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”), U-Swirl International, Inc. (“U-Swirl”), and U-Swirl, Inc. (“SWRL”) (collectively, the “Company” or “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. 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 20 –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; and sales at Company-owned stores of chocolates and other confectionery products.
In FY 2020 and early FY 2021 we entered into a long-term strategic alliance and ecommerce agreements, respectively, with Edible Arrangements®, LLC and its affiliates (“Edible”), whereby it was intended that we would become the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Under the strategic alliance, Rocky Mountain Chocolate Factory branded products were intended to be available for purchase both on Edible’s website as well as through over 1,000 franchised Edible locations nationwide. In addition, due to Edible’s significant e-commerce expertise and scale, we have also executed an ecommerce licensing agreement with Edible, whereby Edible was expected to sell a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites. During FY 2022 certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements. On November 1, 2022, the Company sent a formal notice to Edible, terminating the Exclusive Supplier Operating Agreement, dated December 20, 2019 (“Exclusive Supplier Agreement”), by and between the Company and Edible, and the Ecommerce Licensing Agreement, dated March 16, 2020 (“Licensing Agreement”), by and between the Company and Edible. Subsequent to the termination of the Supplier Agreement and Licensing Agreement, the Company has no remaining material obligations under the Strategic Alliance Agreement, dated as of December 20, 2019, by and among the Company, Farids & Co. LLC and Edible; the Common Stock Purchase Warrant, dated December 20, 2019, issued to Edible; and the Indemnification Letter Agreement, dated March 16, 2020, by and between the Company and Edible. Purchases by Edible during FY 2023, 2022 and 2021 were approximately $557,000, $1.7 million and $3.5 million, or 1.8%, 5.8% and 16.1% of the Company’s revenues, respectively.
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand at February 28, 2023:
| | Stores Open at 2/28/2022 | | | Opened | | | Closed | | | Sold | | | Stores Open at 2/28/2023 | | | Sold, Not Yet Open | | | Total | |
Rocky Mountain Chocolate Factory | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company-owned stores | | | 2 | | | | - | | | | - | | | | (1 | ) | | | 1 | | | | - | | | | 1 | |
Franchise stores - Domestic stores and kiosks | | | 154 | | | | 5 | | | | (7 | ) | | | 1 | | | | 153 | | | | 6 | | | | 159 | |
International license stores | | | 5 | | | | - | | | | (1 | ) | | | - | | | | 4 | | | | 1 | | | | 5 | |
Cold Stone Creamery - co-branded | | | 97 | | | | 7 | | | | (3 | ) | | | - | | | | 101 | | | | - | | | | 101 | |
U-Swirl - co-branded | | | 9 | | | | 2 | | | | (1 | ) | | | - | | | | 10 | | | | - | | | | 10 | |
Total | | | 267 | | | | | | | | | | | | | | | | 269 | | | | 7 | | | | 276 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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. All intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. This amount was approximately $4.2 million on February 28, 2023.
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 a 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. On February 28, 2023, the Company had $191,725 of notes receivable outstanding and an allowance for doubtful accounts of $73,951 associated with these notes, compared to $120,967 of notes receivable outstanding and an allowance for doubtful accounts of $112,287 on February 28, 2022. 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. As of March 1 2021, the Company had $1,952,147 of accounts receivable.
Inventories
Inventories are stated at the lower of cost or net realizable value, which is adjusted for obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. The inventory value is determined through analysis of items held in inventory, and, if the recorded value is higher than the 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 liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax basis of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward prior to its expiration, is more likely than not. 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 14.
Gift Card Breakage
The Company and its franchisees sell gift cards that are redeemable for product in stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in current liabilities in our balance sheets.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 $592,932 and $574,883 at February 28, 2023 and February 28, 2022, respectively. The Company recognized breakage of $59,754 and $89,525 during FY 2023 and FY 2022, 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 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.
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 bases over a period ranging from 3 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
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
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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
On February 28, 2023, the Company had one stock-based compensation plan, the Company’s 2007 Equity Incentive Plan (as amended and restated), for employees and non-employee directors which authorized the granting of equity awards.
The Company recognized $651,016, $1,073,115, and $511,835 related to equity-based compensation expense during the years ended February 28, 2023, 2022 and 2021, respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.
During FY 2023, the Company granted 34,200 restricted stock units to non-employee directors with a grant date fair value of $194,940. During FY 2022, the Company granted 26,058 restricted stock units to non-employee directors with a grant date fair value of $221,496. There were no stock options granted to employees during FY 2023 or FY 2022. The restricted stock unit grants generally vest 17% to 20% annually, or 5% per quarter over a period of five to six years. The Company recognized $651,016 of consolidated stock-based compensation expense related to restricted stock unit grants and stock option grants during FY 2023 compared with $1,026,505 in FY 2022 and $511,835 in FY 2021. The total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of February 28, 2023 was $628,966, which is expected to be recognized over the weighted average period of 1.7 years.
The Company did not issue any unrestricted shares of stock to non-employee directors during the year ended February 28, 2023, compared to 9,000 shares issued during the year ended February 28, 2022 and no shares issued during the year ended February 29, 2021. In connection with these non-employee director stock issuances, the Company recognized $0, $46,610 and $0 of stock-based compensation expense during year ended February 28 or 29, 2023, 2022 and 2021, respectively.
During FY 2023, the Company issued 36,144 stock options and issued up to 94,892 performance-based restricted stock units subject to vesting based on the achievement of performance goals. These issuances were made to the Company’s new Chief Executive Officer and Chief Financial Officer as a part of the incentive compensation structure for Mr. Sarlls and Mr. Arroyo. 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. 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 28, 2023, 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 has the discretion to determine the number of performance-based restricted stock units between 0-200% of the target number that will vest based on the achievement of performance below or above the target performance goal.
