
16,490
-
10,870
167,123
177,993
(4,875,717 )
(4,874,513 )
(516,529 )
-
613,843
(16,812 )
(4,875,717 )
(5,488,356 )
(499,717 )
Earnings (loss) from discontinued operations, net of tax
703,834
(192,422 )
158,020
Net Loss
Basic Loss per Common Share
Loss from continuing operations
Earnings (loss) from discontinued operations
Net loss
Diluted Loss per Common Share
Loss from continuing operations
Earnings (loss) from discontinued operations
Net loss
Weighted Average Common Shares Outstanding - Basic
Dilutive Effect of Employee Stock Awards
Weighted Average Common Shares Outstanding - Diluted
$
$
$
$
$
(4,171,883 ) $
(5,680,778 ) $
(341,697 )
(0.77 ) $
0.11
(0.66 ) $
(0.77 ) $
0.11
(0.66 ) $
(0.88 ) $
(0.03 )
(0.91 ) $
(0.88 ) $
(0.03 ) $
(0.91 ) $
(0.08 )
0.02
(0.06 )
(0.08 )
0.02
(0.06 )
6,294,411
-
6,294,411
6,226,279
-
6,226,279
6,140,687
-
6,140,687
The accompanying notes are an integral part of these consolidated financial statements.
37
Table of Contents
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, less allowance for credit losses
of $331,902 and $666,315, respectively
Notes receivable, current portion, less current portion of the
allowance for credit losses of $29,886 and $35,173, respectively
Refundable income taxes
Inventories
Other
Current assets held for sale
Total current assets
Property and Equipment, Net
Other Assets
Notes receivable, less current portion and allowance for credit losses
of $0 and $38,778, respectively
Goodwill
Intangible assets, net
Lease right of use asset
Other
Long-term assets held for sale
Total other assets
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable
Line of credit
Accrued salaries and wages
Gift card liabilities
Other accrued expenses
Contract liabilities
Lease liability
Current liabilities held for sale
Total current liabilities
Lease Liability, Less Current Portion
Contract Liabilities, Less Current Portion
Long-term liabilities - held for sale
Total Liabilities
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.001 par value per share; 250,000
authorized; 0 shares issued and outstanding
Common stock, $.001 par value, 46,000,000 shares authorized, 6,310,543 shares
and 6,257,137 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Total stockholders' equity
Total Liabilities and Stockholders' Equity
AS OF FEBRUARY 29 or 28,
2024
2023
$
2,082,014
$
4,717,068
2,183,685
489,245
45,969
4,358,401
443,336
-
9,602,650
7,757,655
695,432
575,608
237,897
1,693,970
14,006
-
3,216,913
20,577,218
3,409,892
1,250,000
1,832,851
624,335
300,862
150,494
503,362
-
8,071,796
1,191,109
678,154
-
9,941,059
$
$
2,055,694
23,698
344,885
3,639,780
340,847
83,004
11,204,976
5,710,739
94,076
575,608
265,927
2,355,601
14,054
1,765,846
5,071,112
21,986,827
2,189,760
-
978,606
592,932
162,346
161,137
746,506
178,939
5,010,226
1,640,017
782,278
184,142
7,616,663
-
-
6,306
9,895,704
734,149
10,636,159
20,577,218
$
6,257
9,457,875
4,906,032
14,370,164
21,986,827
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
38
Table of Contents
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Balances as of February 28, 2021
Issuance of common stock, vesting of restricted stock units
and other, net of shares withheld
Equity compensation, restricted stock units, net of shares
withheld
Net loss attributable to RMCF stockholders
Redemption of outstanding preferred stock purchase rights
Balances as of February 28, 2022
Equity compensation, restricted stock units, net of shares
withheld
Net loss attributable to RMCF stockholders
Balances as of February 28, 2023
Equity compensation, restricted stock units, net of shares
withheld
Net loss attributable to RMCF stockholders
Balances as of February 29, 2024
Convertible Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Total
Stockholder
s'
Equity
18,967,56
—
$
—
—
—
—
—
$
—
—
—
$
—
—
$
-
—
—
—
—
-
—
—
-
—
—
-
6,074,293
$
6,074
$ 7,971,712
$ 10,989,783
$
9
9,000
9
46,601
103,063
—
—
103
—
—
788,617
—
—
—
—
(341,697 )
(61,276 )
6,186,356
$
6,186
$ 8,806,930
$ 10,586,810
$
70,781
—
71
—
650,945
—
—
(5,680,778 )
6,257,137
$
6,257
$ 9,457,875
$ 4,906,032
$
48,890
—
49
—
437,829
—
—
(4,171,883 )
6,306,027
$
6,306
$ 9,895,704
$
734,149
$
46,610
788,720
(341,697 )
(61,276 )
19,399,92
6
651,016
(5,680,77
8 )
14,370,16
4
437,878
(4,171,88
3 )
10,636,15
9
The accompanying notes are an integral part of these consolidated financial statements.
39
Table of Contents
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29 or 28,
2023
2024
2022
Cash Flows From Operating Activities
Net Loss
Less: Net Income (Loss) from discontinued operations, net of tax
Net Loss from continuing operations
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization
Provision for obsolete inventory
Provision for loss (recovery) on accounts and notes receivable
Asset impairment and store closure losses
Loss (gain) on sale or disposal of property and equipment
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 (used in) provided by operating activities
of continuing operations
Net cash provided by (used in) operating activities
of discontinued operations
Net cash (used in) provided by operating activities
Cash Flows from Investing Activities
Addition to notes receivable
Proceeds received on notes receivable
Proceeds from insurance recovery
Proceeds from the sale or distribution of assets
Purchases of property and equipment
Other
Net cash used in investing activities
of continuing operations
Net cash provided by investing activities
of discontinued operations
Net cash used in investing activities
Cash Flows from Financing Activities
Repurchase of common stock through net
settlement of restricted stock units
Proceeds from line of credit
Dividends paid and redemption of outstanding
preferred stock purchase rights
Net cash (used in) provided by financing
activities of discontinued operations
Net cash provided by (used in) financing activities
$
(4,171,883 ) $
703,834
(4,875,717 )
(5,680,778 ) $
(192,422 )
(5,488,356 )
887,299
188,786
(402,117 )
—
(37,002 )
437,829
—
227,053
298,916
(878,771 )
(101,466 )
974,769
999,483
(114,767 )
765,263
732,499
(277,000 )
84,183
11,958
651,016
722,163
82,050
391,643
(70,069 )
(7,246 )
661,111
(1,163,216 )
5,384
(341,697 )
158,020
(499,717 )
740,175
384,473
-
-
(159,129 )
1,073,115
(267,576 )
46,311
37,999
(581,433 )
(122,647 )
200,557
1,332,993
26,321
(2,395,705 )
(2,898,617 )
2,211,442
(39,242 )
(2,434,947 )
796,126
(2,102,491 )
646,712
2,858,154
(135,955 )
163,989
-
112,131
(3,017,473 )
9,463
(64,621 )
62,411
-
27,289
(1,000,015 )
10,000
(2,867,845 )
(964,936 )
1,417,738
(1,450,107 )
197,121
(767,815 )
-
1,250,000
-
-
1,250,000
-
-
-
-
-
-
109,809
206,336
2,693
(941,327 )
(10,000 )
(632,489 )
27,491
(604,998 )
(237,785 )
-
(61,276 )
-
(299,061 )
Net Increase (Decrease) in Cash and Cash Equivalents
(2,635,054 )
(2,870,306 )
1,954,095
Cash and Cash Equivalents, Beginning of Year
4,717,068
7,587,374
5,633,279
Cash and Cash Equivalents, End of Year
$
2,082,014
$
4,717,068
$
7,587,374
The accompanying notes are an integral part of these consolidated financial statements.
40
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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”), U-Swirl International, Inc. (dissolved in October 2023)
(“U-Swirl”), and U-Swirl, Inc. (“SWRL”) (collectively, the “Company”, "we", “RMCF”).
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 (“Durango Products”). The Company also sells its candy in select locations
outside of its system of retail stores.
On February 24, 2023 the Company entered into an agreement to sell its three Company-owned U-Swirl locations. Separately, on May 1, 2023, subsequent to the 2023 fiscal
year end, the Company entered into an agreement to sell its franchise rights and intangible assets related to U-Swirl and associated brands. As a result, the activities of the
Company’s U-Swirl subsidiary that have historically been reported in the U-Swirl segment have been reported as discontinued operations. See Note 17 – Discontinued
Operations in the Notes to Consolidated Financial Statements for additional information regarding the Company's discontinued operations, including net sales, operating
earnings and total assets by segment. The Company’s financial statements reflect continuing operations only, unless otherwise noted.
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; sales at Company-owned stores of chocolates and other confectionery products
including gourmet caramel apples; and marketing fees.
The Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be measured on a recurring basis at fair value. The
Company is not a party to any material derivative financial instruments. The Company does not have a material amount of non-financial assets or non-financial liabilities
that are required under U.S. GAAP to be measured at fair value on a recurring basis. The Company has not elected to use the fair value measurement option, as permitted
under U.S. GAAP, for any assets or liabilities for which fair value measurement is not presently required. The Company believes the fair values of cash equivalents,
accounts and notes receivable, accounts payable and line of credit approximate their carrying amounts due to their short duration.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand at February 29, 2024:
Rocky Mountain Chocolate Factory
Company-owned stores
Franchise stores - Domestic stores
and kiosks
International license stores
Cold Stone Creamery - co-branded
U-Swirl - co-branded
Total
Liquidity and Going Concern
Stores
Open at
2/28/2023
Opened
Closed
Sold
Stores
Open at
2/29/2024
1
153
4
101
10
269
1
5
-
4
1
-
(9 )
(1 )
(1 )
-
-
-
-
-
-
2
149
3
104
11
269
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. In accordance with ASC 205-40, Going Concern,
the Company’s management has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to
41
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
continue as a going concern within one year after the date the accompanying financial statements were issued. During the year ended February 29, 2024, the Company
incurred a net loss of $4.2 million and used cash in operating activities of $2.4 million. Additionally, the Company was not in compliance with the requirement under a credit
agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”) to maintain a ratio of total current assets to total current liabilities of at least
1.5 to 1. The Company's current ratio as of February 29, 2024 was 1.19 to 1. The Company requested and received a waiver from the Lender as of the date the financial
statements were available to be issued. The Credit Agreement is set to expire on September 30, 2024. These factors raise substantial doubts about the Company’s ability to
continue as a going concern within one year of the date that these consolidated financial statements are issued. The accompanying consolidated financial statements do not
include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s ability to continue as a going concern is dependent on its ability to continue to implement its business plan. The Company is exploring various means of
strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or,
amending its Credit Line facility. The Company is also exploring supplemental debt facilities for other operational activities. During the next twelve months the Company
intends to sell an unused parcel of land near its headquarters, cut overhead for manufacturing, and increase profits and gross margins through increasing chocolate price
sales to its franchising system and Specialty Market customers. In addition, the Company intends to benefit from busy season of holiday product sales and add a CFO to its
management teams during the next twelve months. In the event the Company is unable to generate profits, positive cash flow, and implement its business plan, it may have
to curtail its business further and no longer continue as a going concern.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the estimate of the reserve for
uncollectible accounts, revenue recognition, reserve for inventory obsolescence, and inputs for assessing goodwill impairment. The Company bases its estimates on
historical experience and also on assumptions that the Company believes are reasonable. The Company assesses these estimates on a regular basis; however, actual results
could materially differ from these estimates.
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.
Accounts and Notes Receivable
Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Notes
receivable generally reflect the sale of assets. Accounts and notes receivable are stated at the net amount expected to be collected, using an estimate of current expected
credit losses to determine the allowance for expected credit losses. The Company evaluates the collectability of its accounts and notes receivable and determines the
appropriate allowance for expected credit losses based on a combination of factors,
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
including the aging of the receivables and historical collection trends. When the Company is aware of a customer’s inability to meet its financial obligation, the Company
may individually evaluate the related receivable to determine the allowance for expected credit losses. The Company uses specific criteria to determine uncollectible
receivables to be written off, including bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due.
As of February 29, 2024, the Company had $2,183,685 of accounts receivable outstanding, inclusive of an allowance for credit losses of $331,902. As of February 29,
2023, the Company had $2,055,694 of accounts receivable outstanding, inclusive of an allowance for credit losses of $666,315.
