The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation), Aspen Leaf Yogurt, LLC (“ALY”), and U-Swirl International, Inc. (“U-Swirl”), and its 46%-owned subsidiary, U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at February 28, 2019:
|
|
Sold, Not Yet Open
|
|
|
Open
|
|
|
Total
|
|
Rocky Mountain Chocolate Factory
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned stores
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Franchise stores - Domestic stores and kiosks
|
|
|
4
|
|
|
|
183
|
|
|
|
187
|
|
International license stores
|
|
|
1
|
|
|
|
64
|
|
|
|
65
|
|
Cold Stone Creamery - co-branded
|
|
|
11
|
|
|
|
91
|
|
|
|
102
|
|
U-Swirl (Including all associated brands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned stores
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Company-owned stores - co-branded
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
Franchise stores - Domestic stores
|
|
|
-
|
|
|
|
87
|
|
|
|
87
|
|
Franchise stores - Domestic - co-branded
|
|
|
-
|
|
|
|
9
|
|
|
|
9
|
|
International license stores
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
|
16
|
|
|
|
442
|
|
|
|
458
|
|
Consolidation
Management accounts for the activities of the Company and its subsidiaries, and the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As described above, on January 14, 2013, the Company acquired a controlling interest in SWRL. Prior to January 14, 2013, the Company’s consolidated financial statements excluded the financial information of SWRL. Beginning on January 14, 2013, the results of operations, assets and liabilities of SWRL have been included in these consolidated financial statements. The Company foreclosed on all of the outstanding stock of U-Swirl International, Inc. as of February 29, 2016 in full satisfaction of the amounts owed under a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016 and concurrently the Company ceased to have financial control of U-Swirl, Inc. as of February 29, 2016. As of February 29, 2016, U-Swirl, Inc. had no assets. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $4.9 million at February 28, 2019.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Receivable
In the normal course of business, the Company extends credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At February 28, 2019, the Company had $391,831 of notes receivable outstanding and an allowance for doubtful accounts of $0 associated with these notes. The notes require monthly payments and bear interest rates ranging from 4.5% to 6%. The notes mature through November 2023 and approximately $375,000 of notes receivable are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or net realizable value. An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. This inventory reserve is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the first-in, first-out method.
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.
Income Taxes
The Company provides for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax bases of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward prior to its expiration, is more likely than not. Due to historical U-Swirl losses, prior to FY 2016 the Company established a full valuation allowance on the Company’s deferred tax assets. During FY 2016 the Company took possession of the outstanding equity in U-Swirl. As a result of the Company’s ownership increasing to 100%, the Company began filing consolidated income tax returns in FY 2017. Because of this change, the Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY 2016. During the fourth quarter of FY 2017 the Company further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section 382 of the Internal Revenue Code as a result of the foreclosure transaction. The correction of this immaterial error to the Company’s balance sheet is further described in Note 16. The Company's temporary differences are listed in Note 6.
Gift Card Breakage
The Company and its franchisees sell gift cards that are redeemable for product in stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.
There are no expiration dates on the Company’s gift cards, and the Company does not charge any service fees. While the Company’s franchisees continue to honor all gift cards presented for payment, the Company may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”) during FY 2019 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. Accrued gift card liability was $742,289 and $3,057,131 at February 28, 2019 and 2018, respectively. The Company recognized breakage of $139,188 and $0 during FY 2019 and FY 2018, respectively. See Note 17 to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC 606.
Goodwill
Goodwill arose from three transaction types. The first type was the result of the incorporation of the Company after its inception as a partnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. The Company has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was the purchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of the assets acquired. Finally, goodwill arose from business acquisitions, where the fair value of the consideration given for acquisition exceeded the fair value of the identified assets net of liabilities.
The Company performs a goodwill impairment test on an annual basis or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Recoverability of goodwill is evaluated through comparison of the fair value of each of the Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. On February 29, 2016 RMCF repossessed all stock in U-Swirl International, Inc. pledged as collateral on the SWRL Loan Agreement. This was the result of SWRL’s inability to repay the SWRL Loan Agreement and inability to cure defaults of financial covenants. As of February 29, 2016, U-Swirl had $1,930,529 of goodwill recorded as a result of past business acquisitions. In the fourth quarter of FY 2016, RMCF performed a test of impairment as a result of the change in ownership and the result of the Company’s test indicated a full impairment of the U-Swirl goodwill. The Company’s testing and impairment is described in Note 13 to the financial statements.
Franchise Rights
Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of 20 years.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales of products to franchisees and other customers are made at standard prices, without any bargain sales of equipment or supplies. Sales of products at retail stores are recognized at the time of sale.
Rebates
Rebates received from purveyors that supply products to the Company’s franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to Company-owned locations are offset against operating costs.
Shipping Fees
Shipping fees charged to customers by the Company’s trucking department are reported as sales. Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
Beginning in FY 2019, upon adoption of adoption of ASC 606, the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of 10 to 15 years. Prior to FY 2019, franchise fee revenue was recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of one percent (1%) of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. The Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from 2.5% to 6% of gross retail sales.
In certain instances, the Company is required to pay a portion of franchise fee revenue, or royalty fees to parties the Company has contracted with to assist in developing and growing a brand. The agreements generally include Development Agents, or commissioned brokers who are paid a portion of the initial franchise fee, a portion of the ongoing royalty fees, or both. When such agreements exist, the Company reports franchise fee and royalty fee revenues net of the amount paid, or due, to the agent/broker.