During FY 2023 and FY 2022 the Company accelerated 12,499 and 66,667, respectively, of restricted stock units and recognized accelerated expense of $95,156 and $525,000, respectively. These restricted stock units were scheduled to vest through March 2025. The acceleration of the restricted stock units was the result of agreements entered into by the Company and former executives of the Company. See Notes 1, 12 and 19 for additional information on costs associated with the contested solicitation of proxies, change in control severance payments, and the acceleration of restricted stock unit vesting.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. Following the expiration of all outstanding options during FY 2017, no stock options were excluded from diluted shares.
The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include outstanding common shares issuable if their effect would be anti-dilutive. During the year ended February 28, 2023, 960,677 shares of common stock warrants and 137,294 shares of unvested restricted stock units 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 warrants and 147,422 shares of unvested restricted stock units were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. During the year ended February 28, 2021, 960,677 shares of common stock reserved for issuance under warrants and 217,103 shares of unvested restricted stock units were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expenses for RMCF amounted to $577,984, $210,103, and $265,285 for the fiscal years ended February 28, 2023, 2022 and 2021, 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. 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.
Recent Accounting Pronouncements
Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on our consolidated financial statements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments and affect the carrying value of accounts receivable. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2023, and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.
Subsequent Events
Except as described below, 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.
On May 1, 2023, subsequent to the end of fiscal year 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. (“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 the Company’s 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 20 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.
On May 8, 2023 the Company announced that Gregory L. Pope, 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 twenty-six 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, 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.
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28:
Cash paid (received) for: | | 2023 | | | 2022 | | | 2021 | |
Interest | | $ | 25,000 | | | $ | 5,202 | | | $ | 76,803 | |
Income taxes | | | (547,763 | ) | | | 240,890 | | | | (21,021 | ) |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 3 –REVENUE FROM CONTRACTS WITH CUSTOMERS
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 28, 2023 and February 28, 2022:
| | Twelve Months Ended | |
| | February 28: | |
| | 2023 | | | 2022 | |
Contract liabilities at the beginning of the year: | | $ | 962,572 | | | $ | 958,177 | |
Revenue recognized | | | (204,657 | ) | | | (179,678 | ) |
Contract fees received | | | 185,500 | | | | 206,000 | |
Amortized gain on the financed sale of equipment | | | - | | | | (21,927 | ) |
Contract liabilities at the end of the year: | | $ | 943,415 | | | $ | 962,572 | |
At February 28, 2023, 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:
2024 | | $ | 161,137 | |
2025 | | | 146,194 | |
2026 | | | 133,309 | |
2027 | | | 119,878 | |
2028 | | | 92,340 | |
Thereafter | | | 290,557 | |
Total | | $ | 943,415 | |
Gift Cards
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.
Factory 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.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 4 – DISAGGREGATION OF REVENUE
The following table presents disaggregated revenue by the method of recognition and segment:
For the Year Ended February 28, 2023 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues recognized over time: | | | | | |
| | Franchising | | | Manufacturing | | | Retail | | | Total | |
Franchise fees | | $ | 204,657 | | | $ | - | | | $ | - | | | $ | 204,657 | |
Revenues recognized at a point in time: | | | | | |
| | Franchising | | | Manufacturing | | | Retail | | | Total | |
Factory sales | | | - | | | | 23,372,133 | | | | - | | | | 23,372,133 | |
Retail sales | | | - | | | | - | | | | 1,084,777 | | | | 1,084,777 | |
Royalty and marketing fees | | | 5,770,785 | | | | - | | | | - | | | | 5,770,785 | |
Total | | $ | 5,975,442 | | | $ | 23,372,133 | | | $ | 1,084,777 | | | $ | 30,432,352 | |
For the Year Ended February 28, 2022 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues recognized over time: | | | | | |
| | Franchising | | | Manufacturing | | | Retail | | | Total | |
Franchise fees | | $ | 179,678 | | | $ | - | | | $ | - | | | $ | 179,678 | |
Revenues recognized at a point in time: | | | | | |
| | Franchising | | | Manufacturing | | | Retail | | | Total | |
Factory sales | | | - | | | | 22,374,175 | | | | - | | | | 22,374,175 | |
Retail sales | | | - | | | | - | | | | 1,160,295 | | | | 1,160,295 | |
Royalty and marketing fees | | | 5,774,400 | | | | - | | | | - | | | | 5,774,400 | |
Total | | $ | 5,954,078 | | | $ | 22,374,175 | | | $ | 1,160,295 | | | $ | 29,488,548 | |
For the Year Ended February 28, 2021 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues recognized over time: | | | | | |
| | Franchising | | | Manufacturing | | | Retail | | | Total | |
Franchise fees | | $ | 178,042 | | | $ | - | | | $ | - | | | $ | 178,042 | |
Revenues recognized at a point in time: | | | | | |
| | Franchising | | | Manufacturing | | | Retail | | | Total | |
Factory sales | | | - | | | | 17,321,001 | | | | - | | | | 17,321,001 | |
Retail sales | | | - | | | | - | | | | 896,793 | | | | 896,793 | |
Royalty and marketing fees | | | 3,367,345 | | | | - | | | | - | | | | 3,367,345 | |
Total | | $ | 3,545,387 | | | $ | 17,321,001 | | | $ | 896,793 | | | $ | 21,763,181 | |
NOTE 5 - INVENTORIES
Inventories consist of the following at February 28:
| | 2023 | | | 2022 | |
Ingredients and supplies | | $ | 2,481,510 | | | $ | 2,753,068 | |
Finished candy | | | 1,567,887 | | | | 2,168,084 | |
Reserve for slow moving inventory | | | (409,617 | ) | | | (623,269 | ) |
Total inventories | | $ | 3,639,780 | | | $ | 4,297,883 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28:
| | 2023 | | | 2022 | |
Land | | $ | 513,618 | | | $ | 513,618 | |
Building | | | 5,151,886 | | | | 5,148,854 | |
Machinery and equipment | | | 10,152,211 | | | | 9,582,157 | |
Furniture and fixtures | | | 512,172 | | | | 533,836 | |
Leasehold improvements | | | 134,010 | | | | 169,683 | |
Transportation equipment | | | 476,376 | | | | 479,701 | |
| | | 16,940,273 | | | | 16,427,849 | |
| | | | | | | | |
Less accumulated depreciation | | | (11,229,534 | ) | | | (10,976,661 | ) |
Property and equipment, net | | $ | 5,710,739 | | | $ | 5,451,188 | |
Depreciation expense related to property and equipment totaled $736,358, $710,804, and $751,396 during the fiscal years ended February 28, 2023, 2022 and 2021, respectively.