On February 29, 2024, the Company had total notes receivable of $1,184,677, of which $1,000,000 relates to the U-Swirl note. The U-Swirl note is a three-year secured
promissory note in the aggregate original principal amount of $1,000,000. Payment is due May 1, 2026. The remaining balance of notes receivable includes $214,563 of
notes receivable outstanding and an allowance for credit losses of $29,886 associated with these notes, compared to $191,725 of notes receivable outstanding and an
allowance for credit losses of $73,951 on February 28, 2023. The notes require monthly payments and bear interest rates ranging from 4.5% to 7.0%. The notes mature
through December 2027 and all of the notes receivable are secured by the assets of the location. 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.
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 net realizable value,
the Company records an expense to reduce inventory to its actual net realizable 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, net realizable 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 ranges 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 asset and liability method. The asset and 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. The Company has recorded a deferred tax asset related to historical U-Swirl losses and has determined that these losses 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 13.
Gift Card Breakage
43
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company and its franchisees sell gift cards that are redeemable for product in stores. The Company manages the gift card program, and therefore collects all funds from
the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in current liabilities in
our 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
recognizes 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 $624,335 and $592,932 at February 29, 2024 and February 28, 2023, respectively. The Company recognized breakage of $40,218 and $59,754 during FY 2024
and FY 2023, respectively.
Goodwill
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, generally the first day of its fourth quarter, 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 recoverability of goodwill is evaluated through a 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.
During FY 2023, the Company recorded $84,183 of impairment of goodwill associated with its retail segment, and included within general and administrative expense on
the Consolidated Statements of Operations. There were no similar impairment charges during FY 2024 or FY 2022.
Intangible Assets
Intangible assets represent non-physical assets that create future economic value and are primarily composed of packaging design, store design, trademarks and non-
competition agreements. Intangible assets are amortized on a straight line basis over periods ranging from 5 years to 20 years based on the expected future economic value
of the intangible asset. Intangible assets are recorded at their cost. The Company performs intangible asset impairment testing 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’s intangible assets are further described
in Note 7 to the financial statements.
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
44
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
The Company recognizes franchise fees over the term of the associated franchise agreement, which is generally a period of 10 years. 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’s manufacturing facility and recognizes a ten percent (10%)
royalty on all other sales of product made in store and sold at franchise locations.
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, and 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.
Stock-Based Compensation
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. Stock-based compensation expense related to stock awards is measured based on the fair value of the awards granted and recognized as an expense over the
requisite service period.
The fair value of each RSU award is based on the fair value of the underlying common stock as of the grant date. Stock-based compensation expense is recognized on a
straight-line basis over the requisite service period, generally five to six years.
The Company accounts for forfeitures as they occur.
Related Party Transactions
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 14, 2022 the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”), by and among the Company, Bradley L. Radoff, an
individual (“Radoff”), Andrew T. Berger, an individual, AB Value Partners, LP (“AB Value Partners”), AB Value Management LLC (“AB Value Management” and,
together with AB Value Partners, “AB Value” and, together with Radoff, “ABV-Radoff”), and Mary Bradley, an individual, pertaining to, among other things, the dismissal
of all pending lawsuits between the parties.
Pursuant to the Settlement Agreement, the Company and ABV-Radoff agreed to a “Standstill Period” commencing on the effective date of the agreement and ending on the
date that is forty-five (45) days prior to the beginning of the Company’s advance notice period for the nomination of directors at the Company’s 2025 annual meeting of
stockholders. During the Standstill Period, ABV-Radoff agreed, subject to certain exceptions, other than in Rule 144 open market broker sale transactions where the identity
of the purchaser is not known and in underwritten widely dispersed public offerings, not to sell, offer, or agree to sell directly or indirectly, through swap or hedging
transactions or otherwise, the securities of the Company or any rights decoupled from the underlying securities of the Company held by ABV-Radoff to any person or entity
other than the Company or an affiliate of ABV-Radoff (a “Third Party”) that, to the ABV-Radoff’s knowledge would result in such Third Party, together with its Affiliates
and Associates (as such terms are defined in the Settlement Agreement), owning, controlling, or otherwise having beneficial ownership or other ownership interest in the
aggregate of more than 4.9% of the Company’s common stock outstanding at such time, or would increase the beneficial ownership or other ownership interest of any Third
Party who, together with its Affiliates and Associates, has a beneficial ownership or other ownership interest in the aggregate of more than 4.9% of the shares Common
Stock outstanding at such time (such restrictions collectively, the “Lock-Up Restriction”).
On August 3, 2023, the Board of Directors of the Company authorized and approved the issuance of a limited waiver (the “Limited Waiver”) of the Lock-Up Restriction
with regard to a sale by ABV-Radoff of up to 200,000 shares of Common Stock to Global Value Investment Corp. (“GVIC”) to be consummated by August 7, 2023. Jeffrey
Geygan, the Company’s Chairman of the Board and current Interim CEO of the Company, is the chief executive officer and a principal of GVIC. Other than as waived by
the Limited Waiver, the Settlement Agreement remains in full force and effect and the rights and obligations under the Settlement Agreement of each of the parties remain
unchanged.
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.
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 29, 2024, 960,677 shares of common stock that were issuable upon exercise of warrants, 160,958 shares of
common stock that were issuable upon the vesting of restricted stock units, and 17,698 shares of common stock that were issuable upon the exercise of options were
excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. During the year ended February 28, 2023, 960,677 shares of
common stock that were issuable upon exercise of warrants, 137,294 shares of common stock that were issuable upon the vesting of restricted stock units, and 36,144 shares
of common stock that were issuable upon the exercise of options were excluded from the computation of diluted earnings per share because their effect would have been
anti-dilutive. During the year ended February 28, 2022, 960,677 shares of common stock reserved for issuance upon the exercise of warrants and 147,422 shares of common
stock that were issuable upon the vesting of 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 expenses amounted to $701,214, $577,984, and $210,103 for the fiscal years ended February 29 or
28, 2024, 2023 and 2022, respectively.
Fair Value of Financial Instruments
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s financial instruments consist of cash and cash equivalents, trade and notes receivables, accounts payables, and its line of credit. The fair value of all
instruments approximates the carrying value, because of the relatively short maturity of these instruments. All of the Company’s financial instruments are classified as level
1 and level 2 assets within the fair value hierarchy. The Company does not have any financial instruments classified as level 3 assets.
Recently Adopted Accounting Pronouncements
Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on the Company's
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 and affect the carrying value of accounts receivable. The
Company adopted ASU 2016-13 effective March 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial
statements.
New Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07
enhances the disclosures required for operating segments in the Company’s annual and interim consolidated financial statements. The disclosures required under ASU 2023-
07 are also required for public entities with a single reportable segment. The updates in this ASU are effective for fiscal years beginning after December 15, 2023, and
interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on
its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires
disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The updates in this ASU are effective for
annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on its consolidated
financial statements.
Subsequent Events
Management evaluated all activity of the Company through the issue date of the financial statements and concluded that no subsequent events have occurred that would
require recognition or disclosure in the financial statements.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 29 or 28:
Cash paid (received) for:
Interest
Income taxes
Supplemental disclosure of non-cash investing activities:
Sale of assets in exchange for note receivable
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
2024
2023
2022
$
25,127 $
(298,895 )
25,000 $
(547,763 )
5,202
240,890
$
1,000,000 $
- $
-
The Company recognizes revenue from contracts with its customers in accordance with Accounting Standards Codification® (“ASC”) 606, which provides that revenues are
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. 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.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and are treated as a single performance
obligation. Initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10
years.
The following table summarizes contract liabilities as of February 29, 2024 and February 28, 2023:
Contract liabilities at the beginning of the year:
Revenue recognized
Contract fees received
Contract liabilities at the end of the year:
Twelve Months Ended
February 29 or 28:
2024
2023
$
$
943,415 $
(167,767 )
53,000
828,648 $
962,572
(204,657 )
185,500
943,415
At February 29, 2024, 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:
2025
2026
2027
2028
2029
Thereafter
Total
$
$
150,494
135,223
112,137
103,775
66,653
260,366
828,648
48
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Gift Cards
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. ASC 606 requires the use of the “proportionate” method for recognizing breakage. The Company
recognizes 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. The Company
recognized breakage of $40,218 and $59,754 during FY 2024 and FY 2023, respectively
Durango Product Sales of Confectionary Items, Retail Sales and Royalty and Marketing Fees
Confectionary items sold to the Company’s franchisees, others and its Company-owned stores’ sales are recognized at the time of the underlying sale, based on the terms of
the sale and when ownership of the inventory is transferred, and are presented net of sales taxes and discounts. Royalties and marketing fees from franchised or licensed
locations, which are based on a percent of sales are recognized at the time the sales occur.
NOTE 4 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 29, 2024
Revenues recognized over time:
Franchise fees
Revenues recognized at a point in time:
Franchising
Manufacturing
Retail
Total
$
167,767
- $
- $
167,767
Durango Product sales
Retail sales
Royalty and marketing fees
Total revenues recognized over time and point in time
$
$
- $
-
5,760,610
5,928,377 $
20,703,409 $
-
-
20,703,409 $
- $
1,318,901
-
1,318,901 $
20,703,409
1,318,901
5,760,610
27,950,687
For the Year Ended February 28, 2023
Revenues recognized over time:
Franchise fees
Revenues recognized at a point in time:
Franchising
Manufacturing
Retail
Total
$
204,657 $
- $
- $
204,657
Durango Product sales
Retail sales
Royalty and marketing fees
Total revenues recognized over time and point in time
$
$
- $
-
5,770,785
5,975,442 $
23,372,133 $
-
-
23,372,133 $
- $
1,084,777
-
1,084,777 $
23,372,133
1,084,777
5,770,785
30,432,352
49
Table of Contents
For the Year Ended February 28, 2022
Revenues recognized over time:
Franchise fees
Revenues recognized at a point in time:
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Franchising
Manufacturing
Retail
Total
$
179,678 $
- $
- $
179,678
Durango Product sales
Retail sales
Royalty and marketing fees
Total revenues recognized over time and point in time
$
$
- $
-
5,774,400
5,954,078 $
22,374,175 $
-
-
22,374,175 $
- $
1,160,295
-
1,160,295 $
22,374,175
1,160,295
5,774,400
29,488,548
NOTE 5 - INVENTORIES
Inventories consist of the following at February 29 or 28:
Ingredients and supplies
Finished candy
Reserve for slow moving inventory
Total inventories
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 29 or 28:
Land
Building
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Transportation equipment
Less accumulated depreciation
Property and equipment, net
$
$
2024
2023
2,037,727 $
2,509,460
(188,786 )
4,358,401 $
2,481,510
1,567,887
(409,617 )
3,639,780
2024
2023
$
513,618 $
5,108,950
12,508,888
590,679
138,515
325,979
19,186,629
513,618
5,151,886
10,152,211
512,172
134,010
476,376
16,940,273
$
(11,428,974 )
7,757,655 $
(11,229,534 )
5,710,739
Depreciation expense related to property and equipment totaled $859,269, $736,358, and $710,804, during the fiscal years ended February 29 or 28, 2024, 2023 and 2022,
respectively.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following at February 29 or 28:
Intangible assets subject to amortization
Store design
Trademark/Non-competition
agreements
Total
Goodwill and intangible assets not
subject to
amortization
Goodwill
Retail
Franchising
Manufacturing
Trademark
Total
Amortization Period (in Years)
10
-
5
2024
2023
Gross
Carrying
Value
Accumulated
Amortization
Gross
Carrying
Value
Accumulated
Amortization
$
394,826
$
277,344
$
394,826
$
259,314
20
259,339
654,165
138,924
416,268
259,339
654,165
128,924
388,238
$
360,972
97,318
97,318
20,000
575,608
$
360,972
97,318
97,318
20,000
575,608
Total Goodwill and Intangible Assets
$
1,229,773
$
416,268
$
1,229,773
$
388,238
There was no change to goodwill during the fiscal year ended February 29, 2024. Changes to goodwill during the fiscal year ended February 28, 2023 consisted of the
following:
Balance as of February 28, 2022
Impairment losses
Goodwill written off related to sales of Company-owned stores
Balance as of February 29, 2023
$
$
Retail Segment
515,065
(84,183
)
(69,910 )
360,972
Amortization expense related to intangible assets totaled $28,030, $28,905, and $29,371 during the fiscal years ended February 29 or 28, 2024, 2023 and 2022, respectively.
