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What changed in Rocky Mountain Chocolate Factory, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Rocky Mountain Chocolate Factory, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+317 added−373 removedSource: 10-K (2023-05-30) vs 10-K (2022-05-27)

Top changes in Rocky Mountain Chocolate Factory, Inc.'s 2023 10-K

317 paragraphs added · 373 removed · 194 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

85 edited+41 added−78 removed19 unchanged
Biggest changeIn addition, by controlling the manufacturing of our own chocolate products, we can better maintain our high product quality standards for those products, offer proprietary products, manage costs, control production and shipment schedules and pursue new or under-utilized distribution channels. 12 Table of Contents Trade Name and Trademarks The trade name " Rocky Mountain Chocolate Factory ®," the phrases, " The Peak of Perfection in Handmade Chocolates ®", " America's Chocolatier ®”, “ The World ’ s Chocolatier ®” as well as all other trademarks, service marks, symbols, slogans, emblems, logos and designs used in the Rocky Mountain Chocolate Factory system, are our proprietary rights.
Biggest changeIn addition, by controlling the manufacturing of our own chocolate products, we can better maintain our high product quality standards for those products, offer proprietary products, manage costs, control production and shipment schedules and pursue new or under-utilized distribution channels.
A typical Rocky Mountain Chocolate Factory store offers up to 100 of these approximately 400 chocolate candies and other confectionery products throughout the year and up to an additional 90 during holiday seasons. Individual stores also offer more than 15 varieties of caramel apples and other products prepared in the store.
A typical Rocky Mountain Chocolate Factory store offers up to 100 of these approximately 400 chocolate candies and other confectionery products throughout the year and up to an additional 90 during the holiday seasons. Individual stores also offer more than 15 varieties of caramel apples and other products prepared in the store.
Although we believe that it is currently preferable to perform certain manufacturing processes, such as dipping of some large pieces by hand, automation increases the speed and efficiency of the manufacturing process.
Although we believe that it is currently preferable to perform certain manufacturing processes, such as the dipping of some large pieces by hand, automation increases the speed and efficiency of the manufacturing process.
We have one or more alternative sources for most essential ingredients and therefore believe that the loss of any supplier would not have a material adverse effect on our business or results of operations. We currently purchase small amounts of finished candy from third parties on a private label basis for sale in Rocky Mountain Chocolate Factory stores.
We have one or more alternative sources for most essential ingredients and therefore believe that the loss of any one supplier would not have a material adverse effect on our business or results of operations. We currently purchase small amounts of finished candy from third parties on a private label basis for sale in Rocky Mountain Chocolate Factory stores.
Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time.
Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time.
We make available free of charge, through our Internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we file such material with, or furnish it to, the SEC.
We make available free of charge, through our Internet website, our Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Complementary to local store marketing efforts, these networks also provide a medium for us to communicate regularly and authentically with customers. When possible, we work to facilitate direct relationships between our franchisees and their customers. We use social media as a powerful tool to build brand recognition, increase repeat exposure and enhance dialogue with consumers about their preferences and needs.
Complementary to local store marketing efforts, these networks also provide a medium for us to communicate regularly and authentically with customers. When possible, we work to facilitate direct relationships between our franchisees and their customers. We use social media as a tool to build brand recognition, increase repeat exposure, and enhance dialogue with consumers about their preferences and needs.
Federal and state environmental regulations have not had a material impact on our operations but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay construction of new stores, increase our capital expenditures and thereby decrease our earnings and negatively impact competitive position.
Federal and state environmental regulations have not had a material impact on our operations but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay the construction of new stores, increase our capital expenditures and thereby decrease our earnings and negatively impact our competitive position.
Chocolate and yogurt products not made on premises by franchisees must be purchased from us or approved suppliers. The franchise agreements require franchisees to comply with our procedures of operation and food quality specifications, to permit inspections and audits by us and to remodel stores to conform with standards then in effect.
Chocolate products not made on premises by franchisees must be purchased from us or approved suppliers. The franchise agreements require franchisees to comply with our procedures of operation and food quality specifications, to permit inspections and audits by us and to remodel stores to conform with standards then in effect.
