NOTE – SUBSEQUENT EVENTS

 

 

On the Board suspended the Company’s quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment as a result of the economic impact of COVID- Furthermore, the Board has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and global economic climate has passed and the Board determines that resumption of dividend payments is in the best interest of the Company and its stockholders.

 

 

As discussed in more detail throughout this Annual Report, we have experienced business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus (COVID-), including the vast mandated self-quarantines and closures of non-essential business throughout the United States and internationally. Nearly all stores have been directly and negatively impacted by public health measures taken in response to COVID- with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. As a result, franchisees and licensees are ordering products for their stores in line with forecasted amounts. This trend has negatively impacted, and is expected to continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees.

 

During this challenging time, our foremost priority is the safety and well-being of our employees, customers, franchisees and communities. In addition to our already stringent practices for the quality and safety of our confections, we are diligently following health and safety guidance issued by the World Health Organization, the Centers for Disease Control and state and local governmental agencies. COVID- has had an unprecedented impact on our industry as containment measures continue to escalate. Numerous countries, states and local governments have effected ordinances to protect the public through social distancing, which has caused, and we expect will continue to cause, a significant decrease in, among other things, retail traffic and factory sales as a result, retail sales and royalty and marketing fees. With that said, Rocky Mountain Chocolate Factory products remain available for sale online. Our current focus is on supporting our franchisees and licensees during this challenging time and driving growth in our online sales, especially in light of our ecommerce licensing agreement with Edible Arrangements®, LLC (“Edible”), as discussed below, while also sensibly managing costs. The number of our and our franchisee’s stores remaining open change frequently and significantly due to the ever-changing nature of the outbreak.

 

In these challenging and unprecedented times, management is taking all necessary and appropriate action to maximize our liquidity as we navigate the current landscape. These actions include significantly reducing our operating expenses and production volume to reflect reduced sales volumes as well as the elimination of all non-essential spending and capital expenditures. Further, in an abundance of caution and to maintain ample financial flexibility, we have drawn down the full amount under our line of credit and we have received a loan under the Paycheck Protection Program (the “PPP”). The receipt of funds under the PPP has allowed us to avoid workforce reduction measures amidst a steep decline in revenue and production volume. While we believe we have sufficient liquidity with our current cash position, we will continue to monitor and evaluate all financing alternatives as necessary as these unprecedented events evolve. For more information, please see Item “Risk Factors—The Novel Coronavirus (COVID-) Pandemic Has, and Continue to, Materially and Adversely Affect our Sales, Earnings, Financial Condition and Liquidity.”

 

It is possible to predict the consequences of current events on the outcome of results in the future. In addition to the steps described above, the Company, Management and the Board take additional actions as a result of current events related to COVID- Continued or prolonged disruption to the economy result in, among other things: an increase in expense associated with obsolete inventory, an increase in bad debt expense, expense associated with the impairment of long-lived assets and intangible assets, an increase in store closures, a decrease in new store openings.

 

The Company has been focused on employee safety and implementing steps to improve safety. The Company has been monitoring the frequently changing guidance on best safety practices and is rapidly integrating safety measures into the working environment. Most of our office and administrative staff are working remotely. The nature of our production environment necessitates that most employees must be on site to perform their job duties. The current trends and the lack of definitive guidance on how to best improve the safety of a production environment make it difficult for us to hire and retain production employees.

We expect sales and earnings to be down materially in the months ending the quarter of FY ) and for FY We are unable to reasonably estimate the extent of these decreases. The events, as described above, have had a significant impact on our domestic franchisees, domestic and international licensees and specialty markets customers (collectively “Customers”). Our ability to realize the full value of our assets depends on the ability of our customers to recover from these events and our business to resume normal operations. Among other financial impacts these events significantly impair our ability to sell inventory on-hand, collect receivables and realize the value of our tangible and intangible assets. We continue to monitor the situation closely and implement further measures to provide additional financial flexibility as we work to protect our cash position and liquidity. We have determined that the events described above did exist at the balance sheet date and have concluded that they are nonrecognized subsequent events.  As a result of this determination amounts were recognized as of related to these subsequent events.

 

On the Company provided notice to the lender to draw down on the line of credit in an amount equal to million (the full amount of the million line of credit, subject to the borrowing base of of eligible accounts receivable plus of eligible inventories). On the interest rate for borrowings under the line of credit was which represents the -month LIBOR rate plus The outstanding principal balance under the line of credit will be due and payable in full on The Company elected to borrow such amounts to ensure it maintains ample financial flexibility in light of the spread of COVID- and the closures and/or modified hours, either voluntarily or as a result of governmental orders or quarantines, of the retail locations of the Company and its franchisees.

 

 

On and Rocky Mountain Chocolate Factory, Inc. and U-Swirl International, Inc. (collectively the “Company”) entered into Loan Agreements and Promissory Notes (collectively the “SBA Loans”) with SOURCE BANK pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received total proceeds of million from the SBA Loans. The SBA Loans are scheduled to mature on and and have a interest rate and are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The SBA Loans be prepaid by the Company at any time prior to maturity with prepayment penalties. The SBA Loans contain customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the SBA Loans be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by the Company during the -week 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 of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at certain levels. In accordance with the requirements of the CARES Act and the PPP, the Company intends to use the proceeds from the SBA Loans primarily for payroll costs. assurance can be given that the Company will be granted forgiveness of the SBA Loans in whole or in part.