At February 29, 2024, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the
following:
2025
2026
2027
2028
2029
Thereafter
Total
$
$
27,405
27,405
27,405
27,405
27,405
100,872
237,897
NOTE 8 –NOTES PAYABLE AND REVOLVING CREDIT LINE
Revolving Credit Line
As of February 29, 2024, the Company had a $4.0 million credit line for general corporate and working capital purposes, of which $2.75 million was available for borrowing
(subject to certain borrowing base limitations). The Company drew down $1.25 million on the credit line during the year ended February 29, 2024. Per the Credit
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Agreement, the maturity date is September 30, 2024, at which point the full amount outstanding is due. The credit line is secured by substantially all of the Company’s assets,
except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.69% at February 29, 2024 and 6.92% at February 28, 2023).
Additionally, the line of credit is subject to various financial ratio and leverage covenants.
As of February 29, 2024, the Company was not in compliance with the requirement under the Credit Agreement to maintain a ratio of total assets to total current liabilities of
at least 1.5 to 1. The Company's current ratio as of February 29, 2024 was 1.19 to 1. The Company has received a waiver from the Lender as of the date of issuance of these
financial statements. The Company in compliance, however, with all other aspects of the Credit Agreement. Refer to Note 1 for further information.
NOTE 9 - 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. As of February 29, 2024, total shares authorized under the 2007 Plan was 985,340, and 183,974 shares were available for issuance.
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 29, 2024, and changes for the three years then ended was as follows:
Twelve Months Ended
February 29 or 28:
2023
2024
2022
Outstanding non-vested restricted stock units at beginning
of year:
Granted
Vested
Cancelled/forfeited
Outstanding non-vested restricted stock units as of
February 29 or 28:
154,131
157,145
(48,890 )
(101,428 )
160,958
105,978
129,092
(70,782 )
(10,157 )
154,131
Weighted average grant date fair value
Weighted average remaining vesting period (in years)
$
5.59 $
1.94
5.23 $
1.73
209,450
26,058
(127,130 )
(2,400 )
105,978
9.33
2.26
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company also issued 19,591 restricted stock units outside of the 2007 Plan, of which 7,393 had service vesting conditions and 12,198 had performance vesting
conditions, further discussed below. The grant date fair value of the non plan awards was $4.86 per share.
Information with respect to stock option awards outstanding under the 2007 Plan at February 29, 2024, and changes for the three years then ended was as follows:
Outstanding stock options at beginning of year:
Granted
Exercised
Cancelled/forfeited
Outstanding stock options as of February 29 or 28:
Weighted average exercise price
Weighted average remaining contractual term (in years)
Twelve Months Ended
February 29 or 28:
2023
2024
2022
36,144
-
-
(18,446 )
17,698
-
36,144
-
-
36,144
$
6.49 $
8.26
6.49
9.26
-
-
-
-
-
n/a
n/a
During the year ended February 29, 2024, the Company issued a total of 157,145 restricted stock units, inclusive of the 2007 Plan and non plan awards, of which 95,151
restricted stock units are subject to vesting based on the achievement of company performance goals and 61,994 restricted stock units that vest over time. These issuances
were made to certain of the Company's executives. These restricted stock units were issued with an aggregate grant date fair value of $877,838 or $5.59 per share. The
performance-based restricted stock units will vest following the end of the Company’s fiscal year ending February 2026 with respect to the target number of performance-
based restricted stock units if the Company achieves metrics related to return on equity, Specialty Market gross margin, average unit volume, and social media engagement
lifetime value during the performance period, subject to continued service through the end of the performance period. The performance-based restricted stock units may vest
from 75% to 110% of target units based upon actual performance. The time-based restricted stock units vest 33% annually on the anniversary date of the award until August
11, 2026.
During the year ended February 28, 2023, the Company issued 36,144 stock options and issued 94,892 performance-based restricted stock units subject to vesting based on
the achievement of performance goals. These issuances were made to certain of the Company's executives. The stock options were issued with an aggregate grant date fair
value of $77,267 or $2.14 per share. The performance-based restricted stock units were issued with an aggregate grant date fair value of $298,582 or $6.29 per share, based
upon a target issuance of 47,446 shares of common stock. The stock options granted vest with respect to one-third of the shares on the last day of the Company’s current fiscal
year ending February 29, 2024, and vest as to remaining shares in equal quarterly increments on the last day of each quarter until the final vesting on February 28, 2025. The
performance-based restricted stock units will vest following the end of the Company’s fiscal year ending February 2025 with respect to the target number of performance-
based restricted stock units if the Company achieves an annualized total shareholder return of 12.5% during the performance period, subject to continued service through the
end of the performance period. The Compensation Committee of the Board of Directors has discretion to determine the number of performance-based restricted stock units
between 0-200% of the target number that will vest based on achievement of performance below or above the target performance goal.
The Company recognized $437,829 and $651,016 of stock-based compensation expense during the years ended February 29 and 28, 2024 and 2023, respectively.
Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards. Refer to Note 16 for further discussion of the
equity impact of the prior CEO termination.
Except as noted above, restricted stock units generally vest in equal annual installments over a period of five to six years. During the year ended February 29 and 28, 2024 and
2023, restricted stock units vested and issued as 48,890 and 70,781 shares of common stock, respectively. Total unrecognized compensation expense of non-vested,
53
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
non-forfeited restricted stock units and stock options granted as of February 29, 2024 was $408,275, which is expected to be recognized over the weighted-average period of
1.9 years. Total unrecognized compensation expense of non-forfeited, performance vesting, restricted stock units as of February 28, 2023 was $628,966, which is expected to
be recognized over the weighted-average period of 1.7 years.
NOTE 10 – 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 Company also leases trucking equipment and warehouse space in support of its production operations. Expense associated with trucking and warehouse leases is included
in cost of sales on the consolidated statements of operations.
The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. During the years ended February 29 or 28, 2024 and 2023, lease
expense recognized in the consolidated statements of operations was $599,853 and $565,046, respectively.
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 Asset and 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 asset and 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 3.9%, 3.4%, and 3.1% as
of February 29 or 28, 2024, 2023 and 2022, respectively. The total estimated future minimum lease payments is $1.9 million as of February 29, 2024.
54
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of February 29, 2024, maturities of lease liabilities for the Company’s operating leases were as follows:
FYE 25
FYE 26
FYE 27
FYE 28
FYE 29
Thereafter
Total
Less: Imputed interest
Present value of lease liabilities:
$
$
$
514,169
496,466
284,667
135,010
103,198
341,130
1,874,640
(180,169 )
1,694,471
The weighted average lease term at February 29 or 28, 2024, 2023, and 2022 was 5.8 years, 5.5 years and 6.7 years, respectively.
The following is a schedule of cash paid for lease liabilities for the three years ended February 29 or 28:
Cash paid for amounts included in the measurement of
lease liabilities
2024
2023
2022
543,543
572,079
563,264
During the years ended February 29 or 28, 2024, 2023, and 2022 the Company entered into new leases representing a future lease liability of $56,012, $1,472,667, and
$588,475, respectively.
The Company did not have any leases categorized as finance leases as of February 29, 2024 or February 28, 2023.
NOTE 11 – 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
29, 2024, the Company was contracted for approximately $270,000 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 29, 2024, 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 its business, financial condition or operating results.
NOTE 12 – STOCKHOLDERS’ EQUITY
Redemption of Preferred Stock Purchase Rights
55
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 2, 2021, the Board of Directors approved the redemption of all the outstanding preferred stock purchase rights (the “Rights”) granted pursuant to the Rights
Agreement, dated March 1, 2015, between the Company and Computershare Trust Company, N.A., as Rights Agent (as amended, the “Rights Agreement”), commonly
referred to as a “poison pill.” Immediately upon the action of the Board of Directors to approve the redemption of the Rights, the right to exercise the Rights terminated, which
effectively terminated the Rights Agreement. Pursuant to the Rights Agreement, the Rights were redeemed at a redemption price of $0.01 per Right. As a result, the Company
paid an aggregate amount of $61,276 to stockholders in October 2021 to redeem the Rights.
Warrants
In connection with a terminated supplier agreement with a former customer of the Company, the Company issued 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 were to vest in annual tranches in varying amounts
following each contract year under the terminated supplier agreement, and was subject to, and only upon, achievement of certain revenue thresholds on an annual or
cumulative five-year basis in connection with its performance under the terminated supplier agreement. The Warrant was to expire 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.
On November 1, 2022, the Company sent a formal notice to the customer terminating the agreement. As of February 29, 2024, no Warrant Shares had vested and, subsequent
to the termination by the Company of supplier agreement, the Company has no remaining material obligations under the Warrant.
The Company determined that the grant date fair value of the Warrant 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 13 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 29 or 28:
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Total
2024
2023
2022
- $
-
-
-
-
-
- $
(116,792 ) $
8,472
(108,320 )
204,058
46,704
250,762
621,841
100,322
722,163
613,843 $
(231,430 )
(36,144 )
(267,574 )
(16,812 )
$
$
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 29 or 28:
Statutory rate
State income taxes, net of federal benefit
Work opportunity tax credits
Equity compensation tax expense
Compensation and benefits permanent differences
Other
Valuation allowance
Impact of CARES act
Effective tax rate
2024
2023
2022
21.0 %
0.0 %
0.0 %
0.0 %
(0.2 )%
1.6 %
(22.4 )%
0.0 %
(0.0 )%
21.0 %
2.9 %
0.0 %
(0.7 )%
(3.2 )%
0.7 %
(33.3 )%
0.0 %
(12.6 )%
21.0 %
3.8 %
(1.2 )%
(8.2 )%
(1.9 )%
0.1 %
0.0 %
(10.3 )%
3.3 %
During FY 2024, the Company's effective tax rate was zero. This was primarily the result of losses reported in the year, no income taxes due, and full valuation allowance
against deferred tax assets.
During FY 2023 the Company’s effective tax rate resulted in recognition of income tax expense despite incurring a pretax loss. During FY 2023 income tax expense was
primarily the result of expense associated with an increase in reserves for deferred tax assets. Management evaluated recent losses before income taxes and determined that it
is no longer more likely than not that our deferred income taxes are fully realizable. Because of this determination, the Company reserved for approximately $1.6 million of
deferred tax assets. As of February 28, 2023, the Company has a full valuation allowance against its deferred tax assets.
During FY 2022 the low effective income tax rate was primarily the result of permanent differences between the Company’s expenses as valued for financial reporting
purposes versus for income tax purposes. These differences were primarily valuation of restricted stock units and the period of recognition for employee retention credits.
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.
The components of deferred income taxes as of February 29 or 28 are as follows:
Deferred Tax Assets
Allowance for doubtful accounts and notes
Inventories
Accrued compensation
Loss provisions and deferred income
Self-insurance accrual
Interest & other
Restructuring charges
Right of use liabilities
Accumulated net losses
Valuation allowance
Net deferred tax assets
Deferred Tax Liabilities
Depreciation and amortization
Right of use assets
Prepaid expenses
Deferred Tax Liabilities
Net deferred tax assets
$
$
2024
2023
169,615 $
30,849
437,972
303,600
27,893
17,239
99,069
479,732
3,576,640
(3,106,393 )
2,036,216 $
(1,450,441
)
(479,609 )
(106,166 )
(2,036,216 )
182,031
100,725
158,652
340,652
24,098
—
98,693
—
1,669,288
(1,721,306 )
852,833
)
(771,593
—
(81,240 )
(852,833 )
$
- $
-
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes deferred income tax valuation allowances as of February 29 or 28:
Valuation allowance at beginning of period
Tax expense realized by valuation allowance
Valuation allowance at end of period
$
$
2024
2023
1,721,306 $
1,385,087
3,106,393 $
98,693
1,622,613
1,721,306
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 2019.
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. A valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than
not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. The Company evaluates, on a quarterly basis, whether it is more likely than
not that our deferred income tax assets are realizable based upon recent past financial performance, tax reporting positions, and expectations of future taxable income. The
determination of deferred tax assets is subject to estimates and assumptions. The Company periodically evaluates our deferred tax assets to determine if our assumptions and
estimates should change. As of February 29, 2024 and February 28, 2023, the Company had a full valuation allowance against its deferred tax assets.
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 29 or 28, 2024 or 2023. 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 the years ended February 29 or 28, 2024 and 2023.
The Company’s subsidiaries, SWRL, along with U-Swirl had a history of net operating losses prior to the company’s acquisition of them and thus the Company has a related
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 has 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.
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.