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
Revenue from one customer of our manufacturing segment represented approximately $3.1 million or 9% of our total revenues during the year ended February 28, 2019 compared to revenue of approximately $5.1 million or 13% of our total revenues during the year ended February 28, 2018. Our future results may be adversely impacted by further decreases in the purchases of this customer or the loss of this customer entirely.
Stock-Based Compensation
At February 28, 2019, the Company had one stock-based compensation plan, the Company’s 2007 Equity Incentive Plan, for employees and non-employee directors which authorized the granting of stock awards.
The Company recognized $519,772, $591,839, and $584,893 related to equity-based compensation expense during the years ended February 28, 2019, 2018 and 2017, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
Beginning March 1, 2017, the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement. Prior to March 1, 2017 tax benefits or expense resulting from the difference in the compensation cost recognized for stock options are reported as financing cash flows in the accompanying Statements of Cash Flows. The excess tax expense included in net cash provided by financing activities for the years ended February 28, 2017 was $34,128.
During FY 2019 and 2018, the Company granted no restricted stock units. There were no stock options granted to employees during FY 2019 or FY 2018. The restricted stock unit grants generally vest 17 to 20% annually over a period of five to six years. The Company recognized $463,795 of consolidated stock-based compensation expense related to grants made in prior years during FY 2019 compared with $532,739 in FY 2018 and $564,473 in FY 2017. Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 2019 was $114,183, which is expected to be recognized over the weighted average period of 0.4 years.
The Company issued 2,000 fully vested, unrestricted shares of stock to non-employee directors during the year ended February 28, 2019 compared to no shares issued during the year ended February 28, 2018 and 2,000 issued during the year ended February 28, 2017. In connection with these non-employee director stock issuances, the Company recognized $24,480, $0 and $20,420 of stock-based compensation expense during year ended February 28, 2019, 2018 and 2017, respectively.
During the year ended February 28, 2018, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense during the year ended February 28, 2018. During the year ended February 28, 2019, the Company issued 3,333 shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized $31,497 in stock-based compensation expense during the year ended February 28, 2019.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. Following the expiration of all outstanding options, during FY 2017, no stock options were excluded from diluted shares.
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to $275,441, $355,678, and $279,698 for the fiscal years ended February 28, 2019, 2018 and 2017, respectively. Total advertising expense for U-Swirl and its brands amounted to $168,000, $222,093, and $335,771 for the fiscal years ended February 28, 2019, 2018 and 2017, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes payable and notes receivable. The fair value of all instruments approximates the carrying value, because of the relatively short maturity of these instruments.
Recent Accounting Pronouncements
In August 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in Quarterly Reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Quarterly Report on Form 10-Q. The Company does not anticipate that the adoption of these SEC amendments will have a material effect on the Company’s financial position, results of operations, cash flows or stockholders’ equity.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt this guidance effective with the three month period ending May 31, 2019 (the first quarter of Fiscal Year 2020). The Company can elect to record a cumulative-effect adjustment as of the beginning of the year of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption. The Company anticipates ASU 2016-02 will have a material impact on the consolidated balance sheet. The impact of ASU 2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The cumulative adjustment to be recorded as right-of-use assets and operating lease liabilities, upon adoption, is expected to be in the range of $3,500,000 to $3,900,000.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in ASC 605 “Revenue Recognition.” ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also did not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard changed the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store opening and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10 to 15 years.
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 17 to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28:
|
|
2019
|
|
|
2018
|
|
Ingredients and supplies
|
|
$
|
2,612,954
|
|
|
$
|
2,764,727
|
|
Finished candy
|
|
|
1,983,854
|
|
|
|
2,371,610
|
|
U-Swirl food and packaging
|
|
|
44,696
|
|
|
|
63,843
|
|
Reserve for slow moving inventory
|
|
|
(371,147
|
)
|
|
|
(357,706
|
)
|
Total inventories
|
|
$
|
4,270,357
|
|
|
$
|
4,842,474
|
|
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28:
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
513,618
|
|
|
$
|
513,618
|
|
Building
|
|
|
5,031,395
|
|
|
|
4,905,103
|
|
Machinery and equipment
|
|
|
10,263,119
|
|
|
|
10,686,631
|
|
Furniture and fixtures
|
|
|
864,944
|
|
|
|
1,067,788
|
|
Leasehold improvements
|
|
|
1,131,659
|
|
|
|
1,568,260
|
|
Transportation equipment
|
|
|
422,458
|
|
|
|
434,091
|
|
Asset impairment
|
|
|
(30,000
|
)
|
|
|
(62,891
|
)
|
|
|
|
18,197,193
|
|
|
|
19,112,600
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(12,411,054
|
)
|
|
|
(12,946,360
|
)
|
Property and equipment, net
|
|
$
|
5,786,139
|
|
|
$
|
6,166,240
|
|
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2019, the Company had a $5.0 million working capital line of credit from Wells Fargo Bank, N.A., collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 50% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at LIBOR plus 2.25% (4.7% at February 28, 2019). At February 28, 2019, $5.0 million was available for borrowings under the line of credit, subject to borrowing base limitations. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2019, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2019 and the Company believes it is likely to be renewed on terms similar to current terms. At February 28, 2019 and 2018 there was no amount outstanding under this line of credit.
