NOTE - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation), Aspen Leaf Yogurt, LLC (“ALY”), and U-Swirl International, Inc. (“U-Swirl”), and its -owned subsidiary, U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).

 

The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.

 

U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt.”

 

The Company’s revenues are currently derived from principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.

 

In FY we entered into a long-term strategic alliance with Edible Arrangements®, LLC and its affiliates (“Edible”) whereby we became the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Rocky Mountain Chocolate Factory branded products are available for purchase both on Edible’s website as well as through over franchised Edible Arrangement 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 sells a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites. Edible will also be responsible for all ecommerce marketing and sales from the Rocky Mountain corporate website and the broader Rocky Mountain ecommerce ecosystem. In the founder of Edible was elected to the Company’s Board of Directors pursuant to a vote by stockholders held at the Company’s Annual Meeting of Stockholders.

 

The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and its subsidiaries at

 

 

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.

 

 

The Company considers all highly liquid instruments purchased with an original maturity of 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 million at

 

 

In the normal course of business, the Company extends credit to customers, primarily franchisees that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarily because its receivables are secured by the assets of the franchisees to which the Company ordinarily extends credit, including, but 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 impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. At the Company had of notes receivable outstanding and an allowance for doubtful accounts of associated with these notes, compared to of notes receivable outstanding and an allowance for doubtful accounts of at The notes require monthly payments and bear interest rates ranging from to The notes mature through and approximately of notes receivable are secured by the assets financed. We experience the failure of our wholesale customers, including our franchisees, to whom we extend credit to pay amounts owed to us on time, or at all, particularly if such customers are significantly impacted by COVID-

 

 

Inventories are stated at the lower of cost or net realizable value, which is adjusted for obsolete, damaged and excess inventories to the lower of cost or net realizable value based on actual differences. The inventory value is determined through analysis of items held in inventory, and, if the recorded value is higher than the market value, the Company records an expense to reduce inventory to its actual market value. The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential. Cost is determined using the -in, -out method.

 

 

Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from to 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 be recoverable. The Company’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.

 

 

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 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 Due to historical U-Swirl losses, prior to FY the Company established a full valuation allowance on the Company’s deferred tax assets. During FY the Company took possession of the outstanding equity in U-Swirl. As a result of the Company’s ownership increasing to the Company began filing consolidated income tax returns in FY Because of this change, the Company has recognized the full value of deferred tax assets that had full valuation allowances prior to FY During the quarter of FY the Company further evaluated the value of deferred tax assets and determined that the assets are restricted due to a limitation on the deductibility of future losses in accordance with Section of the Internal Revenue Code as a result of the foreclosure transaction. The Company's temporary differences are listed in Note

 

 

The Company and its franchisees sell gift cards that are redeemable for product in stores. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their stores. A liability for unredeemed gift cards is included in accounts payable and accrued liabilities in the balance sheets.

 

There are expiration dates on the Company’s gift cards, and the Company does charge any service fees. While the Company’s franchisees continue to honor all gift cards presented for payment, the Company determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. The Company has historically accumulated gift card liabilities and has recognized breakage associated with the gift card liability. The adoption of ASU - “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC ) during FY requires the use of the “proportionate” method for recognizing breakage, which the Company has historically utilized. Upon adoption of ASC the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. Accrued gift card liability was and at and respectively. The Company recognized breakage of and during FY and FY respectively. See Note to the financial statements for a complete description of the adjustments recorded upon the adoption of ASC

 

 

Goodwill arose primarily from transaction types. The 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 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 exceeds its fair value. During FY the impairment test was completed during the months ended (the quarter). Recoverability of goodwill is evaluated through comparison of the fair value of each of the Company’s reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized. The Company’s goodwill is further described in Note to the financial statements.

 

Franchise rights arose from the entry into agreements to acquire substantially all of the franchise rights of Yogurtini, CherryBerry, Fuzzy Peach, Let’s Yo! and Yogli Mogli. Franchise rights are amortized over a period of years.

 

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 of products to franchisees and other customers are recognized when the products are shipped or at the time of delivery when the Franchisee or other customer takes ownership and assumes risk of loss, collection is reasonably assured, persuasive evidence of a contract with a customer exists, and the sales price is fixed or determinable. 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 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 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.