We believe that all of the foregoing are of material importance to our business. The trademark “Rocky Mountain Chocolate Factory” is registered in the United States and Canada. Applications to register the Rocky Mountain Chocolate Factory trademark have been filed and/or obtained in certain foreign countries.
We believe all of the foregoing are of material importance to our business. The trademark “Rocky Mountain Chocolate Factory” is registered in the United States and Canada. Applications to register the Rocky Mountain Chocolate Factory trademark have been filed and/or obtained in certain foreign countries.
In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our manufacturing facility, or if we or our franchisees experience delays in stocking our products.
In addition, we could experience additional lost sales opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our manufacturing facility, or if we or our franchisees experience delays in stocking our products.
In FY 2022, approximately 49% of the revenues of Rocky Mountain Chocolate Factory stores are generated by products manufactured at our factory, 48% by products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and the remaining 3% by products such as ice cream, coffee and other sundries purchased from approved suppliers.
In FY 2023, approximately 49% of the revenues of Rocky Mountain Chocolate Factory stores are generated by products manufactured at our factory, 48% by products made in individual stores using our recipes and ingredients purchased from us or approved suppliers and the remaining 3% by products such as ice cream, coffee and other sundries purchased from approved suppliers.
Operating Environment Rocky Mountain Chocolate Factory We currently establish Rocky Mountain Chocolate Factory stores in six primary environments: regional centers, outlet centers, tourist areas, street fronts, airports and other entertainment-oriented shopping centers. Each of these environments has a number of attractive features, including high levels of foot traffic.
Operating Environment Rocky Mountain Chocolate Factory We currently establish Rocky Mountain Chocolate Factory stores in six primary environments: outlet centers, festival and community centers, regional centers, tourist areas, street fronts, airports and other entertainment-oriented shopping centers. Each of these environments has a number of attractive features, including high levels of foot traffic.
The SEC also maintains a website that contains these reports, proxy and information statements and other information that can be accessed, free of charge, at www.sec.gov . The contents of our websites are not incorporated into, and should not be considered a part of, this Annual Report. 14 Table of Contents
The SEC also maintains a website that contains these reports, proxy and information statements and other information that can be accessed, free of charge, at www.sec.gov. The contents of our websites are not incorporated into, and should not be considered a part of, this Annual Report. 13 Table of Contents
We may terminate the franchise agreement upon the failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission by the franchisee of any unlawful or deceptive practice, which in our judgment are likely to adversely affect the system.
We may terminate the franchise agreement upon the failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission by the franchisee of any unlawful or deceptive practice, which in our judgment is likely to adversely affect the system.
Our ability to terminate franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See "Regulation" below for additional information. The agreements prohibit the transfer or assignment of any interest in a franchise without our prior written consent.
Our ability to terminate franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See “Regulation” below for additional information. The agreements prohibit the transfer or assignment of any interest in a franchise without our prior written consent.
All products are produced consistent with our philosophy of using only the finest high-quality ingredients to achieve our marketing motto of " The Peak of Perfection in Handmade Chocolates ®." We have always believed that we should control the manufacturing of our own chocolate products.
All products are produced consistent with our philosophy of using the finest high-quality ingredients to achieve our marketing motto of “ The Peak of Perfection in Handmade Chocolates ®.” We have always believed that we should control the manufacturing of our own chocolate products.
The Rocky Mountain Chocolate Factory system has historically been concentrated in the western and Rocky Mountain region of the United States, but growth has generated a gradual easterly momentum as new stores have been opened in the eastern half of the country. We believe this growth has further increased our name recognition and demand for our franchises.
The Rocky Mountain Chocolate Factory system currently is concentrated in the western and Rocky Mountain region of the United States, but growth has generated a gradual easterly momentum as new stores have been opened in the eastern half of the country. We believe this growth has further increased our name recognition and demand for our franchises.
ITEM 1. BUSINESS General Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company,” “Rocky Mountain,” “we,” “us,” or “our”), including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), is an international franchisor, confectionery manufacturer and retail operator.