Effective January 16, 2014, the Company entered into a business loan agreement with Wells Fargo Bank, N.A. (the “Wells Fargo Loan Agreement”) for a $7.0 million long-term line of credit to be used to loan money to SWRL to fund the purchase price of business acquisitions by SWRL (the “Wells Fargo Loan”). The Company made its first draw of approximately $6.4 million on the Wells Fargo Loan on January 16, 2014 and the first draw was the amount outstanding at February 28, 2014. Interest on the Wells Fargo Loan is at a fixed rate of 3.75% and the maturity date is January 15, 2020. The Wells Fargo Loan may be prepaid without penalty at any time by the Company. The Wells Fargo Loan is collateralized by substantially all of the Company’s assets. Additionally, the Wells Fargo Loan is subject to various financial ratio and leverage covenants. As of February 28, 2019, the Company was in compliance with all such covenants. The Wells Fargo Loan Agreement also contains customary representations and warranties, covenants and acceleration provisions in the event of a default by the Company.
Long-term debt consists of the following at February 28:
|
|
2019
|
|
|
2018
|
|
Note payable in monthly installments of principal and interest at 3.75% per annum through December 2019 collateralized by sustantially all business assets
|
|
$
|
1,176,488
|
|
|
$
|
2,529,309
|
|
Less current maturities
|
|
|
1,176,488
|
|
|
|
1,352,893
|
|
Long-term obligations
|
|
$
|
-
|
|
|
$
|
1,176,416
|
|
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.
The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2020
|
|
$
|
318,000
|
|
2021
|
|
|
259,000
|
|
2022
|
|
|
249,000
|
|
2023
|
|
|
243,000
|
|
2024
|
|
|
249,000
|
|
Thereafter
|
|
|
175,000
|
|
Total
|
|
$
|
1,493,000
|
|
The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing locations are leased by the franchisee directly. The Company’s current policy is not to act as primary lessee on any further franchised locations, except in rare instances. At February 28, 2019, the Company was the primary lessee at four of the Company’s 313 domestic franchised stores.
In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease. The Company's liability as primary lessee on sublet franchise outlets, all of which is fully offset by sublease rentals, is as follows for the years ending February 28 or 29:
2020
|
|
$
|
92,000
|
|
2021
|
|
|
75,000
|
|
2022
|
|
|
21,000
|
|
Total
|
|
$
|
188,000
|
|
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Minimum rentals
|
|
$
|
1,030,536
|
|
|
$
|
1,270,240
|
|
|
$
|
944,938
|
|
Less sublease rentals
|
|
|
(572,000
|
)
|
|
|
(603,000
|
)
|
|
|
(318,000
|
)
|
Contingent rentals
|
|
|
22,800
|
|
|
|
26,100
|
|
|
|
25,200
|
|
|
|
$
|
481,336
|
|
|
$
|
693,340
|
|
|
$
|
652,138
|
|
In FY 2019, the Company renewed an operating lease for warehouse space in the immediate vicinity of its manufacturing operation. The following is a schedule, by year, of future minimum rental payments required under such lease for the years ending February 28 or 29:
2020
|
|
$
|
116,000
|
|
2021
|
|
|
121,000
|
|
2022
|
|
|
125,000
|
|
2023
|
|
|
129,000
|
|
2024
|
|
|
33,000
|
|
Total
|
|
$
|
524,000
|
|
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2020
|
|
$
|
323,000
|
|
2021
|
|
|
323,000
|
|
2022
|
|
|
257,000
|
|
2023
|
|
|
29,000
|
|
Total
|
|
$
|
932,000
|
|
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28:
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
325,229
|
|
|
|
225,992
|
|
|
|
220,791
|
|
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 2019, the Company was contracted for approximately $880,000 of raw materials under such agreements.