Income tax provision (benefit) allocated to continuing operations and discontinued operations for the years ended February 29 or 28, 2024, 2023 and 2022 was as follows:
58
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Continuing operations
Discontinued operations
Total tax provision (benefit)
NOTE 14 - EMPLOYEE BENEFIT PLAN
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2024
2023
2022
$
$
- $
-
- $
613,843 $
618,308
1,232,151 $
(16,812 )
52,194
35,382
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 29 or 28, 2024, 2023 and 2022, the Company’s contribution was approximately $62,000, $68,000, and $67,000,
respectively, to the plan.
NOTE 15 - OPERATING SEGMENTS
The Company classifies its business interests into three reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, and
Unallocated, which is the basis upon which the Company’s chief operating decision maker, the chief executive officer, 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 2024
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization
FY 2023
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization
FY 2022
Total revenues
Intersegment revenues
Revenue from external customers
Segment profit (loss)
Total assets
Capital expenditures
Total depreciation & amortization
Franchising
$
5,928,870
Manufacturing
$
Retail
Unallocated
Total
$
21,832,674
(1,129,265 )
20,703,409
149,191
11,989,238
2,297,046
$
1,318,901
-
1,318,901
144,842
510,189
41,801
$
755,502
$
7,684
$
$
-
-
-
(6,928,703 )
6,822,626
543,991
92,495
$
29,080,445
(1,129,758 )
27,950,687
(4,875,717 )
20,577,218
3,017,473
887,299
(493 )
5,928,377
1,758,953
1,255,165
134,635
31,618
$
Franchising
$
5,980,945
(5,503 )
5,975,442
2,601,485
1,245,331
17,129
34,301
$
$
(5,546 )
5,954,078
2,862,263
1,160,343
1,832
36,625
$
$
Franchising
$
5,959,624
Manufacturing
$
Manufacturing
$
$
24,628,317
(1,256,184 )
23,372,133
2,832,307
9,792,491
899,219
652,405
$
$
23,442,371
(1,068,196 )
22,374,175
3,863,460
10,023,716
797,178
627,071
$
Retail
Unallocated
Total
1,084,777
-
1,084,777
130,880
442,977
5,413
5,845
Retail
1,160,295
-
1,160,295
75,962
625,850
3,688
5,635
$
$
$
$
$
-
-
-
(10,439,185 )
10,506,028
78,254
72,712
$
31,694,039
(1,261,687 )
30,432,352
(4,874,513 )
21,986,827
1,000,015
765,263
Unallocated
Total
$
-
-
-
(7,318,214 )
15,070,852
138,629
70,844
$
30,562,290
(1,073,742 )
29,488,548
(516,529 )
26,880,761
941,327
740,175
NOTE 16 – CONTESTED SOLICITATION OF PROXIES AND EMPLOYEE AGREEMENTS
59
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Contested Solicitation of Proxies
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During FY 2023 and FY 2022, the Company incurred substantial costs associated with a contested solicitation of proxies in connection with its 2022 and 2021 annual meeting
of stockholders. During FY 2023, the Company incurred approximately $4.1 million of costs associated with the contested solicitation of proxies, compared with $1.7 million
of costs incurred during FY 2022, compared with no material costs incurred during FY 2024. These costs are recognized as general and administrative expense in the
Consolidated Statement of Operations.
Employment Agreement Payments
The Company incurred charges as discussed below in relation to certain of its executives.
Robert J. Sarlls Separation Agreement
Effective January 27, 2024, the Company terminated the services of its CEO and entered into a separation agreement which specified that, due to the involuntary termination,
certain cash payments would be made. These severance payments and the Company’s share of associated payroll taxes in the amount of approximately $660,000 will occur
over a 15-month period. The Company accrued a total of approximately $692,000 for all cash payments to be made to the CEO pursuant to the separation agreement.
In addition, all unvested RSU awards and stock options were cancelled upon effectiveness of the separation agreement. Stock options in the amount of 11,528 were cancelled
as the employee had not met the service vesting condition as of the date of the separation agreement. Vested stock options in the amount of 16,140 could be exercised during
the post termination exercise period as specified in the original option agreement. These shares had not yet been exercised as of February 29, 2024.
Service-based RSU awards in the amount of 27,130 shares were cancelled pursuant to the separation agreement as the employee had not met the required service conditions as
of the date of the separation agreement. Performance-based awards for 46,630 shares were also cancelled as the required performance and service conditions had not been
met as of the date of termination. Because the required performance conditions had not yet been met and the requisite service had not been provided by the employee, the
Company reversed all previously recorded stock-based compensation in the amount of $69,000 in accordance with ASC 718.
Gregory L. Pope, Sr. Retirement Agreement
On May 8, 2023, the Company announced that Gregory L. Pope, Sr., Senior Vice President – Franchise Development, retired effective as of May 3, 2023 (the “Retirement
Date”). In connection with his retirement, the Company and Mr. Pope entered into a retirement agreement and general release (the “Retirement Agreement”) that provides (i)
Mr. Pope will provide consulting services to the Company, as an independent contractor, until December 31, 2023, for a monthly consulting fee of $22,000, (ii) a retirement
bonus of 26 equal bi-weekly payments of $12,500 (less tax withholding) payable beginning November 2023, (iii) for accelerated vesting of 8,332 non-vested restricted stock
units as of the Retirement Date, (iv) payment of the cost of Mr. Pope’s COBRA premiums for up to 18 months, and (v) reimbursement of Mr. Pope’s legal fees incurred in
connection with the Retirement Agreement (not to exceed $7,500). In addition, the Retirement Agreement includes covenants related to cooperation, non solicitation, and
employment, as well as customary release of claims and non-disparagement provisions in favor of the Company, and a non-disparagement provision in favor of Mr. Pope.
In connection with Mr. Dudley’s retirement in FY 2023, Mr. Dudley and the Company entered into a Separation Agreement and General Release (the “Separation
Agreement”), dated September 30, 2022 (the “Effective Date”). Under the Separation Agreement, Mr. Dudley retired from the Company on the Effective Date and will be
entitled, subject to the terms and conditions therein, to the following payments and separation benefits: (i) a cash separation payment amount in accordance with Mr. Dudley’s
employment agreement; (ii) acceleration of vesting of Mr. Dudley’s 12,499 unvested restricted stock units as of the Effective Date; (iii) an additional cash severance payment
of $70,000;
60
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and (iv) Mr. Dudley has agreed to provide consulting services to the Company through December 31, 2022, to the extent requested by the Company, for which he will receive
a cash payment of $56,250. In addition, the Separation Agreement includes covenants related to cooperation, solicitation, and employment, as well as the customary release of
claims and non-disparagement provisions in favor of the Company.
During FY 2022 Bryan J. Merryman agreed to voluntarily step down as President and Chief Executive Officer (“CEO”) of the Company upon the hiring of a new President
and CEO for the Company. On May 5, 2022 the Company concluded its search for a new CEO with the announcement that Robert Sarlls will succeed Mr. Merryman as the
Company’s CEO beginning on May 9, 2022.
In connection therewith, the Company and Mr. Merryman entered into a letter agreement dated November 8, 2021 (the “Letter Agreement”), effective November 3, 2021 (the
“Effective Date”), amending that certain Second Restated Employment Agreement, dated as of February 26, 2019, by and between the Company and Mr. Merryman (the
“Current Employment agreement”). Pursuant to the Letter Agreement, among other things, Mr. Merryman agreed to (i) continue as Chief Financial Officer of the Company,
and (ii) until the Company hires a new President and CEO, as the interim President and CEO of the Company. Except as specifically set forth in the Letter Agreement, all the
terms and provisions of the Current Employment Agreement remain unmodified and in full force and effect. In addition, on November 3, 2021, the Compensation Committee
of the Board of Directors recommended, and the Board of Directors unanimously approved, the acceleration of vesting of approximately 66,667 unvested restricted stock
units previously granted to Mr. Merryman, such that the restricted stock units are fully vested as of November 3, 2021 (the “RSU Acceleration”). On July 7, 2022 Mr.
Merryman retired from the Company and all of the Company’s obligations under the Letter Agreement and the Current Employment Agreement were satisfied.
As a result of the above agreements, the Company incurred the following costs during the fiscal years ended February 29 or 28, 2024, 2023 and 2022:
Severance compensation:
Accelerated restricted stock unit compensation expense:
Reversal of previously recorded restricted stock unit compensation expense:
Consulting Services and Retirement Bonus:
$
2024
2023
692,295 $
74,956
(69,032 )
928,938 $
95,156
—
2022
1,344,813
525,000
—
501,000
56,250
-
Total
$
1,199,219 $
1,080,344 $
1,869,813
These costs are recognized as general and administrative expense in the Consolidated Statement of Operations.
NOTE 17 – DISCONTINUED OPERATIONS
On February 24, 2023 and May 1, 2023, the Company entered into agreements to sell: 1) all operating assets and inventory associated with the Company’s three U-Swirl
Company-owned locations, and 2) all franchise rights and intangible assets associated with the franchise operations of U-Swirl, respectively. The May 1, 2023 sale was
completed pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”), dated May 1, 2023, by and among the Company, as guarantor, U Swirl as seller, LLC
(“Purchaser”), a related company of Fosters Freeze, Inc., a California corporation. Pursuant to the Asset Purchase Agreement, on the Closing Date, Purchaser paid to U-Swirl
$2.75 million, consisting of approximately (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year secured promissory note in the aggregate original principal
amount of $1.0 million. As a result of these asset sales, the activities of the Company’s subsidiary, U-Swirl, which were previously recorded to the U-Swirl operating segment
are reported as discontinued operations in the consolidated statement of operations, consolidated balance sheet and consolidated statement of cash flows for all periods
presented. The majority of the assets and liabilities of U-Swirl met the accounting criteria to be classified as held for sale and were aggregated and reported on separate lines
of the respective statements.
61
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 31, 2023, the Company filed a certificate of dissolution with the Secretary of State of the State of Nevada with respect to U-Swirl. As a result, U-Swirl is
effectively fully dissolved and no longer in legal existence.
The following table discloses the results of operations of the businesses reported as discontinued operations for the years ended February 29 or 28, 2024, 2023 and 2022,
respectively:
Total Revenue
Cost of sales
Operating Expenses
Gain on disposal of assets
Other expense, net
Earnings from discontinued operations before
income taxes
Income tax provision
Earnings (loss) from discontinued operations, net of tax
FOR THE YEARS ENDED FEBRUARY 29 or 28,
2023
2024
2022
$
212,242 $
-
143,198
(634,790 )
-
703,834
-
703,834 $
$
3,128,368 $
654,353
2,048,129
-
-
425,886
618,308
(192,422 ) $
2,854,031
556,933
2,087,021
-
(137
210,214
52,194
158,020
The following table reflects the summary of assets and liabilities held for sale for U-Swirl as of February 29 or 28, 2024 and 2023, respectively:
Accounts and notes receivable, net
Inventory, net
Other
Current assets held for sale
Property and equipment, net
Franchise rights, net
Intangible assets, net
Deferred income taxes
Other
Long-term assets held for sale
Total Assets Held for Sale
Accounts payable
Accrued compensation
Accrued liabilities
Contract liabilities
Current liabilities held for sale
Contract liabilities, less current portion
Long term liabilities held for sale
Total Liabilities Held for Sale
AS OF FEBRUARY 29 or 28,
2023
2024
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
75,914
6,067
1,023
83,004
-
1,708,336
48,095
-
9,415
1,765,846
1,848,850
125,802
11,205
11,981
29,951
178,939
184,142
184,142
363,081
$
$
62
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the gain recognized during the year ended February 29, 2024 related to the sale of assets on May 1, 2023, as described above:
Cash proceeds from the sale of assets
Notes receivable
Total consideration received
Assets and liabilities transferred
Franchise rights
Inventory
Liabilities
Net assets transferred
Costs associated with the sale of assets
Gain on disposal of assets
$
1,757,738
1,000,000
2,757,738
1,703,325
6,067
(229,431 )
1,479,961
642,987
$
634,790
63
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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
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 our Interim Chief Executive Officer and Chief Financial Officer, has conducted an evaluation (pursuant to
Rule 13a-15(b) of the Exchange Act), as of February 29, 2024, of the Company’s disclosure controls and procedures. Based on that evaluation, our Interim Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of February 29, 2024.
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 our Interim Chief Executive Officer, has evaluated the effectiveness, as of February 29, 2024, 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 concluded that the Company’s internal control over financial reporting was effective as of February 29,
2024.