ITEM 1. BUSINESS Our Company Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company,” “Rocky Mountain,” “we,” “us,” or “our”), including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), is an international franchisor, confectionery manufacturer and retail operator.
We have established business relationships with most of the major outlet center developers in the United States. Although not all factory outlet centers provide desirable locations for our stores, we believe our relationships with these developers will provide us with the opportunity to take advantage of attractive sites in new and existing outlet centers.
We have established business relationships with a number of the major outlet center developers in the United States. Although not all factory outlet centers provide desirable locations for our stores, we believe our relationships with these developers will provide us with the opportunity to take advantage of attractive sites in new and existing outlet centers.
We believe our manufacturing expertise and reputation for quality has facilitated the sale of select products through specialty markets. We are currently selling our products in a select number of specialty markets, including wholesale, fundraising, corporate sales, mail order, private label and internet sales.
We believe our manufacturing expertise and reputation for quality has facilitated the sale of select products through specialty markets. We are currently selling our products in a select number of specialty markets, including wholesale, fundraising, corporate sales, mail order, private label and internet sales (collectively “Omni-channel”).
We also employ some individuals on a temporary basis during peak periods of store and factory operations. We seek to assure that participatory management processes, mutual respect and professionalism and high-performance expectations for the employee exist throughout the organization. We believe that we provide working conditions, wages and benefits that compare favorably with those of our competitors.
We also employ some individuals on a temporary basis during peak periods of store and factory operations. We seek to ensure that participatory management processes, mutual respect and professionalism and high-performance expectations for the employees exist throughout the organization. We believe that we provide working conditions, wages and benefits that compare favorably with those of our competitors.
In-store preparation is designed to be both fun and entertaining for customers and we believe the in-store preparation and aroma of our products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for our customers and convey an image of freshness and homemade quality.
In-store preparation is designed to be both fun and entertaining for customers and we believe the in-store preparation and aroma of our products enhance the ambiance at Rocky Mountain Chocolate Factory stores, is fun and entertaining for our customers and conveys an image of freshness and homemade quality.
See Item 1A “Risk Factors—Risks Related to Our Company and Strategy—Our Sales to Specialty Market Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among a Small Number of Customers.” These products are produced using the same quality ingredients and manufacturing processes as the products sold in our network of retail stores.
See Item 1A “Risk Factors—Risks Related to Our Company and Strategy—Our Sales to Omni-channel Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among a Small Number of Customers.” These products are produced using the same quality ingredients and manufacturing processes as the products sold in our network of retail stores.
We believe that our principal competitive strengths lie in our name recognition and our reputation for the quality, value, variety and taste of our products and the special ambiance of our stores; our knowledge and experience in applying criteria for selection of new store locations; our expertise in merchandising and marketing of chocolate, other candy products and frozen yogurt; and the control and training infrastructures we have implemented to assure execution of successful practices and techniques at our store locations.
We believe that our principal competitive strengths lie in our name recognition and our reputation for the quality, value, variety and taste of our products and the ambiance of our stores; our knowledge and experience in applying criteria for the selection of new store locations; our expertise in merchandising and marketing of chocolate and other candy products; and the control and training infrastructures we have implemented to ensure execution of successful practices and techniques at our store locations.
Changes in system wide domestic same store retail sales at Rocky Mountain Chocolate Factory locations are as follows: FY 2018 compared to FY 2017 (2.9 )% FY 2019 compared to FY 2018 1.0 % FY 2020 compared to FY 2019 0.5 % FY 2021 compared to FY 2020 (24.8 )% FY 2022 compared to FY 2021 62.4 % Changes in system wide domestic same store retail sales at frozen yogurt franchise locations are as follows: FY 2018 compared to FY 2017 (4.3 )% FY 2019 compared to FY 2018 (0.5 )% FY 2020 compared to FY 2019 1.3 % FY 2021 compared to FY 2020 (39.4 )% FY 2022 compared to FY 2021 65.1 % Same store sales declined during FY 2021 primarily as a result of nearly all of the franchise stores being directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures.