NOTE 6 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
653,226
|
|
|
$
|
1,916,720
|
|
|
$
|
1,411,127
|
|
State
|
|
|
142,570
|
|
|
|
220,164
|
|
|
|
272,214
|
|
Total Current
|
|
|
795,796
|
|
|
|
2,136,884
|
|
|
|
1,683,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(67,410
|
)
|
|
|
55,658
|
|
|
|
240,233
|
|
State
|
|
|
(11,524
|
)
|
|
|
(32,247
|
)
|
|
|
22,015
|
|
Total Deferred
|
|
|
(78,934
|
)
|
|
|
23,411
|
|
|
|
262,248
|
|
Total
|
|
$
|
716,862
|
|
|
$
|
2,160,295
|
|
|
$
|
1,945,589
|
|
A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years ended February 28 or 29:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Statutory rate
|
|
|
21.0
|
%
|
|
|
31.9
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
3.4
|
%
|
|
|
2.4
|
%
|
|
|
3.6
|
%
|
Domestic production deduction
|
|
|
0.0
|
%
|
|
|
(0.9
|
)%
|
|
|
(1.1
|
)%
|
Work opportunity tax credits
|
|
|
(0.7
|
)%
|
|
|
(0.2
|
)%
|
|
|
(0.4
|
)%
|
Other
|
|
|
0.5
|
%
|
|
|
0.8
|
%
|
|
|
0.0
|
%
|
Impact of tax reform
|
|
|
0.0
|
%
|
|
|
8.2
|
%
|
|
|
0.0
|
%
|
Effective rate - provision (benefit)
|
|
|
24.2
|
%
|
|
|
42.2
|
%
|
|
|
36.1
|
%
|
The components of deferred income taxes at February 28 are as follows:
|
|
2019
|
|
|
2018
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts and notes
|
|
$
|
120,368
|
|
|
$
|
124,469
|
|
Inventories
|
|
|
91,265
|
|
|
|
86,938
|
|
Accrued compensation
|
|
|
87,930
|
|
|
|
130,049
|
|
Loss provisions and deferred income
|
|
|
492,468
|
|
|
|
817,945
|
|
Self-insurance accrual
|
|
|
34,426
|
|
|
|
38,868
|
|
Amortization
|
|
|
217,481
|
|
|
|
520,379
|
|
Restructuring charges
|
|
|
98,693
|
|
|
|
98,728
|
|
U-Swirl accumulated net loss
|
|
|
325,253
|
|
|
|
258,173
|
|
Valuation allowance
|
|
|
(98,693
|
)
|
|
|
(98,728
|
)
|
Net deferred tax assets
|
|
$
|
1,369,191
|
|
|
$
|
1,976,821
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(682,542
|
)
|
|
|
(1,066,113
|
)
|
Prepaid expenses
|
|
|
(79,228
|
)
|
|
|
(75,245
|
)
|
Deferred Tax Liabilities
|
|
|
(761,770
|
)
|
|
|
(1,141,358
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
607,421
|
|
|
$
|
835,463
|
|
The following table summarizes deferred income tax valuation allowances as of February 28:
|
|
2019
|
|
|
2018
|
|
Valuation allowance at beginning of period
|
|
$
|
98,728
|
|
|
$
|
148,494
|
|
Tax expense (benefits) realized by valuation allowance
|
|
|
(35
|
)
|
|
|
-
|
|
Tax benefits released from valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Impact of tax reform
|
|
|
-
|
|
|
|
(49,766
|
)
|
Valuation allowance at end of period
|
|
$
|
98,693
|
|
|
$
|
98,728
|
|
Income tax expense and the effective income tax rate for the year ended February 28, 2019 decreased from the year ended February 28, 2018, primarily as a result of the revaluation of deferred tax assets and liabilities to the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act recognized during the year ended February 28, 2018 and the lower enacted U.S. corporate tax rate of 21% under the Tax Cuts and Jobs Act effective for the year ended February 28, 2019. The revaluation of deferred tax assets and liabilities resulted in income tax expense of approximately $421,000 recognized in consideration of the lower enacted rate for the year ended February 28, 2018.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2013. The Company’s federal income tax returns have been examined for the years ended February 28, 2015 and 2014 and the examination did not result in any changes to the income tax returns filed for these years. The Company’s federal income tax returns are being examined for the years ended February 28 or 29, 2017 and 2016.
Realization of the Company's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the appropriate tax jurisdictions, in future years to obtain benefit from the reversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. Management believes that, with the exception of the deferred tax asset related to restructuring charges, it is more likely than not that RMCF will realize the benefits of its deferred tax assets as of February 28, 2019.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations. The result of the assessment of the Company's tax positions did not have an impact on the consolidated financial statements for the years ended February 28, 2019 or 2018. The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28, 2019 and 2018.
As of February 29, 2016, the Company foreclosed on the outstanding equity of U-Swirl and U-Swirl was consolidated for income tax purposes. SWRL, along with U-Swirl has historically filed its own consolidated federal income tax return and reported its own Federal net operating loss carry forward. As of February 28, 2015, SWRL had recorded a full valuation allowance related to the realization of its deferred income tax assets. As of February 29, 2016, a portion of the U-Swirl deferred tax assets were recognized as a result of it becoming more likely than not that some of these assets would be realized in the future as a result of RMCF and U-Swirl filing a consolidated income tax return.
In accordance with Section 382 of the Internal Revenue Code, deductibility of SWRL’s and U-Swirl’s Federal net operating loss carryovers may be subject to annual limitation in the event of a change in control. The Company has performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl when the Company acquired its controlling ownership interest in January 2013 and again in February 2016 when the Company foreclosed on the stock of U-Swirl. The initial limitations will continue to limit deductibility of SWRL’s and U-Swirl’s net operating loss carryovers, but the annual loss limitation will be deductible to RMCF and U-Swirl International Inc. upon the filing of joint tax returns in FY 2017 and future years.
The Company estimates that the potential future tax deductions of U-Swirl’s Federal net operating losses, limited by section 382, to be approximately $1,323,000 with a resulting deferred tax asset of approximately $325,000. U-Swirl’s Federal net operating loss carryovers will expire at various dates beginning in 2026.
NOTE 7 – STOCKHOLDERS’ EQUITY
Cash Dividend
The Company paid a quarterly cash dividend of $0.12 per common share on March 16, 2018 to stockholders of record on March 6, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 15, 2018 to stockholders of record on June 5, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 14, 2018 to stockholders of record on September 4, 2018. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 7, 2018 to stockholders of record on November 23, 2018. The Company declared a quarterly cash dividend of $0.12 per share of common stock on February 14, 2019, which was paid on March 15, 2019 to stockholders of record on March 5, 2019.