 

 

Beginning in FY upon adoption of ASC the Company began recognizing franchise fees over the term of the associated franchise agreement, which is generally a period of to years. Prior to FY franchise fee revenue was recognized upon opening of the franchise store. In addition to the initial franchise fee, the Company also recognizes a marketing and promotion fee of percent () of franchised stores’ gross retail sales and a royalty fee based on gross retail sales. The Company recognizes royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a percent () royalty on all other sales of product sold at franchise locations. Royalty fees for U-Swirl cafés are based on the rate defined in the acquired contracts for the franchise rights and range from to of gross retail sales.

 

 

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

In the Company’s largest customer, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including the divisions that the Company has historically sold product to, were sold through an auction to multiple buyers.

 

Revenue from FTD represented approximately million or of our total revenues during the year ended compared to revenue of approximately million or of our total revenues during the year ended Our future results be adversely impacted by further decreases in the purchases of this customer or the loss of this customer entirely.

 

At the Company had stock-based compensation plan, the Company’s Equity Incentive Plan, for employees and non-employee directors which authorized the granting of equity awards.

 

The Company recognized and related to equity-based compensation expense during the years ended or and respectively. Compensation costs related to share-based compensation are generally recognized over the vesting period.

 

During FY the Company granted restricted stock units to employees and non-employee directors. During FY the Company granted restricted stock units. There were stock options granted to employees during FY or FY The restricted stock unit grants generally vest to or per quarter over a period of to years. The Company recognized of consolidated stock-based compensation expense related to restricted stock unit grants during FY compared with in FY and in FY Total unrecognized stock-based compensation expense of non-vested, non-forfeited shares granted, as of was which is expected to be recognized over the weighted average period of years.

 

The Company issued fully vested, unrestricted shares of stock to non-employee directors during the year ended compared to shares issued during the year ended and shares issued during the year ended In connection with these non-employee director stock issuances, the Company recognized and of stock-based compensation expense during year ended or and respectively.

 

The Company issued fully vested, unrestricted shares of stock as bonus compensation to our Chief Executive Officer during the year ended in consideration of the entry into a strategic alliance agreement with Edible Arrangements, LLC (“Edible”), as discussed below. Associated with this unrestricted stock award, the Company recognized in stock-based compensation expense during the year ended

 

During the year ended the Company issued shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized in stock-based compensation expense during the year ended During the year ended the Company issued shares of common stock under the Company’s equity incentive plan to the former Vice President of Creative Services. These shares were issued in consideration of services rendered prior to retirement and based on the number of unvested restricted stock units that were forfeited upon retirement. Associated with this unrestricted stock award, the Company recognized in stock-based compensation expense during the year ended

 

 

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 stock options were excluded from diluted shares.

The weighted-average number of shares outstanding used in the computation of diluted earnings per share does include outstanding common shares issuable if their effect would be anti-dilutive. During the year ended shares of common stock warrants were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

 

 

The Company expenses advertising costs as incurred. Total advertising expense for RMCF amounted to and for the fiscal years ended or and respectively. Total advertising expense for U-Swirl and its brands amounted to and for the fiscal years ended or and respectively.

 

 

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.

 

In the SEC adopted amendments to certain disclosure requirements in Securities Act Release - Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in Quarterly Reports on Form -Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after The Company adopted these amendments in its Quarterly Report on Form -Q for the quarter ended Note contains additional information about the impact of adopting these amendments.

 

In the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) - Financial Instruments - Credit Losses (Topic ): Measurement of Credit Losses on Financial Instruments. ASU - significantly changes the impairment model for most financial assets and certain other instruments. ASU - will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU - is effective for the Company's fiscal year beginning and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU - will have on the Company's consolidated financial statements.

 

In the FASB issued ASU - Leases (Topic ), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. The Company adopted ASU - as of using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has been restated and continues to be reported under the accounting standards in effect for those periods. The Company recorded a Right of Use Asset and Lease Liability on the Consolidated Balance Sheet of million upon adoption. The impact of the new standard did affect the Company’s cash flows or results of operations. The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the lease term, which includes options that are likely to be exercised, discounted using an incremental borrowing rate or implicit rate. See Note - Leasing Arrangements for additional information.