Changes in system-wide domestic same store retail sales at Rocky Mountain Chocolate Factory locations are as follows: FY 2019 compared to FY 2018 1.0 % FY 2020 compared to FY 2019 0.5 % FY 2021 compared to FY 2020 (24.8 )% FY 2022 compared to FY 2021 62.4 % FY 2023 compared to FY 2022 0.5 % Same store sales declined during FY 2021 primarily as a result of nearly all of the franchise stores being directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures.
High Traffic Environments We currently establish franchised stores in the following environments: regional centers, outlet centers, tourist areas, street fronts, airports, other entertainment-oriented environments and strip centers.
High Traffic Environments We currently establish franchised stores in the following environments: regional centers, outlet centers, tourist areas, street fronts, airports, other entertainment-oriented environments and festival and community centers.
We believe that distribution of Rocky Mountain Chocolate Factory products through specialty markets also increases name recognition and brand awareness in areas of the country in which we have not previously had a significant presence and we believe it will also improve and benefit our entire store system.
We believe that distribution of Rocky Mountain Chocolate Factory products through our Omni-channel business also increases name recognition and brand awareness in areas of the country in which we have not previously had a significant presence and we believe it will also improve and benefit our entire store system.
International growth is generally achieved through entry into a Master License Agreement covering specific countries, with a licensee that meets minimum qualifications to develop Rocky Mountain Chocolate Factory, or a brand of U-Swirl in that country. License agreements are generally entered into for a period of 3-10 years and allow the licensee exclusive development rights in a country.
International Franchising and Licensing International growth is generally achieved through entry into a Master License Agreement covering specific countries, with a licensee that meets minimum qualifications to develop Rocky Mountain Chocolate Factory in that country. License agreements are generally entered into for a period of 3-10 years and allow the licensee exclusive development rights in a country.
Festival and Community Centers As of February 28, 2022, there were approximately 30 Rocky Mountain Chocolate Factory stores in festival and community centers. Festival and community centers offer retail shopping outside of traditional regional and outlet center shopping.
Festival and Community Centers As of February 28, 2023, there were approximately 31 Rocky Mountain Chocolate Factory stores in festival and community centers. Festival and community centers offer retail shopping outside of traditional regional and outlet center shopping.
Most Rocky Mountain Chocolate Factory stores do not have significant space for the storage of inventory, and we encourage franchisees and store managers to order only the quantities that they can reasonably expect to sell within approximately two to four weeks.
Most Rocky Mountain Chocolate Factory stores do not have significant space for the storage of inventory, and we encourage franchisees and store managers to order only the quantities that they can reasonably expect to sell within approximately two to four weeks. For these reasons, we generally do not have a significant backlog of orders.
As a result of macro-economic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs. Trucking Operations We operate nine trucks and ship a substantial portion of our products from the factory on our own fleet.
As a result of recent macro-economic inflationary trends and disruptions to the global supply chain, we have experienced and may continue to experience higher raw material, labor, and freight costs. Trucking Operations We operate eight trucks and ship a substantial portion of our products from the factory on our own fleet.
We have experienced and expect to continue to experience labor and logistics challenges, which we believe have contributed to lower factory, retail and e-commerce sales of our products due to the availability of material, labor and freight.
We have seen labor and logistics challenges, which we believe have contributed to lower factory, retail, and e-commerce sales of our products due to the availability of material, labor, and freight.
Site Selection Careful selection of a site is critical to the success of our stores. We consider many factors in identifying suitable sites, including tenant mix, visibility, attractiveness, accessibility, level of foot traffic and occupancy costs. Final site selection occurs only after our senior management has approved the site.
We consider many factors in identifying suitable sites, including tenant mix, visibility, attractiveness, accessibility, level of foot traffic and occupancy costs. Final site selection occurs only after our senior management has approved the site.
Our principal competitive strengths lie in our brand name recognition, our reputation for the quality, variety and taste of our products, the special ambiance of our stores, our knowledge and experience in applying criteria for selection of new store locations, our expertise in the manufacture of chocolate candy products and the merchandising and marketing of confectionary products, and the control and training infrastructures we have implemented to assure consistent customer service and execution of successful practices and techniques at our stores.