Future declarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long-term interest of the Company’s stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During FY 2017, the Company repurchased 35,108 shares under the repurchase plan at an average price of $10.01 per share. The Company did not repurchase any shares during the years ended February 28, 2019 or 2018. As of February 28, 2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
NOTE 8 - STOCK COMPENSATION PLANS
In FY 2014, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards.
The following table summarizes stock awards under the 2007 Plan as of February 28, 2019:
Original share authorization:
|
|
|
300,000
|
|
Prior plan shares authorized and incorporated in the 2007 Plan:
|
|
|
85,340
|
|
Additional shares authorized through 2007 Plan amendment:
|
|
|
300,000
|
|
Available for award:
|
|
|
685,340
|
|
Cancelled/forfeited:
|
|
|
199,859
|
|
Shares awarded as unrestricted shares, stock options or restricted stock units:
|
|
|
(557,409
|
)
|
|
|
|
|
|
Shares available for award:
|
|
|
327,790
|
|
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2019, and changes for the three years then ended was as follows:
|
|
Twelve Months Ended
|
|
|
|
February 28:
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Outstanding stock options at beginning of year:
|
|
|
-
|
|
|
|
-
|
|
|
|
12,936
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,936
|
)
|
Outstanding stock options as of February 28:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Weighted average remaining contractual term (in years)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2019, and changes for the three years then ended was as follows:
|
|
Twelve Months Ended
|
|
|
|
February 28:
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Outstanding non-vested restricted stock units at beginning of year:
|
|
|
77,594
|
|
|
|
123,658
|
|
|
|
181,742
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(49,058
|
)
|
|
|
(44,064
|
)
|
|
|
(48,084
|
)
|
Cancelled/forfeited
|
|
|
(3,534
|
)
|
|
|
(2,000
|
)
|
|
|
(10,000
|
)
|
Outstanding non-vested restricted stock units as of February 28:
|
|
|
25,002
|
|
|
|
77,594
|
|
|
|
123,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
12.05
|
|
|
$
|
12.16
|
|
|
$
|
12.21
|
|
Weighted average remaining vesting period (in years)
|
|
|
0.38
|
|
|
|
1.27
|
|
|
|
2.23
|
|
NOTE 9 - OPERATING SEGMENTS
The Company classifies its business interests into five reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
FY 2019
|
|
Franchising
|
|
|
Manufacturing
|
|
|
Retail
|
|
|
U-Swirl
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
5,361,528
|
|
|
$
|
25,324,024
|
|
|
$
|
1,272,009
|
|
|
$
|
3,737,606
|
|
|
$
|
-
|
|
|
$
|
35,695,167
|
|
Intersegment revenues
|
|
|
(5,236
|
)
|
|
|
(1,144,484
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,149,720
|
)
|
Revenue from external customers
|
|
|
5,356,292
|
|
|
|
24,179,540
|
|
|
|
1,272,009
|
|
|
|
3,737,606
|
|
|
|
-
|
|
|
|
34,545,447
|
|
Segment profit (loss)
|
|
|
2,288,871
|
|
|
|
4,310,722
|
|
|
|
(52,009
|
)
|
|
|
(32,391
|
)
|
|
|
(3,559,532
|
)
|
|
|
2,955,661
|
|
Total assets
|
|
|
1,182,355
|
|
|
|
12,267,458
|
|
|
|
1,001,419
|
|
|
|
5,264,989
|
|
|
|
6,505,920
|
|
|
|
26,222,141
|
|
Capital expenditures
|
|
|
3,548
|
|
|
|
526,402
|
|
|
|
9,617
|
|
|
|
16,512
|
|
|
|
57,707
|
|
|
|
613,786
|
|
Total depreciation & amortization
|
|
$
|
46,369
|
|
|
$
|
573,846
|
|
|
$
|
32,762
|
|
|
$
|
952,178
|
|
|
$
|
104,644
|
|
|
$
|
1,709,799
|
|
FY 2018
|
|
Franchising
|
|
|
Manufacturing
|
|
|
Retail
|
|
|
U-Swirl
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
6,004,897
|
|
|
$
|
27,491,089
|
|
|
$
|
1,876,021
|
|
|
$
|
4,142,085
|
|
|
$
|
-
|
|
|
$
|
39,514,092
|
|
Intersegment revenues
|
|
|
(4,882
|
)
|
|
|
(1,434,515
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,439,397
|
)
|
Revenue from external customers
|
|
|
6,000,015
|
|
|
|
26,056,574
|
|
|
|
1,876,021
|
|
|
|
4,142,085
|
|
|
|
-
|
|
|
|
38,074,695
|
|
Segment profit (loss)
|
|
|
2,623,081
|
|
|
|
5,791,980
|
|
|
|
(37,102
|
)
|
|
|
542,073
|
|
|
|
(3,795,829
|
)
|
|
|
5,124,203
|
|
Total assets
|
|
|
1,157,158
|
|
|
|
12,729,659
|
|
|
|
1,134,876
|
|
|
|
8,125,171
|
|
|
|
5,793,771
|
|
|
|
28,940,635
|
|
Capital expenditures
|
|
|
15,429
|
|
|
|
429,545
|
|
|
|
33,056
|
|
|
|
11,899
|
|
|
|
55,027
|
|
|
|
544,956
|
|
Total depreciation & amortization
|
|
$
|
46,087
|
|
|
$
|
540,033
|
|
|
$
|
32,567
|
|
|
$
|
576,162
|
|
|
$
|
124,406
|
|
|
$
|
1,319,255
|
|
FY 2017
|
|
Franchising
|
|
|
Manufacturing
|
|
|
Retail
|
|
|
U-Swirl
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
5,951,055
|
|
|
$
|
26,678,514
|
|
|
$