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following at February 28:
| | | | | | | | 2023 | | | 2022 | |
| | Amortization Period (in Years) | | | Gross Carrying Value | | | Accumulated Amortization | | | Gross Carrying Value | | | Accumulated Amortization | |
Intangible assets subject to amortization | | | | | | | | | | | | | | | | | | | | | | |
Store design | | | | 10 | | | | $ | 394,826 | | | $ | 259,314 | | | $ | 394,826 | | | $ | 240,409 | |
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 | | | | 259,339 | | | | 128,924 | | | | 259,339 | | | | 118,924 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | 1,205,968 | | | | 940,041 | | | | 1,205,968 | | | | 911,136 | |
Goodwill and intangible assets not subject to amortization | | | | | | | | | | | | | | | | | | | | | | |
Franchising segment | | | | | | | | | | | | | | | | | | | | | | |
Company stores goodwill | | | | | | | | $ | 360,972 | | | | | | | $ | 515,065 | | | | | |
Franchising goodwill | | | | | | | | | 97,318 | | | | | | | | 97,318 | | | | | |
Manufacturing segment-goodwill | | | | | | | | | 97,318 | | | | | | | | 97,318 | | | | | |
Trademark | | | | | | | | | 20,000 | | | | | | | | 20,000 | | | | | |
Total | | | | | | | | | 575,608 | | | | | | | | 729,701 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total Goodwill and Intangible Assets | | | | | | | $ | 1,781,576 | | | $ | 940,041 | | | $ | 1,935,669 | | | $ | 911,136 | |
Changes to goodwill during the fiscal year ended February 28, 2023 consist of the following:
| | Retail Segment | |
Balance as of February 28, 2022 | | | | |
Goodwill | | $ | 515,065 | |
Impairment losses | | | (84,183 | ) |
Goodwill written off related to sales of Company-owned stores | | | (69,910 | ) |
Balance as of February 28, 2023 | | $ | 360,972 | |
Amortization expense related to intangible assets totaled $28,905, $29,371, and $27,051 during the fiscal years ended February 28, 2023, 2022 and 2021, respectively.
At February 28, 2023, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:
2024 | | | 28,030 | |
2025 | | | 27,405 | |
2026 | | | 27,405 | |
2027 | | | 27,405 | |
2028 | | | 27,405 | |
Thereafter | | | 128,277 | |
Total | | $ | 265,927 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 8 – IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
We assess the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances indicate the carrying value of the assets or asset group may not be recoverable. During FY 2023 and FY 2021 these tests indicated the impairment of certain long-lived assets. During FY 2021, due to the significant impact of the COVID-19 pandemic on our operations, we recorded $533,000 of expenses associated with the testing of long-lived asset impairment. During FY 2023 we recorded $84,000 of expense associated with the testing of our long-lived assets as a result of the reduction in the number of Company-owned stores in operation and the resulting impairment of goodwill associated with the retail segment. This expense is presented within general and administrative expense on the Consolidated Statements of Operations.
The assessment of our goodwill, trademark and long-lived asset fair values includes many assumptions that are subject to risk and uncertainties. The primary assumptions, which are all Level 3 inputs of the fair value hierarchy (inputs to the valuation methodology that are unobservable and significant to the fair value measurement), used in our impairment testing consist of:
| ● | Expected future cash flows from the operation of our Company-owned store. |
| ● | Forecasted future royalty revenue, marketing revenue and associated expenses. |
| ● | The projected rate of royalty savings on trademarks. |
During FY 2023, 2022, and 2021, costs associated with the impairment of goodwill and long-lived assets consist of the following:
| | 2023 | | | 2022 | | | 2021 | |
Company store goodwill impairment | | $ | 84,183 | | | $ | 0 | | | $ | 317,243 | |
Trademark intangible asset impairment | | | - | | | | - | | | | 159,000 | |
Company-owned store impairment of long-lived assets | | | - | | | | - | | | | 57,100 | |
| | | | | | | | | | | | |
Total | | $ | 84,183 | | | $ | 0 | | | $ | 533,343 | |
NOTE 9 –NOTES PAYABLE AND REVOLVING CREDIT LINE
Paycheck Protection Program
During FY 2021 the Company received promissory notes pursuant to the Paycheck Protection Program (“PPP”), under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA Loans”). The Company received total proceeds of $1.4 million from SBA Loans. During FY 2021, approximately $1.4 million, representing all of the original loan proceeds, was forgiven by the SBA.
The amount of loan proceeds eligible for forgiveness was based on a formula based on a number of factors, including the amount of loan proceeds used by the Company during the period after the loan origination for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that, among other things, at least 60-75% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at a certain level. In accordance with the requirements of the CARES Act and the PPP, the Company believes it has used the proceeds from the SBA Loans for qualifying expenses.