Our principal competitive strengths lie in our brand name recognition, our reputation for the quality, variety and taste of our products, the ambiance of our stores, our expertise in the manufacture of chocolate candy products and the merchandising and marketing of confectionary products, and the control and training infrastructures we have implemented to ensure consistent customer service and execution of successful practices and techniques at our stores.
In FY 2022, approximately 17% of our factory sales resulted from the sale of products outside of our system of franchised and licensed locations, which we refer to as specialty markets, compared with 37% of our factory sales resulting from specialty markets customers in FY 2021.
In FY 2023, approximately 15% of our factory sales resulted from the sale of products outside of our system of franchised and licensed locations, which we refer to as Omni-channel customers, compared with 17% of our factory sales resulting from Omni-channel customers in FY 2022.
In-store preparation is designed to be both fun and entertaining for customers and we believe the in-store preparation and aroma of our products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for our customers and convey an image of freshness and homemade quality.
We believe the in-store preparation and aroma of our products enhances the ambiance at Rocky Mountain Chocolate Factory stores, is fun and entertaining for our customers and conveys an image of freshness and homemade quality.
Additionally, certain states have enacted and others may enact laws and regulations governing the termination or non-renewal of franchises and other aspects of the franchise relationship that are intended to protect franchisees.
Additionally, certain states have enacted and others may enact laws and regulations governing the termination or non-renewal of franchises and other aspects of the franchise relationship that are intended to protect franchisees, including among other things, limitation on the duration and scope of non-competition provisions applicable to franchisees.
To date, the majority of stores have location specific websites and location specific Facebook® pages dedicated to help customers interact directly with their local store. Proceeds from the monthly marketing fees collected from franchisees are used by us to facilitate and assist stores in managing their online presence consistent with our brand and marketing efforts.
The majority of stores have location-specific Facebook® and Instagram® accounts dedicated to helping customers interact directly with their local store. Proceeds from the monthly marketing fees collected from franchisees are used by us to facilitate and assist stores in managing their online presence consistent with our brand and marketing efforts. Competition The retailing of confectionery products is highly competitive.
We believe that we are operating in substantial compliance with all applicable laws and regulations. 13 Table of Contents Employees At February 28, 2022, we employed approximately 217 people, including 155 full-time employees. Most employees, with the exception of store management, factory management and corporate management, are paid on an hourly basis.
We believe that we are operating in substantial compliance with all applicable laws and regulations. Human Capital On February 28, 2023, we employed approximately 158 people, including 136 full-time employees, in the United States. Most employees, with the exception of store management, factory management and corporate management, are paid on an hourly basis.
Generally, we require an initial license fee and commitment to a development schedule. International license agreements in place include the following: ● In March 2013, we entered into a Licensing Agreement in the country of South Korea.
Generally, we require an initial license fee and commitment to a development schedule. Active international license agreements in place include the following: ● In October 2014, we entered into a Licensing Agreement in the Republic of the Philippines.
Quality Standards and Control The franchise agreements for Rocky Mountain Chocolate Factory and U-Swirl brands franchisees require compliance with our procedures of operation and food quality specifications and permits audits and inspections by us. Operating standards for Rocky Mountain Chocolate Factory and U-Swirl brands stores are set forth in operating manuals.
Quality Standards and Control The franchise agreements for Rocky Mountain Chocolate Factory brand franchisees require compliance with our procedures of operation and food quality specifications and permit audits and inspections by us. Operating standards for Rocky Mountain Chocolate Factory brand stores are set forth in operating manuals. These manuals cover general operations, factory ordering, merchandising, advertising and accounting procedures.
The refusal right, if exercised, would allow us to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee.
The refusal right, if exercised, would allow us to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee. The term of each franchise agreement is ten years, and franchisees have the right to renew for one additional ten-year term.
Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store prepares numerous products, including fudge, barks and caramel apples, in the store.
Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store prepares numerous products, including caramel apples, in the store. In-store preparation is designed to be both fun and entertaining for customers.
We seek to establish a fun, enjoyable and inviting atmosphere in each of our store locations. Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store prepares numerous products, including fudge, barks and caramel apples, in the store.