|
1,710,734
|
|
|
$
|
5,216,076
|
|
|
$
|
-
|
|
|
$
|
39,556,379
|
|
Intersegment revenues
|
|
|
(5,332
|
)
|
|
|
(1,254,670
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,260,002
|
)
|
Revenue from external customers
|
|
|
5,945,723
|
|
|
|
25,423,844
|
|
|
|
1,710,734
|
|
|
|
5,216,076
|
|
|
|
-
|
|
|
|
38,296,377
|
|
Segment profit (loss)
|
|
|
2,495,709
|
|
|
|
5,609,957
|
|
|
|
128,024
|
|
|
|
1,017,395
|
|
|
|
(3,855,380
|
)
|
|
|
5,395,705
|
|
Total assets
|
|
|
1,216,241
|
|
|
|
12,900,070
|
|
|
|
1,101,461
|
|
|
|
9,124,822
|
|
|
|
5,075,762
|
|
|
|
29,418,356
|
|
Capital expenditures
|
|
|
15,480
|
|
|
|
966,619
|
|
|
|
17,047
|
|
|
|
40,924
|
|
|
|
198,402
|
|
|
|
1,238,472
|
|
Total depreciation & amortization
|
|
$
|
54,053
|
|
|
$
|
463,996
|
|
|
$
|
14,755
|
|
|
$
|
622,654
|
|
|
$
|
133,251
|
|
|
$
|
1,288,709
|
|
Revenue from one customer of the Company’s Manufacturing segment represented approximately $3.1 million, or 9.1 percent, of the Company’s revenues from external customers during the year ended February 28, 2019, compared to $5.1 million, or 13.4 percent of the Company’s revenues from external customers during the year ended February 28, 2018.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28 or 29:
Cash paid for:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Interest, net
|
|
$
|
52,102
|
|
|
$
|
102,640
|
|
|
$
|
129,927
|
|
Income taxes
|
|
|
638,252
|
|
|
|
2,431,884
|
|
|
|
1,997,751
|
|
Non-cash Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Inventory
|
|
|
52,918
|
|
|
|
258,247
|
|
|
|
531,017
|
|
Non-cash Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payable
|
|
$
|
714,939
|
|
|
$
|
708,652
|
|
|
|
702,525
|
|
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28, 2019, 2018 and 2017, the Company’s contribution was approximately $70,000, $68,000, and $66,000, respectively, to the plan.
NOTE 12 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscal years ended February 28, 2019 and 2018:
2019
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
Total revenue
|
|
$
|
8,366,085
|
|
|
$
|
7,800,088
|
|
|
$
|
8,949,747
|
|
|
$
|
9,429,527
|
|
|
$
|
34,545,447
|
|
Gross margin
|
|
|
1,916,807
|
|
|
|
1,852,435
|
|
|
|
1,882,975
|
|
|
|
1,312,026
|
|
|
|
6,964,243
|
|
Net income
|
|
|
576,944
|
|
|
|
750,815
|
|
|
|
525,361
|
|
|
|
385,679
|
|
|
|
2,238,799
|
|
Basic earnings per share
|
|
|
0.10
|
|
|
|
0.13
|
|
|
|
0.09
|
|
|
|
0.06
|
|
|
|
0.38
|
|
Diluted earnings per share
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
|
$
|
0.37
|
|
2018
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
Total revenue
|
|
$
|
9,346,447
|
|
|
$
|
8,266,691
|
|
|
$
|
9,961,572
|
|
|
$
|
10,499,985
|
|
|
$
|
38,074,695
|
|
Gross margin
|
|
|
2,191,974
|
|
|
|
2,210,910
|
|
|
|
2,311,579
|
|
|
|
2,276,586
|
|
|
|
8,991,049
|
|
Net income
|
|
|
813,672
|
|
|
|
928,284
|
|
|
|
751,056
|
|
|
|
470,896
|
|
|
|
2,963,908
|
|
Basic earnings per share
|
|
|
0.14
|
|
|
|
0.16
|
|
|
|
0.13
|
|
|
|
0.08
|
|
|
|
0.50
|
|
Diluted earnings per share
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
$
|
0.50
|
|
NOTE 13 – GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28:
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Amortization Period (Years)
|
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store design
|
|
|
10
|
|
|
|
$
|
220,778
|
|
|
$
|
214,152
|
|
|
$
|
220,778
|
|
|
$
|
212,653
|
|
Packaging licenses
|
|
3
|
-
|
5
|
|
|
|
120,830
|
|
|
|
120,830
|
|
|
|
120,830
|
|
|
|
120,830
|
|
Packaging design
|
|
|
10
|
|
|
|
|
430,973
|
|
|
|
430,973
|
|
|
|
430,973
|
|
|
|
430,973
|
|
Trademark/Non-competition agreements
|
|
5
|
-
|
20
|
|
|
|
715,339
|
|
|
|
223,628
|
|
|
|
715,339
|
|
|
|
136,087
|
|
Franchise rights
|
|
|
20
|
|
|
|
|
5,979,637
|
|
|
|
2,300,717
|
|
|
|
5,979,637
|
|
|
|
1,545,710
|
|
Total
|
|
|
|
|
|
|
|
7,467,557
|
|
|
|
3,290,300
|
|
|
|
7,467,557
|
|
|
|
2,446,253
|
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchising segment-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company stores goodwill
|
|
|
|
|
|
|
$
|
1,099,328
|
|
|
$
|
267,020
|
|
|
$
|
1,099,328
|
|
|
$
|
267,020
|
|
Franchising goodwill
|
|
|
|
|
|
|
|
295,000
|
|
|
|
197,682
|
|
|
|
295,000
|
|
|
|
197,682
|
|
Manufacturing segment-goodwill
|
|
|
|
|
|
|
|
295,000
|
|
|
|
197,682
|
|
|
|
295,000
|
|
|
|
197,682
|
|
Trademark
|
|
|
|
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
Total goodwill
|
|
|
|
|
|
|
|
1,709,328
|
|
|
|
662,384
|
|
|
|
1,709,328
|
|
|
|
662,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
|
$
|
9,176,885
|
|
|
$
|
3,952,684
|
|
|
$
|
9,176,885
|
|
|
$
|
3,108,637
|
|
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.