Revolving Credit Line
The Company has a $5.0 million credit line for general corporate and working capital purposes, of which $5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2023. The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at SOFR plus 2.37% (6.92% at February 28, 2023). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2023, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2023.
NOTE 10 - STOCK COMPENSATION PLANS
In FY 2021, stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (as amended and restated, the “2007 Plan”). The 2007 Plan allows awards of stock options, stock appreciation rights, stock awards, restricted stock and stock units, performance shares and performance units, and other stock- or cash-based awards.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes stock awards under the 2007 Plan as of February 28, 2023:
Original share authorization: | | | 300,000 | |
Prior plan shares authorized and incorporated in the 2007 Plan: | | | 85,340 | |
Additional shares authorized through 2007 Plan amendments: | | | 600,000 | |
Available for award: | | | 985,340 | |
Cancelled/forfeited: | | | 244,647 | |
Shares awarded as unrestricted shares, stock options or restricted stock units: | | | (1,066,781 | ) |
| | | | |
Shares available for award: | | | 163,206 | |
Information with respect to restricted stock unit awards outstanding under the 2007 Plan at February 28, 2023, and changes for the three years then ended was as follows:
| | Twelve Months Ended | |
| | February 28: | |
| | 2023 | | | 2022 | | | 2021 | |
Outstanding non-vested restricted stock units at beginning of year: | | | 105,978 | | | | 209,450 | | | | 265,555 | |
Granted | | | 129,092 | | | | 26,058 | | | | - | |
Vested | | | (70,782 | ) | | | (127,130 | ) | | | (54,761 | ) |
Cancelled/forfeited | | | (10,157 | ) | | | (2,400 | ) | | | (1,344 | ) |
Outstanding non-vested restricted stock units as of February 28: | | | 154,131 | | | | 105,978 | | | | 209,450 | |
| | | | | | | | | | | | |
Weighted average grant date fair value | | $ | 5.23 | | | $ | 9.33 | | | $ | 9.40 | |
Weighted average remaining vesting period (in years) | | | 1.73 | | | | 2.26 | | | | 3.68 | |
Information with respect to stock option awards outstanding under the 2007 Plan at February 28, 2023, and changes for the three years then ended was as follows:
| | Twelve Months Ended | |
| | February 28: | |
| | 2023 | | | 2022 | | | 2021 | |
Outstanding stock options at beginning of year: | | | - | | | | - | | | | - | |
Granted | | | 36,144 | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | |
Cancelled/forfeited | | | - | | | | - | | | | - | |
Outstanding stock options as of February 28 or 29: | | | 36,144 | | | | - | | | | - | |
| | | | | | | | | | | | |
Weighted average exercise price | | | 6.49 | | | | n/a | | | | n/a | |
Weighted average remaining contractual term (in years) | | | 9.26 | | | | n/a | | | | n/a | |
NOTE 11 – LEASING ARRANGEMENTS
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.
The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing franchised locations are leased by the franchisee directly.
In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.
The following is a schedule of lease expense for all retail operating leases for the three years ended February 28:
| | 2023 | | | 2022 | | | 2021 | |
Minimum rentals | | $ | 106,203 | | | $ | 136,125 | | | $ | 189,696 | |
Less sublease rentals | | | (39,186 | ) | | | (60,254 | ) | | | (113,515 | ) |
Contingent rentals | | | 30,600 | | | | 22,800 | | | | 10,800 | |
| | $ | 97,617 | | | $ | 98,671 | | | $ | 86,981 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company also leases trucking equipment and warehouse space in support of its manufacturing operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.
The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28:
2023 | | | 2022 | | | 2021 | |
351,738 | | | | 270,767 | | | | 340,731 | |
As of February 28, 2023 and 2022 the Company was party to nine leasing arrangements for its retail operations, manufacturing facility, franchisees subleases, and trucking equipment as described above.
ASU 2016-02 Leases (Topic 842) allows, as a practical expedient, the retention of the classification of existing leases as operating or financing. All of the Company’s leases are classified as operating leases and that classification has been retained upon adoption. The Company does not believe the utilization of this practical expedient has a material impact on lease classifications.
The amount of the ‘Right of Use Asset’ and ‘Lease Liability’ recorded in the Consolidated Balance Sheets upon the adoption of ASU 2016-02 was $3.3 million. The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the life of its leases. This includes known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the sales performance of the location remains strong. Therefore, the ‘Right of Use Asset’ and ‘Lease Liability’ include an assumption on renewal options that have not yet been exercised by the Company, and are not currently a future obligation. The Company has separated non-lease components from lease components in the recognition of the ‘Right of Use Asset’ and ‘Lease Liability’ except in instances where such costs were not practical to separate. To the extent that occupancy costs, such as site maintenance, are included in the ‘Right of Use Asset’ and ‘Lease Liability,’ the impact is immaterial. For franchised locations, the related occupancy costs including property taxes, insurance and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee under non-store related leases such as storage facilities and trucking equipment. For leases where the implicit rate is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease. The weighted average discount rate used for operating leases was 3.4%, 3.1%, and 3.4% as of February 28, 2023, 2022 and 2021, respectively. The total estimated future minimum lease payments is $2.6 million.
As of February 28, 2023, maturities of lease liabilities for the Company’s operating leases were as follows:
FYE 24 | | $ | 760,952 | |
FYE 25 | | | 611,988 | |
FYE 26 | | | 514,346 | |
FYE 27 | | | 242,558 | |
FYE 28 | | | 71,671 | |
Thereafter | | | 390,450 | |
Total | | $ | 2,591,965 | |
| | | | |
Less: Imputed interest | | | (205,442 | ) |
Present value of lease liabilities: | | $ | 2,386,523 | |
The weighted average lease term at February 28, 2023, 2022, and 2021 was 5.5 years, 6.7 years and 6.9 years, respectively.
