• Filing Date: 2019-07-15
  • Form Type: 10-Q
  • Description: Quarterly report
v3.19.2
Note 1 - Nature of Operations and Basis of Presentation
3 Months Ended
May 31, 2019
Notes to Financial Statements  
Business Description and Accounting Policies [Text Block]
NOTE
1
– 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”), 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, 2019).
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 were 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, the Company entered into a credit facility with Wells Fargo Bank, 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. As a result of certain defaults under the SWRL Loan Agreement, 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
February
29,
2016
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
February
29,
2016,
and concurrently the Company ceased to have financial control of SWRL as of
February
29,
2016.
As of
May 31, 2019,
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: (i) sales to franchisees and other
third
parties of chocolates and other confectionery products manufactured by the Company; (ii) sales at Company-owned stores of chocolates, other confectionery products and frozen yogurt (including products manufactured by us); (iii) the collection of initial franchise fees and royalties from franchisees.
 
The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés at
May 31, 2019:
 
   
Sold, Not Yet
Open
   
Open
   
Total
 
Rocky Mountain Chocolate Factory
                       
Company-owned stores
   
-
     
2
     
2
 
Franchise stores - Domestic stores and kiosks
   
3
     
181
     
184
 
International license stores
   
1
     
63
     
64
 
Cold Stone Creamery - co-branded
   
9
     
93
     
102
 
U-Swirl (Including all associated brands)
   
 
     
 
     
-
 
Company-owned stores
   
-
     
1
     
1
 
Company-owned stores - co-branded
   
-
     
3
     
3
 
Franchise stores - Domestic stores
   
-
     
86
     
86
 
Franchise stores - Domestic - co-branded
   
1
     
8
     
8
 
International license stores
   
-
     
2
     
2
 
Total
   
14
     
439
     
453
 
 
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 (the “SEC”) 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. 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, 2019
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, 2019.
 
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.
 
Recent Accounting Pronouncements
 
In
August 2018,
the SEC adopted amendments to certain disclosure requirements in Securities Act Release
No.
33
-
10532,
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
10
-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
November 5, 2018.
In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question
105.09”
), that provides transition guidance related to this disclosure requirement. CDI – Question
105.09
states that the SEC would
not
object if the filer’s
first
presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form
10
-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on
November 30, 2018
and is
first
presenting the analysis of changes in stockholders’ equity in its interim financial statements in this Quarterly Report on this Form
10
-Q. The adoption of these SEC amendments did
not
have a material effect on the Company’s financial position, results of operations, cash flows or stockholders’ equity.
 
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.
 
The Company adopted ASU
2016
-
02
as of
March 1, 2019,
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. The Company recorded a Right of Use Asset and Lease Liability on the Consolidated Balance Sheet of
$3.3
million upon adoption. The impact of the new standard did
not
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.