Under the applicable SEC rules, we are not required to include an attestation report of our independent registered public accounting firm, CohnReznick LLP, on the Company’s
internal control over financial reporting.
Changes in Internal Control over Financial Reporting — During the year ended February 28, 2023, we identified a material weakness in our internal controls resulting from
our finance department not being able to process and account for complex, non-routine transactions in accordance with GAAP. During the year ended February 29, 2024, we
retained the assistance of several accounting experts to assist us in the accounting and reporting of complex, non-routine transactions and ensure correct accounting under US
GAAP. As of February 29, 2024, management determined that the enhancements to the controls noted above have been in place for a sufficient period of time and has
concluded, through testing, that the material weakness identified in the prior year has been remediated.
Except as noted above, our management, including our Interim Chief Executive Officer, confirm that there were no other changes in our company's internal control over
financial reporting during the fiscal year ended February 29, 2024 that have materially affected, or are reasonably likely to materially affect, our company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
64
Table of Contents
During the three months ended February 29, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a Rule 10b5-1
trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K under the Securities Act).
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
65
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 Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120
days after February 29, 2024.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120
days after February 29, 2024.
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 Proxy Statement for our 2024 Annual Meeting of
Stockholders, to be filed no later than 120 days after February 29, 2024.
Equity Compensation Plan Information
The following table provides information with respect to the Company’s equity compensation plan, as of February 29, 2024, which consists solely of the Company’s 2007
Equity Incentive Plan:
Plan category
Equity compensation plans approved by the Company’s
stockholders
Equity compensation plans not approved by the Company’s
stockholders
Total
Number of
securities to
be issued
upon exercise
of outstanding
options, warrants
and rights (1)
Weighted-
average
exercise
price of
outstanding
options, warrants
and rights (1)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected
in column(a)) (2)
178,656
$
-0-
178,656
$
6.49
-0-
6.49
183,974
-0-
183,974
(1)Awards outstanding under the 2007 Equity Incentive Plan as of February 29, 2024 consist of 160,958 unvested restricted stock units and 17,698 outstanding stock options
with a weighted-average exercise price of $6.49.
(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 Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120
days after February 29, 2024.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders, to be filed no later than 120
days after February 29, 2024.
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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 (PCAOB ID No. 596)
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 166)
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
Year Ended February 29, 2024
Valuation Allowance for Accounts and Notes
Receivable
Year Ended February 28, 2023
Valuation Allowance for Accounts and Notes
Receivable
Year Ended February 28, 2022
Valuation Allowance for Accounts and Notes
Receivable
Page
35
37
38
39
40
41
Balance at
Beginning
of Period
Additions
Charged to
Costs & Exp.
Deductions
Balance at
End of
Period
763,905
112,922
515,039
361,788
983,022
(173,600 )
45,517
763,905
1,454,140
-
471,118
983,022
67
Table of Contents
3.Exhibits
The exhibits listed on the Exhibit Index are filed as part of this Form 10-K.
EXHIBIT INDEX
Exhibit
Number
Description
Incorporated by Reference or
Filed/Furnished Herewith
2.1
Asset Purchase Agreement, dated May 1, 2023, by and among U-Swirl
Exhibit 2.1 to the Current Report on Form 8-K filed on May 4, 2023 (File
International, Inc., a Nevada corporation, U Swirl, LLC, a Delaware limited
liability company, and Rocky Mountain Chocolate Factory, Inc., a Delaware
corporation
No. 001-36865)
3.1
3.2
4.1**
10.1**
Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate
Exhibit 3.1 to the Current Report on Form 8-K12G3 filed on March 2,
Factory, Inc., a Delaware corporation
2015 (File No. 001-36865)
Third Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc.
Exhibit 3.1 to the Current Report on Form 8-K filed on September 12,
Description of Securities
2023 (File No. 001-36865)
Filed herewith.
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
Form of Franchise Agreement for Rocky Mountain Chocolate Factory
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended
May 31, 2010 (File No. 000-14749)
10.3**
Rocky Mountain Chocolate Factory, Inc. 2007 Equity Incentive Plan (as
Exhibit 10.1 to the Current Report on Form 8-K filed on September 18,
Amended and Restated)
2020 (File No. 001-36865)
10.4**
Form of Indemnification Agreement (Directors)
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*
10.7
10.8
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)
Credit Agreement, dated October 13, 2021, between Wells Fargo Bank, National
Exhibit 10.3 to the Current Report on Form 8-K filed on October 6, 2022
Association and Rocky Mountain Chocolate Factory, Inc.
(File No. 001-36865)
First Amendment to Credit Agreement, dated September 26, 2022, between Wells
Fargo Bank, National Association and Rocky Mountain Chocolate Factory, Inc.
Exhibit 10.1 to the Current Report on Form 8-K filed on October 6, 2022
(File No. 001-36865)
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10.9
Second Amendment to Credit Agreement, dated September 20, 2023 by and
Exhibit 10.1 to the Current Report on Form 8-K filed on October 3, 2023
between Wells Fargo Bank, National Association and Rocky Mountain Chocolate
Factory, Inc.
(File No. 001-36865)
10.9
Revolving Line of Credit Note, dated September 28, 2023, between Wells Fargo
Exhibit 10.2 to the Current Report on Form 8-K filed on October 3, 2023
Bank, National Association and Rocky Mountain Chocolate Factory, Inc.
(File No. 001-36865)
10.10†
Settlement and Release Agreement, dated December 14, 2022, between Bradley
L. Radoff, Andrew T. Berger, AB Value Management LLC, Mary Bradley and
Rocky Mountain Chocolate Factory, Inc.
Exhibit 10.1 to the Current Report on Form 8-K filed on December 16,
2022 (File No. 001-36865)
10.11**
Offer Letter, dated May 3, 2022, between Rocky Mountain Chocolate Factory,
Exhibit 10.1 to the Current Report on Form 8-K filed on May 6, 2022
Inc. and Robert J. Sarlls.
(File No. 001-36865)
10.12**
Retirement Agreement and General Release, dated May 3, 2023, between Rocky
Mountain Chocolate Factory, Inc., a Delaware Corporation, and Gregory L. Pope
Exhibit 10.1 to the Current Report on Form 8-K filed on May 8, 2023
(File No. 001-36865)
10.13**
Offer Letter, dated July 15, 2022, between Rocky Mountain Chocolate Factory,
Exhibit 10.1 to the Current Report on Form 8-K filed on July 21, 2022
Inc. and Allen Arroyo
(File No. 001-36865)
10.14
10.15
10.16
Secured Promissory Note, dated May 1, 2023, by and between U Swirl, LLC, a
Delaware limited liability company, and U-Swirl International, Inc., a Nevada
corporation
Exhibit 10.1 to the Current Report on Form 8-K filed on May 4, 2023
(File No. 001-36865)
Security Agreement, dated May 1, 2023, by and among U-Swirl International,
Inc., a Nevada corporation, Bob Partners X, LLC, a Delaware limited liability
company, U Swirl, LLC, a Delaware limited liability company, U Swirl
Franchising LLC, a Delaware limited liability company, and U Swirl Gift Card
LLC
Pledge Agreement, dated May 1, 2023, by and among, U Swirl, LLC, a Delaware
limited liability company, U-Swirl International, Inc., a Nevada corporation, Bob
Partners X, LLC, a Delaware limited liability company, and certain persons
named therein
Exhibit 10.2 to the Current Report on Form 8-K filed on May 4, 2023
(File No. 001-36865)
Exhibit 10.3 to the Current Report on Form 8-K filed on May 4, 2023
(File No. 001-36865)
10.18
Waiver and Consent, dated August 3, 2023, to Settlement Agreement and Release Exhibit 10.1 to the Current Report on Form 8-K filed on August 7, 2023
(File No. 001-36865)
10.19
Covenant Breach Waiver, dated January 22, 2024, issued by Wells Fargo Bank,
Exhibit 10.3 to the Current Report on Form 8-K filed on January 26, 2024
N.A.,
(File No. 001-36865)
10.20
Offer Letter, dated March 25, 2024, by and between Rocky Mountain Chocolate
Exhibit 10.1 to the Current Report on Form 8-K filed on March 28, 2024
Factory, Inc. and Starlette B. Johnson
(File No. 001-36865
10.21
Separation Agreement, dated January 27, 2024, by and between Rocky Mountain
Filed herewith.
Chocolate Factory, Inc. and Robert J. Sarlls
21.1
23.1
Subsidiaries of the Registrant
Filed herewith.
Consent of Plante & Moran, PLLC Independent Registered Public Accounting
Filed herewith.
Firm
69
Table of Contents
23.2
31.1
32.1
97.1
101.INS
Consent of CohnReznick LLP Independent Registered Public Accounting Firm
Filed herewith.
Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith.
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002
Filed herewith.
Rocky Mountain Chocolate Factory, Inc. Clawback Policy
Inline XBRL Instance Document (the Instance Document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document) (1)
Filed herewith.
Filed herewith.
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents Filed herewith.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document
Filed herewith.
and contained in Exhibit 101)
* 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 required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
(1) These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange
Act of 1937, as amended, or otherwise subject to liability under those sections.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Date: June 13, 2024
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
/s/ Jeffrey R. Geygan
JEFFREY R. GEYGAN
Interim Chief Executive Officer
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 13, 2024
Date: June 13, 2024
Date: June 13, 2024
Date: June 13, 2024
/s/ Jeffrey R. Geygan
JEFFREY R. GEYGAN
Interim Chief Executive Officer
(Principal Executive Officer, Principal Financial Officer, and Principal
Accounting Officer)
/s/ Starlette B. Johnson
STARLETTE B. JOHNSON, Chair of Board
/s/ Steven L. Craig
STEVEN L. CRAIG, Director
/s/ Mark Riegel
MARK RIEGEL, Director
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DESCRIPTION OF CAPITAL STOCK
Rocky Mountain Chocolate Factory, Inc. (the “Company”) is incorporated in the State of Delaware and has one class of securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), which is our common stock, $0.001 par value per share (“Common Stock”). The rights of stockholders of
the Company are generally governed by Delaware law and the Company’s amended and restated certificate of incorporation (the “Certificate of Incorporation”) and Third
Amended and Restated Bylaws (the “Bylaws”). The following is a summary of the material provisions of the Certificate of Incorporation and Bylaws. This summary is not
complete and is qualified by reference to the full texts of the Certificate of Incorporation and Bylaws, copies of which are filed with the Securities and Exchange Commission
(“SEC”), as well as applicable provisions of the Delaware General Corporation Law (“DGCL”).
General
The authorized capital stock of the Company consists of 46,000,000 shares of Common Stock, and 250,000 shares of preferred stock, $0.001 par value per share
Exhibit 4.1
(“Preferred Stock”).
Common Stock
The holders of Common Stock are entitled to one vote per share on all matters to be voted on by the common stockholders, including the election of directors.
Except as provided by the terms of any outstanding Preferred Stock, our common stockholders will possess exclusive voting power. The holders of Common Stock are not
entitled to cumulative voting in the election of directors. Directors will be elected by a plurality of the votes cast in the election of directors at a duly called meeting at which a
quorum is present. The affirmative vote of a majority of the votes cast at a duly called meeting at which a quorum is present shall be sufficient to approve all other matters
which may properly come before the meeting, unless more than a majority of the votes cast is required by law or the Certificate of Incorporation.
Subject to preferences of any outstanding shares of Preferred Stock, the holders of Common Stock are entitled to receive ratably any dividends our Board of
Directors (“Board of Directors”) may declare out of funds legally available for the payment of dividends. If the Company is liquidated, dissolved or wound up, the holders of
Common Stock are entitled to share pro rata in all assets remaining after payment of, or provision for, the Company’s liabilities and liquidation preferences of any outstanding
shares of Preferred Stock. Holders of our Common Stock have no preemptive, subscription, redemption, sinking fund or conversion rights. The rights, preferences and
privileges of holders of our Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which we may
designate and issue in the future.
Preferred Stock
The Board of Directors has the authority, subject to limitations prescribed by law, without further action by the stockholders, to issue up to 250,000 shares of
Preferred Stock from time to time in one or more series and to establish the number of shares to be included in each such series. The Board of Directors also has the authority to
fix the designations, voting powers, preferences, privileges, rights and limitations of any series of Preferred Stock, including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of Common Stock. The
issuance of Preferred Stock may decrease the market price of the Company’s Common Stock.