The following is a schedule of cash paid for lease liabilities for the three years ended February 28:
| | 2023 | | | 2022 | | | 2021 | |
Cash paid for amounts included in the measurement of lease liabilities | | | 572,079 | | | | 563,264 | | | | 530,137 | |
During the years ended February 28, 2023, 2022, and 2021 the Company entered into new leases representing a future lease liability of $1,472,667, $588,475, and $0, respectively.
The Company did not have any leases categorized as finance leases as of February 28, 2023 or February 28, 2022.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Employment Agreement Payments upon a Change in Control
We have entered into employment agreements with certain of our former executives which contain, among other things, "change in control" severance provisions.
The employment agreement of Mr. Dudley generally provides that, if the Company or the executive terminates the executive's employment under circumstances constituting a "triggering termination," the executive will be entitled to receive, among other benefits, 2.99 times the sum of (i) the executive's annual salary using the highest annual base compensation rate in effect at any time during employment and (ii) the greater of (a) two times the bonus that would be payable to the executive for the bonus period in which the change in control occurred or (b) 25% of the amount described in clause (i). The employment agreement of Mr. Dudley also provided for a payment of $18,000, which represents the estimated cost to the executive of obtaining accident, health, dental, disability, and life insurance coverage for the 18-month period following the expiration of COBRA coverage.
A “change in control,” as used in the agreement for Mr. Dudley, generally means a change in the control of the Company following any number of events, but specifically, a proxy contest in which our Board of Directors prior to the transaction constitutes less than a majority of our Board of Directors after the transaction or the members of our Board of Directors during any consecutive two-year period who at the beginning of such period constituted the Board of Directors cease to be the majority of the Board of Directors at the conclusion of that period. We have determined that a change in control has taken place on October 6, 2021. A “triggering termination” generally occurs when an executive is terminated during a specified period preceding a change in control of us, or if the executive or the Company terminates the executive’s employment under circumstances constituting a triggering termination during a specified period after a change in control. A triggering termination may also include a voluntary termination under certain scenarios.
In connection with Mr. Dudley’s retirement, 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; 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.
Mr. Sarlls’ employment agreement provides for the following upon “change in control”: If Mr. Sarlls’ employment is involuntarily terminated without cause or if he resigns for good reason on or within 2 years following consummation of a change in control, the cash severance amount (15 months of base salary) which would otherwise be payable on the regular payroll schedule over a 15-month period following separation (if severance were due outside the change in control context) will be accelerated and paid in a lump sum promptly following separation. Mr. Sarlls’ agreement incorporates by reference the change in control definition set forth in Treasury Regulation Section 1.409A-3(i)(5).
Mr. Arroyo’s employment agreement provides for the following upon “change in control”: If Mr. Arroyo’s employment is involuntarily terminated without cause or if he resigns for good reason on or within 2 years following consummation of a change in control, the cash severance amount (9 months of base salary) which would otherwise be payable on the regular payroll schedule over a 9-month period following separation (if severance were due outside the change in control context) will be accelerated and paid in a lump sum promptly following separation. Mr. Arroyo’s agreement incorporates by reference the change in control definition set forth in Treasury Regulation Section 1.409A-3(i)(5).
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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, 2023, the Company was contracted for approximately $384,000 of raw materials under such agreements. The Company has designated these contracts as normal under the normal purchase and sale exception under the accounting standards for derivatives. These contracts are not entered into for speculative purposes.
Litigation
From time to time, the Company is involved in litigation relating to claims arising out of its operations. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. At February 28, 2023, the Company was not a party to any legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or operating results.
NOTE 13 – STOCKHOLDERS’ EQUITY
Redemption of Preferred Stock Purchase Rights
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 consideration of Edible entering into the exclusive supplier agreement and the performance of its obligations therein, on December 20, 2019, the Company issued Edible a warrant (the “Warrant”) to purchase up to 960,677 shares of the Company’s common stock (the “Warrant Shares”) at an exercise price of $8.76 per share. The Warrant Shares vest in annual tranches in varying amounts following each contract year under the exclusive supplier agreement, subject to, and only upon, Edible’s achievement of certain revenue thresholds on an annual or cumulative five-year basis in connection with its performance under the exclusive supplier agreement. The Warrant expires six months after the final and conclusive determination of revenue thresholds for the fifth contract year and the cumulative revenue determination in accordance with the terms of the Warrant. As of February 28, 2023, no warrants have vested and subsequent to the termination by the Company of the Exclusive Supplier Agreement on November 1, 2022, the Company has no remaining material obligations under the Warrant.
The Company determined that the grant date fair value of the warrants was de minimis and did not record any amount in consideration of the warrants. The Company utilized a Monte Carlo model for purposes of determining the grant date fair value.
