• Filing Date: 2018-07-13
  • Form Type: 10-Q
  • Description: Quarterly report
v3.10.0.1
Significant Accounting Policies (Policies)
3 Months Ended
May 31, 2018
Accounting Policies [Abstract]  
Basis of Accounting, Policy [Policy Text Block]
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”), and U-Swirl International, Inc., a Nevada corporation (“U-Swirl”), and its
46%
-owned subsidiary, U-Swirl, Inc. (“SWRL”), of which RMCF had financial control until
February
29,
2016
(collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
 
The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in
1981,
the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates soft-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.
 
In
January 2013,
through its wholly-owned subsidiaries, including ALY, the Company entered into
two
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
January 2013,
to SWRL, in exchange for a
60%
controlling equity interest in SWRL (
46%
equity interest as of
May 31, 2018).
Upon completion of these transactions, the Company ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL. The SWRL board of directors is composed solely of board members also serving on the Company’s board of directors (the “Board of Directors”).
 
In fiscal year (“FY”)
2014,
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, we entered into a credit facility with Wells Fargo Bank, N.A. used to finance the acquisitions by SWRL, and in turn, we 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. As a result of certain defaults under the SWRL Loan Agreement, we 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, we foreclosed on all of the outstanding stock of U-Swirl on
February
29,
2016
in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl becoming our wholly-owned subsidiary as of
February
29,
2016,
and concurrently we ceased to have financial control of SWRL as of
February
29,
2016.
As of
May 31, 2018,
SWRL had
no
operating assets.
 
U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.
 
The Company’s revenues are currently derived from
three
principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.
 
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés at
May 31, 2018:
 
   
Sold, Not Yet
Open
   
 
Open
   
 
Total
 
Rocky Mountain Chocolate Factory
                       
Company-owned stores
   
-
     
3
     
3
 
Franchise stores – Domestic stores and kiosks
   
7
     
181
     
188
 
International License Stores
   
1
     
66
     
67
 
Cold Stone Creamery – co-branded
   
8
     
89
     
97
 
U-Swirl Stores (Including all associated brands)
                       
Company-owned stores
   
-
     
2
     
2
 
Company-owned stores – co-branded
   
-
     
3
     
3
 
Franchise stores – Domestic stores
   
*
     
99
     
99
 
Franchise stores – Domestic – co-branded
   
*
     
15
     
15
 
International License Stores
   
-
     
1
     
1
 
Total
   
16
     
459
     
475
 
 
*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.
 
Basis of Presentation
 
The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had
no
effect on net income, working capital or equity previously reported. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the
three
months ended
May 31, 2018
are
not
necessarily indicative of the results to be expected for the entire fiscal year.
 
These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form
10
-K for the fiscal year ended
February 28, 2018.
Subsequent Events, Policy [Policy Text Block]
Subsequent Events
 
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.
New Accounting Pronouncements, Policy [Policy Text Block]
Recent Accounting Pronouncements
 
In
June 2016,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016
-
13,
Financial Instruments - Credit Losses (Topic
326
): Measurement of Credit Losses on Financial Instruments. ASU
2016
-
13
significantly changes the impairment model for most financial assets and certain other instruments. ASU
2016
-
13
will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU
2016
-
13
is effective for the Company's fiscal year beginning
March 1, 2020
and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU
2016
-
13
will have on the Company's consolidated financial statements.
  
In
February 2016,
the FASB issued ASU
2016
-
02,
Leases (Topic
842
), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC
840
“Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after
December 15, 2018,
including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. The Company expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption. The Company anticipates ASU
2016
-
02
will have a material impact on the consolidated balance sheet. The impact of ASU
2016
-
02
is non-cash in nature, as such, it will
not
affect the Company’s cash flows. The Company is currently evaluating the impact of ASU
2016
-
02
on the consolidated statements of income.
 
In
January 2016,
the FASB issued ASU
2016
-
01,
Financial Instruments - Overall (Subtopic
825
-
10
), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company adopted this guidance effective
March 1, 2018
and there was
no
impact to the Company’s consolidated financial statements resulting from adoption of this standard.
 
In
May 2014,
the FASB issued ASU
No.
2014
-
09,
Revenue from Contracts with Customers (“ASC
606”
). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in Topic
605,
Revenue Recognition. This guidance is effective for annual reporting periods beginning after
December 15, 2017,
including interim reporting periods. ASC
606
provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This new standard does
not
impact the Company's recognition of revenue from sales of confectionary items to our franchised and licensed locations, or in Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does
not
change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that impact the term of the franchise agreement. The Company's policy for recognizing initial franchise and renewal fees through
February 28, 2018,
was to recognize initial franchise fees upon new store opening and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are
not
distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning
March 1, 2018,
initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally
10
-
15
years.
 
The Company adopted ASC
606
as of
March 1, 2018,
using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has
not
been restated and continues to be reported under the accounting standards in effect for those periods. See Note
11
to these financial statements for additional details regarding the adjustments recorded upon adoption of this standard.