Board of Directors
The Board of Directors is not classified and each of our directors is elected annually. Our Certificate of Incorporation provides that the number of directors may be
fixed only by the resolution of the Board of Directors. Subject to the rights of the holders of any outstanding Preferred Stock, any vacancy in the Board of Directors (including a
vacancy caused by an increase in the number of directors) may be filled solely by resolution adopted by a majority of our directors then in office, whether or not such majority
constitutes less than a quorum, or by a single remaining director. Subject to the rights of holders of any outstanding Preferred Stock to elect directors or to remove directors so
elected, a director may be removed only by the affirmative vote of the holders of at least a majority of the voting power of the outstanding capital stock entitled to vote in the
election of directors, voting as a single class.
Special Meetings of Stockholders
Subject to the rights of holders of any outstanding Preferred Stock, special meetings of stockholders may be called only (a) pursuant to a resolution approved by a
majority of the Board of Directors, (b) by the chair of the Board of Directors, or (c) by holders of at least 25% of all the shares entitled to vote at the meeting, provided that such
holders have continuously held at least 25% of all the shares entitled to vote at the meeting for a period of two years prior to such special meeting.
No Stockholder Action by Written Consent
The Certificate of Incorporation provides that stockholders may not take action by written consent in lieu of a meeting.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
Except as provided in Rule 14a-8 of the Exchange Act and under the “Proxy Access” heading below, a stockholder who intends to propose business or nominate
candidates for election as directors at an annual or special meeting of the stockholders of the Company must comply with the notice, informational requirements and procedures
set forth in our Certificate of Incorporation and Bylaws. For the notice to be timely in connection with an annual meeting, such notice must be received by the Secretary of the
Company at the principal executive offices of the Company not less than 90 nor more than 120 days prior to the one-year anniversary of the preceding year’s annual meeting.
However, in the event that the next annual meeting of stockholders is convened more than 30 days prior to or delayed by more than 30 days after the one-year anniversary of the
date of the prior year’s annual meeting, notice by the stockholder to be timely must be received by the Secretary of the Company at the principal executive offices of the
Company not later than the close of business on the later of the (i) 90th day before such annual meeting or (ii) 10th day following the date on which public announcement of the
date of the next annual meeting of stockholders is first made. To nominate a nominee for election to the Board of Directors at a special meeting at which directors are to be
elected, a stockholder’s notice must be received by the Secretary of the Company at the principal executive offices of the Company not later than the close of business on the
later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
Proxy Access
A qualifying stockholder, or a group of up to 20 such stockholders, owning at least 3% of the Company’s outstanding Common Stock throughout the three-year
period preceding and including the date of submission of a director nomination notice, and who continues to own at least 3% of the Company’s outstanding Common Stock
through the date of an annual meeting, may generally be able to nominate and include in the Company’s proxy materials for an annual meeting of stockholders, qualifying
director nominees constituting up to the greater of one nominee or 25% of the total number of directors of the Company on the last day on which a director nomination notice
may be submitted pursuant to the Bylaws; provided that the qualifying stockholder(s) and director nominee(s) satisfy the eligibility, procedural and other requirements specified
in the Bylaws, including that notice of a nomination be delivered to the Company not less than 120 days or more than 150 days before the first anniversary of the date that the
Company first sent its proxy statement or a notice of availability of proxy materials (whichever is earlier) to stockholders for the prior year’s annual meeting.
Amendment to the Certificate of Incorporation and the Bylaws
The Certificate of Incorporation may generally be amended by the affirmative vote of a majority of the holders of the outstanding stock entitled to vote, except with
respect to provisions regarding (i) the (a) Board of Directors, (b) stockholder meetings, and (c) the alteration, amendment, or repeal of the Certificate of Incorporation, which
may only be amended upon approval of holders of at least 66-2/3% of the voting power of all of the Company’s then-outstanding shares then entitled to vote in the election of
directors, voting together as a single class, and (ii) the limitation of director liability and indemnification, which may only be amended by the affirmative vote of the holders of
at least 80% of the voting power of the Company’s then-outstanding shares then entitled to vote in the election of directors, voting together as a single class. The Bylaws may
generally be amended by the Board of Directors or by stockholders upon approval of holders of at least 66-2/3% of the voting power of all of the Company’s then-outstanding
voting stock, voting together as a single class.
Limitations on Business Combinations with Interested Stockholders
We are also subject to Section 203 of the Delaware General Corporation Law which, subject to exceptions, prohibits a Delaware corporation from engaging in any
business combination with any “interested stockholder” for a period of three years following the date that a stockholder became an interested stockholder, unless:
• prior to that date, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested
stockholder;
• upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the
voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting
stock owned by the interested stockholder) (a) shares owned by persons who are directors and also officers, and (b) shares owned by employee stock plans in which
employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
• on or following that date the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, by the
affirmative vote of at least 66-2/3% of the outstanding voting stock that is not owned by the interested stockholder.
The term “interested stockholder” is defined generally as any person who is the owner of 15% or more of the Company’s outstanding voting stock or any person
who is an affiliate or associate of the Company and was the owner of 15% or more of the Company’s outstanding voting stock at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, and the affiliates and associates of such person.
Anti-Takeover Effects of Various Provisions
Certain provisions of the DGCL, our Certificate of Incorporation and our Bylaws summarized above may have an anti-takeover effect and could make the following
transactions more difficult: acquisition of the Company by means of a tender offer; acquisition of the Company by means of a proxy contest or otherwise; or removal of the
Company’s incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may
otherwise consider to be in their best interest or in the best interests of the Company, including transactions that might result in a premium over the market price for shares of our
Common Stock.
Transfer Agent
The transfer agent for the Common Stock is Computershare Trust Company, N.A. Its address is c/o Computershare Investor Services, 150 Royall St., Suite 101,
Canton, MA 02021 or P.O. Box 43078, Providence, RI 02940-3078 and its telephone number is (800) 962-4284.
Nasdaq Global Market Listing
Our Common Stock is listed on the Nasdaq Global Market under the trading symbol “RMCF.”
Exhibit 10.21
SEPARATION AGREEMENT AND GENERAL RELEASE
This Separation Agreement and General Release (hereinafter “Agreement”) is hereby entered into effective as of January 27, 2024
between ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. (hereinafter “the Company”) and ROBERT J. SARLLS (hereinafter “Mr.
Sarlls”), who are collectively referred to herein as the “Parties.” As set forth in more detail below, by signing this Agreement, Mr. Sarlls
understands that he, among other things, is giving up claims (both known and unknown) he might have against the Company, is releasing the
Company from all liability, and is agreeing not to file a lawsuit of any kind against the Company. In consideration of the mutual promises
contained herein, and other good and valuable consideration as hereinafter recited, the receipt and adequacy of which is hereby acknowledged,
the Parties, intending to be legally bound, agree as follows:
1.Effective as of January 27, 2024, the Company has involuntarily terminated the employment of Mr. Sarlls without Cause (as
defined in the employment agreement between the Company and Mr. Sarlls dated May 3, 2022) (the “Employment Agreement”). In
accordance with the Employment Agreement, Mr. Sarlls hereby resigns from the Company’s Board of Directors, and any positions held with
any affiliates of the Company, effective as of January 27, 2024.
2.In full and complete settlement of these matters, the Company agrees to provide the following payments and benefits to Mr. Sarlls
in accordance with the terms of the Employment Agreement:
(a)Base salary continuation for a period of fifteen (15) months on the Company’s regular payroll schedule, commencing
with the first paydate following January 27, 2024 (i.e., February 6, 2024) and ending on April 29, 2025. As of January 27, 2024, Mr. Sarlls’
annual base salary is $390,000, and therefore, the gross amount of each salary continuation payment will be $15,000. As set forth in the
Employment Agreement, no payments of base salary will be made until April 2, 2024, which is the first paydate occurring after the sixty (60)-
day period following January 27, 2024. Payments of base salary that would have been made on the regular payroll schedule during this sixty
(60) day period (gross amount of $60,000) shall be made on April 2, 2024, along with the $15,000 (gross amount) otherwise payable on that
date. The total amount of the base salary continuation payments under this Section 2(a) is $495,000.
(b)Accrued unused PTO in the gross amount of $37,500 payable on the February 7, 2024 paydate.
(c)If Mr. Sarlls elects COBRA health coverage continuation, the Company will reimburse Mr. Sarlls for, or pay directly, the
premium charged for such coverage, until the earliest to occur of (i) January 27, 2025, (ii) the date on which Mr. Sarlls obtains health
insurance coverage from another source, or (iii) the date on which Mr. Sarlls ceases to be eligible for COBRA health coverage continuation.
Mr. Sarlls agrees that he is not otherwise entitled to the payments and benefits described in Sections 2(a), and (c) above unless he
signs this Agreement and does not revoke it within the revocation period described in Section 22. Mr. Sarlls further agrees that, except as
provided in this Agreement, he is not entitled to any compensation, payments, reimbursement, equity, stock,
options, benefits or remuneration in any form from the Company or any Releasee (as defined below), including but not limited to any portion of
the annual cash incentive award for the fiscal year ending February 29, 2024, and that he has forfeited all of his outstanding nonvested equity
awards, which are as follows:
i.11,528 Time-Vested Stock Options granted May 9, 2022. (A total of 27,668 Time-Vested Options were granted
on this date, of which 16,140 have vested and remain exercisable in accordance with their terms, subject to the terms of the
stock option agreement regarding expiration of unexercised vested stock options following termination of employment.)
ii.27,130 Time-Vested Restricted Stock Units granted August 11, 2023.
iii.42,391 Performance-Vested Restricted Stock Units granted August 11, 2023.
3.Mr. Sarlls waives any right to future employment with the Company or any of its parents, subsidiaries, affiliates, or successors. Mr.
Sarlls further agrees never to apply for, seek, or pursue employment at, or election or appointment to the board of directors of, the Company or
any such related entities, and agrees that the Company or such related entities has no obligation to consider any such application.
4.Mr. Sarlls agrees that upon the separation of his employment with the Company, he will surrender, to the best of his abilities, to the
Company every item and every document that is the Company’s property (including but not limited to keys, credit cards, records, computers,
peripherals, computer files or storage media, notes, memoranda, models, inventory and equipment) or contains Company information, in
whatever form. All of these materials are the sole and absolute property of the Company.
5.All reference requests from Mr. Sarlls’s prospective employers shall be made in writing addressed to the attention of the Chair of
the Company’s Board of Directors, and shall include a written authorization signed by Mr. Sarlls for the release of the information. The
Company will provide to prospective employers Mr. Sarlls’s dates of employment, job title, and last annual compensation. Mr. Sarlls hereby
acknowledges that the Confidential and Proprietary Information, Inventions Assignment, Restrictive Covenant and Arbitration Agreement
between him and the Company shall remain in effect in accordance with its terms.
6.Mr. Sarlls will cooperate with any reasonable request by the Company in connection with any matter with which he was involved or
any existing or potential claim, investigation, administrative proceeding, lawsuit or other legal or business matter that arose during his
employment by the Company.
7.Mr. Sarlls agrees that, to the maximum extent permitted by law, and in consideration of the payments and consideration described
herein, he will, and hereby does, forever and irrevocably release and discharge the Company, its officers, directors, employees, independent
contractors, agents, affiliates, parents, subsidiaries, divisions, predecessors, employee benefit plans, purchasers, assigns, representatives,
successors and successors in interest (herein
2
collectively referred to as “Releasees”) from any and all claims, causes of action, damages of any kind, obligations, contracts, promises,
expenses, costs, attorneys’ fees, compensation, and liabilities, known or unknown, whatsoever which he now has, has had, or may have,
whether the same be at law, in equity, or mixed, in any way arising from or relating to any act, occurrence, or transaction on or before the date
of this Agreement, including without limitation his employment and separation of employment from the Company. This waiver and release
does not apply to any claim that may arise after the date that Mr. Sarlls signs this Agreement. THIS IS A GENERAL RELEASE. Mr. Sarlls
expressly acknowledges that this General Release includes, but is not limited to, Mr. Sarlls’s intent to release the Company from any claim
relating to his employment at the Company, including, but not limited to, tort and contract claims, wrongful discharge claims, pension claims,
employee benefit claims, severance benefits, statutory claims, compensation claims, claims for damages, claims under any state, local or
federal wage and hour law or wage payment or collection law, and claims of discrimination, retaliation or harassment based on age, race, color,
sex, religion, handicap, disability, national origin, ancestry, citizenship, marital status, sexual orientation, genetic information or any other
protected basis, or any other claim of employment discrimination, retaliation or harassment under the Age Discrimination In Employment Act
(29 U.S.C. §§ 626 et seq., “ADEA”), Title VII of the Civil Rights Acts of 1964 and 1991 as amended (42 U.S.C. §§ 2000e et seq.), the
Americans With Disabilities Act (42 U.S.C. §§ 12101 et m.), and any other law, statute, regulation or ordinance of any kind, including those
prohibiting employment discrimination or governing employment. The Parties agree that this General Release provision, and the covenant not
to sue provision below, survive and remain in full force and effect in the event the Company or any Releasee institutes an action or proceeding
against Mr. Sarlls for breach of any provision of this Agreement.