NOTE 14 - INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended February 28:
| | 2023 | | | 2022 | | | 2021 | |
Current | | | | | | | | | | | | |
Federal | | $ | (116,792 | ) | | $ | 204,058 | | | $ | (294,368 | ) |
State | | | 8,472 | | | | 46,704 | | | | 44,643 | |
Total Current | | | (108,320 | ) | | | 250,762 | | | | (249,725 | ) |
| | | | | | | | | | | | |
Deferred | | | | | | | | | | | | |
Federal | | | 621,841 | | | | (231,430 | ) | | | (425,580 | ) |
State | | | 100,322 | | | | (36,144 | ) | | | (70,190 | ) |
Total Deferred | | | 722,163 | | | | (267,574 | ) | | | (495,770 | ) |
Total | | $ | 613,843 | | | $ | (16,812 | ) | | $ | (745,495 | ) |
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 28:
| | 2023 | | | 2022 | | | 2021 | |
Statutory rate | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % |
State income taxes, net of federal benefit | | | 2.9 | % | | | 3.8 | % | | | 4.3 | % |
Paycheck Protection Program debt forgiveness | | | 0.0 | % | | | 0.0 | % | | | 28.7 | % |
Work opportunity tax credits | | | 0.0 | % | | | (1.2 | )% | | | 0.3 | % |
Equity compensation tax expense | | | (0.7 | )% | | | (8.2 | )% | | | (2.5 | )% |
Compensation and benefits permanent differences | | | (3.2 | )% | | | (1.9 | )% | | | 0.0 | % |
Other | | | 0.7 | % | | | 0.1 | % | | | 0.6 | % |
Valuation allowance | | | (33.3 | )% | | | 0.0 | % | | | 0.0 | % |
Impact of CARES act | | | 0.0 | % | | | (10.3 | )% | | | 12.1 | % |
Effective tax rate | | | (12.6 | )% | | | 3.3 | % | | | 64.5 | % |
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 effective income tax rate for the year ended February 28, 2021 was a result of debt forgiveness income being realized with no associated income tax expense and the revaluation of a portion of deferred tax assets as a result of the Company realizing a taxable loss during FY 2021 that can be carried back to prior periods with a higher effective income tax rate.
The components of deferred income taxes at February 28 are as follows:
| | 2023 | | | 2022 | |
Deferred Tax Assets | | | | | | | | |
Allowance for doubtful accounts and notes | | $ | 182,031 | | | $ | 225,515 | |
Inventories | | | 100,725 | | | | 153,262 | |
Accrued compensation | | | 158,652 | | | | 429,076 | |
Loss provisions and deferred income | | | 340,652 | | | | 379,069 | |
Self-insurance accrual | | | 24,098 | | | | 27,049 | |
Amortization | | | - | | | | - | |
Restructuring charges | | | 98,693 | | | | 98,693 | |
Accumulated net losses | | | 1,669,288 | | | | 445,560 | |
Valuation allowance | | | (1,721,306 | ) | | | (98,693 | ) |
Net deferred tax assets | | $ | 852,833 | | | $ | 1,659,531 | |
| | | | | | | | |
Deferred Tax Liabilities | | | | | | | | |
Depreciation and amortization | | | (771,593 | ) | | | (860,318 | ) |
Prepaid expenses | | | (81,240 | ) | | | (77,050 | ) |
Deferred Tax Liabilities | | | (852,833 | ) | | | (937,368 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | - | | | $ | 722,163 | |
The following table summarizes deferred income tax valuation allowances as of February 28:
| | 2023 | | | 2022 | |
Valuation allowance at beginning of period | | $ | 98,693 | | | $ | 98,693 | |
Tax expense realized by valuation allowance | | | 1,622,613 | | | | - | |
Valuation allowance at end of period | | $ | 1,721,306 | | | $ | 98,693 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Under the recently enacted CARES Act a net operating loss (“NOL”) arising during the Company’s fiscal year 2021 can be carried back for five years to offset the Company’s taxable income for fiscal years 2016-2020. This five-year period spans Federal effective tax rates for the Company ranging from 21% to 34%, the result of the Tax Cuts and Jobs Act enacted during the Company’s fiscal year ended February 28, 2018. During FY 2022 the Company filed returns necessary to carry back FY 2021 losses to offset the Company’s taxable income in prior years. As a result, approximately $317,000 was included in refundable income taxes at February 28, 2022.
The Company’s deferred tax assets are valued at the current federally enacted rate of 21%. The loss carryback provisions of the CARES Act will enable the Company to offset taxable income from prior years when federally enacted tax rates were higher than 21%. As a result, the Company incurred a gain associated with the revaluation of the Company’s deferred tax assets in the amount of $148,000 during FY 2021.
In December 2020 the Consolidated Appropriations Act, 2021 (bill) inclusive of additional coronavirus aid was signed into law. Among the many provisions of the bill, expenses related to the receipt of paychecks protection program funds (“PPP”) that were previously determined to be non-deductible by the Internal Revenue Service (“IRS”) may now be deducted for federal income tax purposes. As a result, the Company realized debt forgiveness income of $1.4 million during FY 2021 with no associated income taxes.
The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2018.
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. We evaluate, 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. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change.
During FY 2023, FY 2022, and FY 2021, the Company incurred significant losses before income taxes, primarily as a result of substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 and 2021 annual meetings of stockholders. 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.
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, 2023 or 2022. 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, 2023 and 2022.
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.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Income tax provision (benefit) allocated to continuing operations and discontinued operations for the years ended February 28, 2023, 2022 and 2021 was as follows:
| | 2023 | | | 2022 | | | 2021 | |
Continuing operations | | $ | 613,843 | | | $ | (16,812 | ) | | $ | (745,495 | ) |
Discontinued operations | | | 618,308 | | | | 52,194 | | | | (146,419 | ) |
Total tax provision (benefit) | | $ | 1,232,151 | | | $ | 35,382 | | | $ | (891,914 | ) |
NOTE 15 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’s contribution up to a maximum of 1.5% of the employee’s compensation. During the years ended February 28, 2023, 2022 and 2021, the Company’s contribution was approximately $68,000, $67,000, and $62,000, respectively, to the plan.