Amortization expense related to intangible assets totaled $844,320, $446,050, and $427,840 during the fiscal years ended February 28 or 29, 2019, 2018 and 2017, respectively.
During the year ended February 28, 2019 the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.
At February 28, 2019, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:
2020
|
|
$
|
706,177
|
|
2021
|
|
|
594,229
|
|
2022
|
|
|
490,060
|
|
2023
|
|
|
411,607
|
|
2024
|
|
|
345,642
|
|
Thereafter
|
|
|
1,629,542
|
|
Total
|
|
$
|
4,177,257
|
|
NOTE 14 – COSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
Costs associated with Company-owned store closures at February 28, 2019, 2018 and 2017 were comprised of the following:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Loss on distribution of assets
|
|
$
|
81,981
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Lease settlement costs
|
|
|
145,000
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
226,981
|
|
|
$
|
-
|
|
|
$
|
60,000
|
|
NOTE 15 – SUBSEQUENT EVENTS
On May 28, 2019, the Company announced that its Board of Directors has declared a first quarter FY2020 cash dividend of $0.12 per common share outstanding. The cash dividend will be payable June 14, 2019 to shareholders of record at the close of business June 4, 2019.
In March 2019, the Company’s Compensation Committee awarded 270,000 restricted stock units to eligible employees of the Company. The awards vest over a period of five to six years and have a grant date fair value of $2,536,100. Expense associated with these awards will be recognized over the vesting period.
NOTE 16 – IMMATERIAL REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the fourth quarter of FY 2017, the Company identified an immaterial error related to the overstatement of the income tax benefit and related deferred income tax asset accounts that impacted the Company’s previously issued annual consolidated financial statements. The adjustment relates to the foreclosure upon the interest in U-Swirl and the realization of U-Swirl deferred tax assets and refundable income taxes.
The Company determined that this error was not material to any of the Company’s prior annual consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, a revision for the correction is reflected in the February 28, 2017 financial information of the applicable prior periods in this Form 10-K. The error resulted in corrections to beginning retained earnings, accrued liabilities and deferred tax assets of $(492,766), $192,233 and $(300,533), respectively, on the Consolidated Balance Sheet as of February 28, 2017.
NOTE 17 – ADOPTION OF ASU 2014-09, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC 606”)
As described in Note 1, effective March 1, 2018, the Company adopted ASC 606. ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to our franchisees and others, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018, was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.
Gift Cards
The Company’s franchisees sell gift cards which do not have either expiration dates, or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
Impact to Prior Periods
The cumulative adjustment recorded upon adoption of ASC 606 consisted of net contract liabilities of approximately $1,022,720, a reduction in gift card liability of $2,250,743 and approximately $302,094 of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did not record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC 606 on March 1, 2018:
|
|
Amount
|
|
Increase in deferred revenue
|
|
$
|
(1,022,720
|
)
|
Reduction in gift card liabilities
|
|
|
2,250,743
|
|
Adjustment to deferred income tax assets
|
|
|
(302,094
|
)
|
|
|
|
|
|
Cumulative increase to retained earnings
|
|
$
|
925,929
|
|
The Company adopted ASC 606 as of March 1, 2018, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods.