8.Mr. Sarlls represents and agrees that he has not, by himself or on his behalf, instituted, prosecuted, filed, or processed any litigation,
claims or proceedings against the Company or any Releasees. Mr. Sarlls agrees, to the maximum extent permitted by law, not to make or file
any lawsuits, complaints, or other proceedings against the Company or any Releasee or to join in any such lawsuits, complaints, or other
proceedings against the Company or Releasees concerning any matter relating to his employment with the Company or that arose on or prior to
the date of this Agreement. Nothing in this Agreement prohibits Mr. Sarlls from filing a charge with any government administrative agency
(such as the Equal Employment Opportunity Commission), or from testifying, assisting or participating in an investigation, hearing or
proceeding conducted by such agency; however, Mr. Sarlls waives the right to receive any individualized relief, such as reinstatement,
backpay, or other damages, in a lawsuit or administrative action brought by Mr. Sarlls or by any government agency on his behalf. Mr. Sarlls
agrees that if there is any complaint filed in any court or arbitral forum which seeks reinstatement, damages or other remedies for Mr. Sarlls
relating to any claim that is covered by this Agreement, Mr. Sarlls will immediately file a dismissal with prejudice of such claim or remedy.
9.Mr. Sarlls further agrees and covenants that, to the maximum extent permitted by law, he will not and has not, encourage or
voluntarily assist or aid in any way others in making or filing any lawsuits, complaints, or other proceedings against the Company, or any other
Releasee.
10.Nothing in this Agreement prevents Mr. Sarlls from discussing or disclosing information about unlawful acts in the workplace,
such as harassment or discrimination or any other conduct that Mr. Sarlls has reason to believe is unlawful.
3
11.Mr. Sarlls acknowledges and declares that he has been fully compensated for all work performed and time he has worked while
employed by the Company, and that he is not owed any compensation, wages, salary, payments, bonus, equity interest, remuneration or income
from the Company of any kind, including, but not limited to amounts under his Employment Agreement with the Company, except as provided
in this Agreement.
12.The Parties further agree that, in entering into this Agreement, the Company is expressly relying on the foregoing representations
by Mr. Sarlls, and that Mr. Sarlls is expressly relying on the foregoing representations of the Company. The Parties further agree that the
representations made by each party in the proceeding sections are admissions by each party and are admissible, if offered by the Company or
Mr. Sarlls, as a sworn statement of fact by the Company or Mr. Sarlls in any proceeding between the Parties.
13.The Parties agree that the above-mentioned consideration is not to be construed as an admission of any wrongdoing or liability on
the part of the either Party under any statute or otherwise, but that on the contrary, any such wrongdoing or liability is expressly denied by the
Parties.
14.Mr. Sarlls agrees that neither this Agreement nor the negotiations in pursuance thereof shall be construed or interpreted to render
Mr. Sarlls a prevailing party for any reason, including but not limited to an award of attorney’s fees, expenses or costs under any statute or
otherwise.
15.Mr. Sarlls agrees that, to the maximum extent permitted by law, the terms of this Agreement and the negotiations in pursuance
thereof are strictly confidential and shall not be disclosed, and have not been disclosed, to any person or entity. Mr. Sarlls may disclose the
Agreement to his attorneys, accountants and tax advisors who, as agents and representatives of Mr. Sarlls, also must keep the terms of this
Agreement strictly confidential.
16.Mr. Sarlls agrees that, to the maximum extent permitted by law, he will not and has not, by any verbal, written or electronic
expression or communication (including use of any social or professional networking websites and/or blogs), or by any deed or act of
communication, disparage, criticize, condemn or impugn the Company or Releasees, or their reputation or character, or any of their actions,
services, products, writings, policies, practices, procedures or advertisements.
17.Mr. Sarlls agrees that a violation or breach of his duties, obligations or covenants in this Agreement by Mr. Sarlls will support a
cause of action for breach of contract, and will entitle the Company to recover damages flowing from such breach, specifically including, but
not limited to, the recovery of any payments made to Mr. Sarlls under this Agreement, to stop any payments or obligations owing under this
Agreement, to recover the costs and attorneys’ fees the Company incurs to recover under this Section 17 and to obtain injunctive, monetary or
other relief permitted by law. It is expressly agreed that the non-exclusive damages set forth above in this Section 17 in the event of a breach
are not a penalty, but are fair and reasonable in light of the difficulty of proving prejudice to the Company in the event of such a breach.
4
18.The Parties further agree that this Agreement shall be binding upon and inure to the benefit of the personal representatives, heirs,
executors, and administrators of Mr. Sarlls and the heirs, executors, administrators, affiliates, successors, predecessors, subsidiaries, divisions,
officers, purchasers, agents, assigns, representatives, directors and employees of the Company, that this Agreement contains and comprises the
entire agreement and understanding of the Parties, that there are no additional promises, contracts, terms or conditions between the Parties
other than those contained herein, and that this Agreement shall not be modified except in writing signed by each of the Parties hereto.
19.The Parties agree that this Agreement and the rights and obligations hereunder shall be governed by, and construed in accordance
with, the laws of the State of Colorado regardless of any principles of conflicts of laws or choice of laws of any jurisdiction. The Parties agree
that the state courts of the State of Colorado and, if the jurisdictional prerequisites exist, the United States District Court for the District of
Colorado, shall have sole and exclusive jurisdiction and venue to hear and determine any dispute or controversy arising under or concerning
this Agreement. Mr. Sarlls and the Company hereby waive trial by jury as to any and all litigation arising out of and/or relating to this
Agreement.
20.If any terms of the above provisions of this Agreement are found null, void or inoperative, for any reason, the remaining
provisions will remain in full force and effect. The language of all parts of this Agreement shall in all cases be construed as a whole, according
to its fair meaning, and not strictly for or against either of the Parties.
21.Mr. Sarlls understands that he has twenty-one (21) days from the date of his receipt of this Agreement, which was January 31,
2024, to consider his decision to sign it, and that he may unilaterally waive this period at his election. Mr. Sarlls’s signature on this Agreement
constitutes an express waiver of the twenty-one (21) day period if affixed prior to the expiration of that period. By signing this Agreement, Mr.
Sarlls expressly acknowledges that his decision to sign this Agreement was knowing and voluntary and of his own free will. The Parties agree
that any revisions or modifications to this Agreement, whether material or immaterial, will not and did not restart this time period.
22.Mr. Sarlls acknowledges that he may revoke this Agreement only as it pertains to claims under the ADEA for up to and including
seven (7) days after his execution of this Agreement, and that the aspects of this Agreement regarding his release of claims under the ADEA
shall not become effective until the expiration of seven (7) days from the date of his execution of this Agreement. This provision regarding
revocation shall have no effect on the validity and enforceability of any other term, condition or provision of this Agreement, which becomes
effective when signed. In the event that Mr. Sarlls revokes this Agreement as it pertains to claims under the ADEA, the Parties agree that, in
lieu of the payments and benefits set forth in Sections 2(a) and (c) above, the Company will pay to Mr. Sarlls a lump sum of $5,000.00 (Five
Thousand Dollars), less all lawful deductions, the adequacy of which is hereby acknowledged. Mr. Sarlls accordingly agrees that, in the event
he revokes this Agreement as it pertains to claims under the ADEA, all other provisions of this Agreement (including without limitation the
release provisions in Section 7) are independently supported by adequate consideration and are fully enforceable. Mr. Sarlls expressly agrees
that, in order to be effective, his revocation pursuant to this Section 22 must be in writing and must actually be received by Mr. Jeffrey R.
Geygan, Chair of the Board of
5
Directors of the Company, by 5:00 p.m. Mountain Time on or before the seventh day following his execution of this Agreement.
23.The Parties agree that, to the extent that any provision of this Agreement is determined to be in violation of the Older Workers
Benefit Protection Act (“OWBPA”), it should be severed from the Agreement or modified to comply with the OWBPA, without affecting the
validity or enforceability of any of the other terms or provisions of the Agreement.
24.The Company hereby advises Mr. Sarlls to consult with an attorney prior to executing this Agreement.
25.Mr. Sarlls acknowledges, certifies and agrees: (a) that he has carefully read this Agreement and understands all of its terms; (b)
that he had a reasonable amount of time to consider his decision to sign this Agreement; (c) that in executing this Agreement he does not rely
and has not relied upon any representation or statement made by any of the Company’s agents, representatives, or attorneys with regard to the
subject matter, basis, or effect of the Agreement; (d) that he enters into this Agreement voluntarily, of his own free will, without any duress and
with knowledge of its meaning and effect; (e) that he is not owed any wages by the Company for work performed, whether as wages or salary,
overtime, bonuses or commissions, or for accrued but unused paid time off, and that Mr. Sarlls has been fully compensated for all hours
worked; (f) that Mr. Sarlls is not aware of any factual basis for a claim that the Company has defrauded the government of the United States or
of any State; (g) that Mr. Sarlls has incurred no work-related injuries; (h) that Mr. Sarlls has received all family or medical leave to which he
was entitled under the law; and (i) that Mr. Sarlls has been and hereby is advised to consult with legal counsel of Mr. Sarlls’s choice prior to
execution and delivery of this Agreement, and that Mr. Sarlls has done so or voluntarily elected not to do so. The Company is expressly relying
on the foregoing representations and admissions by Mr. Sarlls, and the Parties agree that such representations are admissible, if offered by the
Company, as sworn statements of fact by Mr. Sarlls in any proceeding between the Parties.
26.This Agreement may be executed in counterparts, each of which will be deemed an original but all of which together will
constitute one and the same instrument. An originally executed version of this Agreement that is scanned as an image file (e.g., Adobe PDF,
TIF, JPEG, etc.) and then delivered by one party to the other party via electronic mail as evidence of signature, shall, for all purposes hereof, be
deemed an original signature. In addition, an originally executed version of this Agreement that is delivered via facsimile by one party to the
other party as evidence of signature shall, for all purposes hereof, be deemed an original.
6
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above.
/s/ Robert J. Sarlls
Robert J. Sarlls
ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.
/s/ Jeffrey R. Geygan
Jeffrey R. Geygan,
Chair, Board of Directors
02/01/24
Date
01/27/24
Date
7
Subsidiary
Rocky Mountain Chocolate Factory, Inc.
U-Swirl, Inc.
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of Incorporation
Colorado
Nevada
Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in Rocky Mountain Chocolate Factory, Inc.’s Registration Statements on Form S-8 (File
Nos. 333-249485, 333-206534, 333-145986, and 333-191729) of our report dated May 30, 2023 relating to the consolidated financial
statements as of February 28, 2023 and for each of the years in the two-year period ended February 28, 2023, which appears in this Annual
Report on Form10-K.
Exhibit 23.1
/s/ Plante & Moran, PLLC
Cleveland, Ohio
June 13, 2024
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-249485, 333-206534, 333-145986, and 333-191729) of Rocky Mountain
Chocolate Factory, Inc. of our report dated June 13, 2024, with respect to the consolidated financial statements of Rocky Mountain Chocolate Factory, Inc. included in this
Annual Report (Form 10-K) for the fiscal year ended February 29, 2024
Exhibit 23.2
/s/ CohnReznick LLP
New York, New York
June 13, 2024
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey R. Geygan, certify that:
(1)I have reviewed this Annual Report on Form 10-K of Rocky Mountain Chocolate Factory, Inc.;
(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
(5)The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Date: June 13, 2024
By:
/s/ Jeffrey R. Geygan
Jeffrey R. Geygan, Interim Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Rocky Mountain Chocolate Factory, Inc. (the "Company") on Form 10-K for the fiscal year ended February 29, 2024 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey R. Geygan, Interim Chief Executive Officer of the Company certify, pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 13, 2024
By:
/s/ Jeffrey R. Geygan
Jeffrey R. Geygan, Interim Chief Executive Officer (Principal Executive
Officer and Principal Financial Officer)
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350 and is not being filed for purposes of Section 18 of the
Exchange Act, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation
language in such filing.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
CLAWBACK POLICY
Exhibit 97.1
The Compensation Committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of Rocky Mountain Chocolate
Factory, Inc. (the “Company”) has adopted the following Clawback Policy (the “Policy”) on November 9, 2023, effective as of October 2,
2023 (the “Effective Date”).