NOTE 16 - OPERATING SEGMENTS
The Company classifies its business interests into four reportable segments: Rocky Mountain Chocolate Factory, Inc. Franchising, Manufacturing, Retail Stores, and Other, which is the basis upon which the Company’s chief operating decision maker evaluates the Company’s performance. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differences in products and services:
FY 2023 | | Franchising | | | Manufacturing | | | Retail | | | Other | | | Total | |
Total revenues | | $ | 5,980,945 | | | $ | 24,628,317 | | | $ | 1,084,777 | | | $ | - | | | $ | 31,694,039 | |
Intersegment revenues | | | (5,503 | ) | | | (1,256,184 | ) | | | - | | | | - | | | | (1,261,687 | ) |
Revenue from external customers | | | 5,975,442 | | | | 23,372,133 | | | | 1,084,777 | | | | - | | | | 30,432,352 | |
Segment profit (loss) | | | 2,601,485 | | | | 2,832,307 | | | | 130,880 | | | | (10,439,185 | ) | | | (4,874,513 | ) |
Total assets | | | 1,245,331 | | | | 9,792,491 | | | | 442,977 | | | | 10,506,028 | | | | 21,986,827 | |
Capital expenditures | | | 17,129 | | | | 899,219 | | | | 5,413 | | | | 78,254 | | | | 1,000,015 | |
Total depreciation & amortization | | $ | 34,301 | | | $ | 652,405 | | | $ | 5,845 | | | $ | 72,712 | | | $ | 765,263 | |
FY 2022 | | Franchising | | | Manufacturing | | | Retail | | | Other | | | Total | |
Total revenues | | $ | 5,959,624 | | | $ | 23,442,371 | | | $ | 1,160,295 | | | $ | - | | | $ | 30,562,290 | |
Intersegment revenues | | | (5,546 | ) | | | (1,068,196 | ) | | | - | | | | - | | | | (1,073,742 | ) |
Revenue from external customers | | | 5,954,078 | | | | 22,374,175 | | | | 1,160,295 | | | | - | | | | 29,488,548 | |
Segment profit (loss) | | | 2,862,263 | | | | 3,863,460 | | | | 75,962 | | | | (7,318,214 | ) | | | (516,529 | ) |
Total assets | | | 1,160,343 | | | | 10,023,716 | | | | 625,850 | | | | 15,070,852 | | | | 26,880,761 | |
Capital expenditures | | | 1,832 | | | | 797,178 | | | | 3,688 | | | | 138,629 | | | | 941,327 | |
Total depreciation & amortization | | $ | 36,625 | | | $ | 627,071 | | | $ | 5,635 | | | $ | 70,844 | | | $ | 740,175 | |
FY 2021 | | Franchising | | | Manufacturing | | | Retail | | | Other | | | Total | |
Total revenues | | $ | 3,549,055 | | | $ | 18,316,165 | | | $ | 896,793 | | | $ | - | | | $ | 22,762,013 | |
Intersegment revenues | | | (3,668 | ) | | | (995,164 | ) | | | - | | | | - | | | | (998,832 | ) |
Revenue from external customers | | | 3,545,387 | | | | 17,321,001 | | | | 896,793 | | | | - | | | | 21,763,181 | |
Segment profit (loss) | | | 846,039 | | | | 1,422,491 | | | | (309,799 | ) | | | (3,113,948 | ) | | | (1,155,217 | ) |
Total assets | | | 1,338,990 | | | | 9,330,194 | | | | 634,124 | | | | 13,647,844 | | | | 24,951,152 | |
Capital expenditures | | | 150 | | | | 103,003 | | | | 4,505 | | | | 41,859 | | | | 149,517 | |
Total depreciation & amortization | | $ | 42,579 | | | $ | 642,806 | | | $ | 14,150 | | | $ | 78,912 | | | $ | 778,447 | |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 17 – SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscal years ended February 28, 2023 and 2022:
| | Fiscal Quarter | | | | | | | | | | |
2023 | | First | | | Second | | | Third | | | Fourth | | | Total | |
Total revenue | | $ | 6,902,198 | | | $ | 6,557,356 | | | $ | 8,825,093 | | | $ | 8,147,705 | | | $ | 30,432,352 | |
Gross margin | | | 881,699 | | | | 1,181,806 | | | | 1,859,186 | | | | 78,846 | | | | 4,001,537 | |
Net (loss) income from continuing operations | | | (285,767 | ) | | | (3,152,491 | ) | | | (196,157 | ) | | | (1,853,941 | ) | | | (5,488,356 | ) |
Net (loss) income from discontinued operations | | | 170,826 | | | | (488,695) | | | | (15,822 | ) | | | 141,269 | | | | (192,422 | ) |
Net (loss) income | | $ | (114,941 | ) | | $ | (3,641,186 | ) | | $ | (211,979 | ) | | $ | (1,712,672 | ) | | $ | (5,680,778 | ) |
Basic earnings (loss) per share | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | $ | (0.05 | ) | | $ | (0.51 | ) | | $ | (0.03 | ) | | $ | (0.29 | ) | | $ | (0.88 | ) |
Earnings (loss) from discontinued operations | | | 0.03 | | | | (.08 | ) | | | - | | | | 0.02 | | | | (.03 | ) |
Net Earnings | | $ | (0.02 | ) | | $ | (0.59 | ) | | $ | (0.03 | ) | | $ | (0.27 | ) | | $ | (0.91 | ) |
Diluted earnings (loss) per share | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | $ | (0.05 | ) | | $ | (0.51 | ) | | $ | (0.03 | ) | | $ | (0.29 | ) | | $ | (0.88 | ) |
Earnings (loss) from discontinued operations | | | 0.03 | | | | (.08 | ) | | | - | | | | 0.02 | | | | (.03 | ) |
Net Earnings | | $ | (0.02 | ) | | $ | (0.59 | ) | | $ | (0.03 | ) | | $ | (0.27 | ) | | $ | (0.91 | ) |
| | Fiscal Quarter | | | | | | | | | | |
2022 | | First | | | Second | | | Third | | | Fourth | | | Total | |
Total revenue | | $ | 6,757,428 | | | $ | 7,033,474 | | | $ | 7,902,033 | | | $ | 7,795,613 | | | $ | 29,488,548 | |
Gross margin | | | 925,141 | | | | 1,519,680 | | | | 1,580,543 | | | | 898,367 | | | | 4,923,731 | |
Net (loss) income from continuing operations | | | 447,820 | | | | 84,272 | | | | (1,413,010 | ) | | | 381,201 | | | | (499,717 | ) |
