NOTE – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

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 (“RMCF”), Aspen Leaf Yogurt, LLC, a Colorado limited liability company (“ALY”), U - Swirl International, Inc. (“U - Swirl”) (a Nevada corporation), and its - owned subsidiary, U - Swirl, Inc., a Nevada corporation (“SWRL”) of which, RMCF had financial control until (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

The Company is an international franchisor, confectionery manufacturer and retail operator in the United States, Canada, Japan, South Korea and the United Arab Emirates. 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.

 

Effective the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, which was previously the public company, became a wholly - owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value per share, were exchanged on a - for - basis for shares of common stock, par value per share, of Newco. The new holding company began trading on on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.

 

In through our wholly - owned subsidiaries, including ALY, the Company entered into agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self - serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in to SWRL, in exchange for a controlling equity interest in SWRL, which was subsequently diluted down to as of following various issuances of common stock of SWRL. At that time, U - Swirl was a wholly - owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company - owned ALY locations or sell and support frozen yogurt franchise locations, which were being supported by SWRL. As of the Company held a interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving on the Company’s Board of Directors.

 

In fiscal year (“FY”) SWRL acquired the franchise rights and certain other assets of self - serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions by SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly - owned subsidiary, U - Swirl. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended and the loan matured on without payment in full by SWRL. Upon the occurrence and during the continuance of an event of default, the Company was entitled to charge interest on all amounts due under the SWRL Loan Agreement at the default rate of per annum, accelerate payment of all amounts due under the SWRL Loan Agreement, and foreclose on all or any portion of the security interest. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U - Swirl on in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U - Swirl becoming a wholly - owned subsidiary of the Company as of and concurrently the Company ceased to have financial control of SWRL as of As of SWRL had no operating assets.

 

U - Swirl operates self - serve frozen yogurt cafés under the names “U - Swirl,” “Yogurtini,” “CherryBerry,” “Josie’s Frozen Yogurt,” “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 of both confectionery products and frozen yogurt; and sales at Company - owned stores of chocolates, frozen yogurt, and other confectionery products.

 

The following table summarizes the number of stores operated under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés as of

 

 

*U - Swirl cafés and the brands franchised by U - Swirl have historically utilized a development area sales model. The result is that many areas are under development, and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.