1.Purpose. The purpose of this Policy is to provide for the recoupment of certain incentive compensation pursuant to Section 954 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010, in the manner required by Section 10D of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), Rule 10D-1 promulgated thereunder, and the Applicable Listing Standards (as defined below)
(collectively, the “Dodd-Frank Rules”).
2.Administration. This Policy shall be administered by the Compensation Committee. Any determinations made by the Compensation
Committee shall be final and binding on all affected individuals.
3.Definitions. For purposes of this Policy, the following capitalized terms shall have the meanings set forth below.
(a)“Accounting Restatement” shall mean an accounting restatement of the Company’s financial statements due to the material
noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting
restatement (i) to correct an error in previously issued financial statements that is material to the previously issued financial statements (i.e., a
“Big R” restatement), or (ii) that would result in a material misstatement if the error were corrected in the current period or left uncorrected in
the current period (i.e., a “little r” restatement).
(b)“Affiliate” shall mean each entity that directly or indirectly controls, is controlled by, or is under common control with the
Company.
(c)“Applicable Exchange” shall mean (i) The Nasdaq Stock Market, if the Company’s securities are listed on such national stock
exchange, or (ii) the New York Stock Exchange, if the Company’s securities are listed on such national stock exchange.
(d)“Applicable Listing Standards” shall mean (i) Nasdaq Listing Rule 5608, if the Company’s securities are listed on The Nasdaq
Stock Market, or (ii) Section 303A.14 of the New York Stock Exchange Listed Company Manual, if the Company’s securities are listed on the
New York Stock Exchange.
(e)“Clawback Eligible Incentive Compensation” shall mean Incentive-Based Compensation Received by a Covered Executive (i) on
or after the Effective Date, (ii) after beginning service as a Covered Executive, (iii) if such individual served as a Covered Executive at any
time during the performance period for such Incentive-Based Compensation (irrespective of whether such individual continued to serve as a
Covered Executive upon or following the Restatement Trigger Date), (iv) while the Company has a class of securities listed on a national
securities exchange or a national securities association, and (v) during the applicable Clawback Period. For the avoidance of doubt, Incentive-
Based Compensation Received by a Covered Executive on or after the Effective Date could, by the terms of this Policy, include amounts
approved, awarded, or granted prior to such date.
(f)“Clawback Period” shall mean, with respect to any Accounting Restatement, the three completed fiscal years of the Company
immediately preceding the Restatement Trigger Date and any transition period (that results from a change in the Company’s fiscal year) within
or immediately following those three completed fiscal years (except that a transition period between the last day of the Company’s previous
fiscal year end and the first day of its new fiscal year that comprises a period of at least nine months shall count as a completed fiscal year).
(g)“Company Group” shall mean the Company and its Affiliates.
(h)“Covered Executive” shall mean any “executive officer” of the Company as defined under the Dodd-Frank Rules, and, for the
avoidance of doubt, includes each individual identified as an executive officer of the Company in accordance with Item 401(b) of Regulation S-
K under the Exchange Act.
(i)“Erroneously Awarded Compensation” shall mean the amount of Clawback Eligible Incentive Compensation that exceeds the
amount of Incentive-Based Compensation that otherwise would have been Received had it been determined based on the restated amounts,
computed without regard to any taxes paid. With respect to any compensation plan or program that takes into account Incentive-Based
Compensation, the amount contributed to a notional account that exceeds the amount that otherwise would have been contributed had it been
determined based on the restated amount, computed without regard to any taxes paid, shall be considered Erroneously Awarded Compensation,
along with earnings accrued on that notional amount.
(j)“Financial Reporting Measures” shall mean measures that are determined and presented in accordance with the accounting
principles used in preparing the Company’s financial statements, and all other measures that are derived wholly or in part from such measures.
Stock price and total shareholder return (and any measures that are derived wholly or in part from stock price or total shareholder return) shall
for purposes of this Policy be considered Financial Reporting Measures. For the avoidance of doubt, a measure need not be presented in the
Company’s financial statements or included in a filing with the U.S. Securities and Exchange Commission (the “SEC”) in order to be
considered a Financial Reporting Measure.
(k)“Incentive-Based Compensation” shall mean any compensation that is granted, earned or vested based wholly or in part upon the
attainment of a Financial Reporting Measure.
(l)“Received” shall mean the deemed receipt of Incentive-Based Compensation. Incentive-Based Compensation shall be deemed
received for this purpose in the Company’s fiscal period during which the Financial Reporting Measure specified in the applicable Incentive-
Based Compensation award is attained, even if payment or grant of the Incentive-Based Compensation occurs after the end of that period.
(m)“Restatement Trigger Date” shall mean the earlier to occur of (i) the date the Board, a committee of the Board, or the officer(s) of
the Company authorized to take such action
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if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting
Restatement, or (ii) the date a court, regulator or other legally authorized body directs the Company to prepare an Accounting Restatement.
4.Recoupment of Erroneously Awarded Compensation. Upon the occurrence of a Restatement Trigger Date, the Company shall recoup
Erroneously Awarded Compensation reasonably promptly, in the manner described below. For the avoidance of doubt, the Company’s
obligation to recover Erroneously Awarded Compensation under this Policy is not dependent on if or when restated financial statements are
filed following the Restatement Trigger Date.
(a)Process. The Compensation Committee shall use the following process for recoupment:
(i)First, the Compensation Committee will determine the amount of any Erroneously Awarded Compensation for each
Covered Executive in connection with such Accounting Restatement. For Incentive-Based Compensation based on (or derived from) stock
price or total shareholder return where the amount of Erroneously Awarded Compensation is not subject to mathematical recalculation directly
from the information in the applicable Accounting Restatement, the amount shall be determined by the Compensation Committee based on a
reasonable estimate of the effect of the Accounting Restatement on the stock price or total shareholder return upon which the Incentive-Based
Compensation was Received (in which case, the Company shall maintain documentation of such determination of that reasonable estimate and
provide such documentation to the Applicable Exchange).
(ii)Second, the Compensation Committee will provide each affected Covered Executive with a written notice stating the
amount of the Erroneously Awarded Compensation, a demand for recoupment, and the means of recoupment that the Company will accept.
(b)Means of Recoupment. The Compensation Committee shall have discretion to determine the appropriate means of recoupment of
Erroneously Awarded Compensation, which may include without limitation: (i) recoupment of cash or shares of Company stock, (ii) forfeiture
of unvested cash or equity awards (including those subject to service-based and/or performance-based vesting conditions), (iii) cancellation of
outstanding vested cash or equity awards (including those for which service-based and/or performance-based vesting conditions have been
satisfied), (iv) to the extent consistent with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), offset of other
amounts owed to the Covered Executive or forfeiture of deferred compensation, (v) reduction of future compensation, and (vi) any other
remedial or recovery action permitted by law. Notwithstanding the foregoing, the Company Group makes no guarantee as to the treatment of
such amounts under Section 409A and shall have no liability with respect thereto. For the avoidance of doubt, appropriate means of recoupment
may include amounts approved, awarded, or granted prior to the Effective Date. Except as set forth in Section 4(d) below, in no event may the
Company Group accept an amount that is less than the amount of Erroneously Awarded Compensation in satisfaction of a Covered Executive’s
obligations hereunder.
(c)Failure to Repay. To the extent that a Covered Executive fails to repay all Erroneously Awarded Compensation to the Company
Group when due (as determined in
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accordance with Section 4(a) above), the Company shall, or shall cause one or more other members of the Company Group to, take all actions
reasonable and appropriate to recoup such Erroneously Awarded Compensation from the applicable Covered Executive. The applicable
Covered Executive shall be required to reimburse the Company Group for any and all expenses reasonably incurred (including legal fees) by
the Company Group in recouping such Erroneously Awarded Compensation.
(d)Exceptions. Notwithstanding anything herein to the contrary, the Company shall not be required to recoup Erroneously Awarded
Compensation if one of the following conditions is met and the Compensation Committee determines that recoupment would be impracticable:
(i)The direct expense paid to a third party to assist in enforcing this Policy against a Covered Executive would exceed the
amount to be recouped, after the Company has made a reasonable attempt to recoup the applicable Erroneously Awarded Compensation,
documented such attempts, and provided such documentation to the Applicable Exchange;
(ii)Recoupment would violate home country law where that law was adopted prior to November 28, 2022, provided that,
before determining that it would be impracticable to recoup any amount of Erroneously Awarded Compensation based on violation of home
country law, the Company has obtained an opinion of home country counsel, acceptable to the Applicable Exchange, that recoupment would
result in such a violation and a copy of the opinion is provided to the Applicable Exchange; or
to employees, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.
(iii)Recoupment would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available
5.Reporting and Disclosure. The Company shall file all disclosures with respect to this Policy in accordance with the requirements of the
Dodd-Frank Rules.
6.Indemnification Prohibition. No member of the Company Group shall be permitted to indemnify any current or former Covered Executive
against (i) the loss of any Erroneously Awarded Compensation that is recouped pursuant to the terms of this Policy, or (ii) any claims relating
to the Company Group’s enforcement of its rights under this Policy. The Company may not pay or reimburse any Covered Executive for the
cost of third-party insurance purchased by a Covered Executive to fund potential recoupment obligations under this Policy.
7.Acknowledgment. To the extent required by the Compensation Committee, each Covered Executive shall be required to sign and return to
the Company the acknowledgement form attached hereto as Exhibit A pursuant to which such Covered Executive will agree to be bound by the
terms of, and comply with, this Policy. For the avoidance of doubt, each Covered Executive will be fully bound by, and must comply with, the
Policy, whether or not such Covered Executive has executed and returned such acknowledgment form to the Company.
8.Interpretation. The Compensation Committee is authorized to interpret and construe this Policy and to make all determinations necessary,
appropriate, or advisable for the administration of this Policy. The Compensation Committee intends that this Policy be interpreted consistent
with the Dodd-Frank Rules.
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9.Amendment; Termination. The Compensation Committee may amend or terminate this Policy from time to time in its discretion, including
as and when it determines that it is legally required to do so by any federal securities laws, SEC rule or the rules of any national securities
exchange or national securities association on which the Company’s securities are listed.
10.Other Recoupment Rights. The Compensation Committee intends that this Policy be applied to the fullest extent of the law. The
Compensation Committee may require that any employment agreement, equity award, cash incentive award, or any other agreement entered
into be conditioned upon the Covered Executive’s agreement to abide by the terms of this Policy. Any right of recoupment under this Policy is
in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company Group, whether arising
under applicable law, regulation or rule, pursuant to the terms of any other policy of the Company Group, pursuant to any employment
agreement, equity award, cash incentive award, or other agreement applicable to a Covered Executive, or otherwise (the “Separate Clawback
Rights”). Notwithstanding the foregoing, there shall be no duplication of recovery of the same Erroneously Awarded Compensation under this
Policy and the Separate Clawback Rights, unless required by applicable law.
11.Successors. This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors,
administrators or other legal representatives.
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Exhibit A
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
CLAWBACK POLICY
ACKNOWLEDGEMENT FORM
By signing below, the undersigned acknowledges and confirms that the undersigned has received and reviewed a copy of the Rocky Mountain
Chocolate Factory, Inc. Clawback Policy (the “Policy”). Capitalized terms used but not otherwise defined in this Acknowledgement Form (this
“Acknowledgement Form”) shall have the meanings ascribed to such terms in the Policy.
By signing this Acknowledgement Form, the undersigned acknowledges and agrees that the undersigned is and will continue to be subject to
the Policy and that the Policy will apply both during and after the undersigned’s employment with the Company Group. Further, by signing
below, the undersigned agrees to abide by the terms of the Policy, including, without limitation, by returning any Erroneously Awarded
Compensation to the Company Group reasonably promptly to the extent required by, and in a manner permitted by, the Policy, as determined
by the Compensation Committee of the Company’s Board of Directors in its sole discretion.
Sign: _____________________________
Name: [Employee]
Date: ______________________________
A-1