Net (loss) income from discontinued operations | | | 131,985 | | | | 112661 | | | | (64,636 | ) | | | (21,990 | ) | | | 158,020 | |
Net (loss) income | | $ | 579,805 | | | $ | 196,933 | | | $ | (1,477,646 | ) | | $ | 359,211 | | | $ | (341,697 | ) |
Basic earnings (loss) per share | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | $ | 0.07 | | | $ | 0.01 | | | $ | (0.23 | ) | | $ | 0.06 | | | $ | (0.08 | ) |
Earnings (loss) from discontinued operations | | | 0.02 | | | | 0.02 | | | | (0.01 | ) | | | - | | | | 0.02 | |
Net Earnings | | $ | 0.09 | | | $ | 0.03 | | | $ | (0.24 | ) | | $ | 0.06 | | | $ | (0.06 | ) |
Diluted earnings (loss) per share | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | $ | 0.07 | | | $ | 0.01 | | | $ | (0.23 | ) | | $ | 0.06 | | | $ | (0.08 | ) |
Earnings (loss) from discontinued operations | | | 0.02 | | | | 0.02 | | | | (0.01 | ) | | | - | | | | 0.02 | |
Net Earnings | | $ | 0.09 | | | $ | 0.03 | | | $ | (0.24 | ) | | $ | 0.06 | | | $ | (0.06 | ) |
NOTE 18 – COSTS ASSOCIATED WITH COMPANY-OWNED STORE CLOSURES
Costs associated with Company-owned store asset disposals at February 28, 2023, 2022 and 2021 were comprised of the following:
| | 2023 | | | 2022 | | | 2021 | |
Loss on distribution of assets | | $ | - | | | $ | - | | | $ | 57,100 | |
| | | | | | | | | | | | |
Total | | $ | - | | | $ | - | | | $ | 57,100 | |
NOTE 19 – CONTESTED SOLICITATION OF PROXIES AND CHANGE IN CONTROL PAYMENTS
Contested Solicitation of Proxies
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 and no comparable costs during FY 2021. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations.
Employment Agreement Payments upon a Change in Control
As described above in Note 12, we have entered into employment agreements with certain of our executives, which contain, among other things, "change in control" severance provisions.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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; 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. As of February 28, 2023 all of the Company’s obligations under the Separation Agreement were satisfied.
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 these Agreements the Company incurred the following costs during FY 2023 and FY 2022:
| | 2023 | | | 2022 | |
Severance compensation: | | $ | 928,938 | | | $ | 1,344,813 | |
Accelerated restricted stock unit compensation expense: | | | 95,156 | | | | 525,000 | |
Consulting Services: | | | 56,250 | | | | - | |
| | | | | | | | |
Total | | $ | 1,080,344 | | | $ | 1,869,813 | |
These costs are recognized as general and administrative expense in the Consolidated Statement of Operations.
NOTE 20 – 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. 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.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table discloses the results of operations of the businesses reported as discontinued operations for the years ended February 28, 2023, 2022 and 2021, respectively:
| | FOR THE YEARS ENDED FEBRUARY 28, | |
| | 2023 | | | 2022 | | | 2021 | |
Total Revenue | | $ | 3,128,368 | | | $ | 2,854,031 | | | $ | 1,717,524 | |
Cost of sales | | | 654,353 | | | | 556,933 | | | | 320,068 | |
Operating Expenses | | | 2,048,129 | | | | 2,087,021 | | | | 2,142,310 | |
Other income (expense), net | | | - | | | | (137 | ) | | | (108,380 | ) |
Earnings (loss) from discontinued operations before income taxes | | | 425,886 | | | | 210,214 | | | | (636,474 | ) |
Income tax provision (benefit) | | | 618,308 | | | | 52,194 | | | | (146,419 | ) |
Earnings (loss) from discontinued operations, net of tax | | $ | (192,422 | ) | | $ | 158,020 | | | $ | (490,055 | ) |
The following table reflects the summary of assets and liabilities held for sale for U-Swirl as of February 28, 2023 and 2022, respectively:
| | AS OF FEBRUARY 28, | |
| | 2023 | | | 2022 | |
Accounts and notes receivable, net | | $ | 75,914 | | | $ | 62,078 | |
Inventory, net | | | 6,067 | | | | 56,319 | |
Other | | | 1,023 | | | | 8,467 | |
Current assets held for sale | | | 83,004 | | | | 126,864 | |
| | | | | | | | |
Property and equipment, net | | | - | | | | 48,702 | |
Franchise rights, net | | | 1,708,336 | | | | 2,078,066 | |
Intangible assets, net | | | 48,095 | | | | 58,853 | |
Deferred income taxes | | | - | | | | 666,108 | |
Other | | | 9,415 | | | | 34,061 | |
Long-term assets held for sale | | | 1,765,846 | | | | 2,885,790 | |
Total Assets Held for Sale | | | 1,848,850 | | | | 3,012,654 | |
| | | | | | | | |
Accounts payable | | | 125,802 | | | | 83,909 | |
Accrued compensation | | | 11,205 | | | | 49,312 | |
Accrued liabilities | | | 11,981 | | | | 15,388 | |
Contract liabilities | | | 29,951 | | | | 24,634 | |
Current liabilities held for sale | | | 178,939 | | | | 173,243 | |
| | | | | | | | |
Contract liabilities, less current portion | | | 184,142 | | | | 159,602 | |
Long term liabilities held for sale | | | 184,142 | | | | 159,602 | |
Total Liabilities Held for Sale | | $ | 363,081 | | | $ | 332,845 | |