The adoption of ASC 606 impacted the Company’s previously reported financial statements as follows:
|
|
CONSOLIDATED BALANCE SHEET
|
|
|
|
AS OF FEBRUARY 28, 2018
|
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,072,984
|
|
|
$
|
-
|
|
|
$
|
6,072,984
|
|
Accounts receivable, net
|
|
|
3,897,334
|
|
|
|
-
|
|
|
|
3,897,334
|
|
Notes receivable, current portion, net
|
|
|
105,540
|
|
|
|
-
|
|
|
|
105,540
|
|
Refundable income taxes
|
|
|
342,863
|
|
|
|
-
|
|
|
|
342,863
|
|
Inventories, net
|
|
|
4,842,474
|
|
|
|
-
|
|
|
|
4,842,474
|
|
Other
|
|
|
310,173
|
|
|
|
-
|
|
|
|
310,173
|
|
Total current assets
|
|
|
15,571,368
|
|
|
|
-
|
|
|
|
15,571,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
6,166,240
|
|
|
|
-
|
|
|
|
6,166,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable, less current portion, net
|
|
|
235,983
|
|
|
|
-
|
|
|
|
235,983
|
|
Goodwill, net
|
|
|
1,046,944
|
|
|
|
-
|
|
|
|
1,046,944
|
|
Franchise rights, net
|
|
|
4,433,927
|
|
|
|
-
|
|
|
|
4,433,927
|
|
Intangible assets, net
|
|
|
587,377
|
|
|
|
-
|
|
|
|
587,377
|
|
Deferred income taxes
|
|
|
835,463
|
|
|
|
(302,094
|
)
|
|
|
533,369
|
|
Other
|
|
|
63,333
|
|
|
|
-
|
|
|
|
63,333
|
|
Total other assets
|
|
|
7,203,027
|
|
|
|
(302,094
|
)
|
|
|
6,900,933
|
|
Total Assets
|
|
$
|
28,940,635
|
|
|
$
|
(302,094
|
)
|
|
$
|
28,638,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
1,352,893
|
|
|
|
-
|
|
|
$
|
1,352,893
|
|
Accounts payable
|
|
|
1,647,991
|
|
|
|
-
|
|
|
|
1,647,991
|
|
Accrued salaries and wages
|
|
|
644,005
|
|
|
|
-
|
|
|
|
644,005
|
|
Gift card liabilities
|
|
|
3,057,131
|
|
|
|
(2,250,743
|
)
|
|
|
806,388
|
|
Other accrued expenses
|
|
|
325,034
|
|
|
|
-
|
|
|
|
325,034
|
|
Dividend payable
|
|
|
708,652
|
|
|
|
-
|
|
|
|
708,652
|
|
Deferred revenue
|
|
|
471,910
|
|
|
|
(143,445
|
)
|
|
|
328,465
|
|
Total current liabilities
|
|
|
8,207,616
|
|
|
|
(2,394,188
|
)
|
|
|
5,813,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, Less Current Maturities
|
|
|
1,176,416
|
|
|
|
-
|
|
|
|
1,176,416
|
|
Deferred Revenue, Less Current Portion
|
|
|
-
|
|
|
|
1,166,165
|
|
|
|
1,166,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
5,903
|
|
|
|
-
|
|
|
|
5,903
|
|
Additional paid-in capital
|
|
|
6,131,147
|
|
|
|
-
|
|
|
|
6,131,147
|
|
Retained earnings
|
|
|
13,419,553
|
|
|
|
925,929
|
|
|
|
14,345,482
|
|
Total stockholders' equity
|
|
|
19,556,603
|
|
|
|
925,929
|
|
|
|
20,482,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
28,940,635
|
|
|
$
|
(302,094
|
)
|
|
$
|
28,638,541
|
|
The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
|
|
For the Years Ended February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Franchise Fees contained within the
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income:
|
|
$
|
335,028
|
|
|
$
|
681,613
|
|
|
$
|
324,718
|
|
Adjustment required to conform revenue to prior period method:
|
|
|
(53,528
|
)
|
|
|
-
|
|
|
|
-
|
|
Comparable franchise fees:
|
|
$
|
281,500
|
|
|
$
|
681,613
|
|
|
$
|
324,718
|
|
On February 28, 2019, annual revenue expected to be recognized in the future, related to performance obligations that are not yet fully satisfied, are estimated to be the following:
2020
|
|
$
|
256,093
|
|
2021
|
|
|
204,071
|
|
2022
|
|
|
190,524
|
|
2023
|
|
|
176,394
|
|
2024
|
|
|
137,477
|
|
Thereafter
|
|
|
388,013
|
|
Total
|
|
$
|
1,352,572
|
|
NOTE 18 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2019
|
|
Revenues recognized over time under ASC 606:
|
|
|
Franchising
|
|
|
Manufacturing
|
|
|
Retail
|
|
|
U-Swirl
|
|
|
Total
|
|
Revenues recognized over time under ASC 606:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise fees
|
|
$
|
199,362
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
135,666
|
|
|
$
|
335,028
|
|
Revenues recognized at a point in time:
|
|
|
Franchising
|
|
|
Manufacturing
|
|
|
Retail
|
|
|
U-Swirl
|
|
|
Total
|
|
Factory sales
|
|
|
-
|
|
|
|
24,179,540
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,179,540
|
|
Retail sales
|
|
|
-
|
|
|
|
-
|
|
|
|
1,272,009
|
|
|
|
2,112,245
|
|
|
|
3,384,254
|
|
Royalty and marketing fees
|
|
|
5,156,930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,489,695
|
|
|
|
6,646,625
|
|
Total
|
|
$
|
5,356,292
|
|
|
$
|
24,179,540
|
|
|
$
|
1,272,009
|
|
|
$
|
3,737,606
|
|
|
$
|
34,545,447
|
|