We seek to establish a fun, enjoyable and inviting atmosphere in each of our store locations. Unlike many other confectionery stores, each Rocky Mountain Chocolate Factory store prepares numerous products, including caramel apples, in the store. In FY 2023, an average of approximately half of the revenues of franchised stores were generated by sales of products prepared on premises.
The “U-Swirl Frozen Yogurt and Design” (a logo) is also registered in Mexico and U-Swirl has a registration for “U-Swirl” in Canada. We have not attempted to obtain patent protection for the proprietary recipes developed by our master candy-maker and instead rely upon our ability to maintain the confidentiality of those recipes.
We have not attempted to obtain patent protection for the proprietary recipes developed by our master candy-maker and instead rely upon our ability to maintain the confidentiality of those recipes.
Training is based on standard operating policies and procedures contained in an operations manual provided to all franchisees, which the franchisee is required to follow by terms of the franchise agreement. Additionally, and importantly, trainees are provided with a complete orientation to our operations by working in key factory operational areas and by meeting with members of our senior management.
Training is based on standard operating policies and procedures contained in an operations manual provided to all franchisees, which the franchisee is required to follow by terms of the franchise agreement.
Our consolidated revenues are primarily derived from three principal sources: (i) sales to franchisees and other third parties of chocolates and other confectionery products manufactured by us (69%-74%-68%); (ii) sales at Company-owned stores of chocolates, other confectionery products and frozen yogurt (including products manufactured by us) (9%-8%-10%) and (iii) the collection of initial franchise, royalties and marketing fees from franchisees (22%-18%-22%).
Our consolidated revenues in FY 2023 were primarily derived from three principal sources: (i) sales to franchisees and other third parties of chocolates and other confectionery products manufactured by us (77%-76%-80% in 2023, 2022 and 2021 respectively); (ii) sales at Company-owned stores of chocolates and other confectionery products (including products manufactured by us) (3%-4%-4%), and (iii) the collection of initial franchise, royalties and marketing fees from franchisees (20%-20%-16%).
Internet and Social Media Beginning in 2010, we initiated a program to leverage the marketing benefits of various social media outlets. These low-cost marketing opportunities seek to leverage the positive feedback of our customers to expand brand awareness through a customer’s network of contacts.
This support leverages low-cost, high return publicity opportunities for mutual gain partnerships. Internet and Social Media We’ve initiated a robust program to leverage the marketing benefits of various social media outlets. These lower-cost marketing opportunities leverage the positive feedback of our customers, expanding brand awareness through a customer’s network of contacts.
The term of each franchise agreement is ten years, and franchisees have the right to renew for one additional ten-year term. 10 Table of Contents Franchise Financing We do not typically provide prospective franchisees with financing for their stores for new or existing franchises, but we have developed relationships with several sources of franchisee financing to whom we will refer franchisees.
Franchise Financing We do not typically provide prospective franchisees with financing for their stores for new or existing franchises, but we have developed relationships with several sources of franchisee financing to whom we will refer franchisees. Typically, franchisees have obtained their own sources of such financing and have not required our assistance.
Many of these competitors have greater name recognition and financial, marketing and other resources than us. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees.
We and our franchisees compete with numerous businesses that offer products similar to those offered by our stores. Many of these competitors have greater name recognition and financial, marketing and other resources than us. In addition, there is intense competition among retailers for attractive commercial real estate sites suitable for Rocky Mountain Chocolate Factory stores, store personnel and qualified franchisees.
We have established a business relationship with most of the major developers in the United States and believe that these relationships provide us with the opportunity to take advantage of attractive sites in new and existing real estate environments. COVID-19 has had a significant impact on the operation of traditional high traffic environments.
We have established business relationships with most of the major developers in the United States and believe that these relationships provide us with the opportunity to take advantage of attractive sites in new and existing real estate environments. Multi-unit Operators We have traditionally focused our franchise marketing efforts largely on single unit operators.
The field consultants also review and discuss store operating results with the franchisee and provide advice and guidance in improving store profitability and in developing and executing store marketing and merchandising programs.
We provide ongoing support to franchisees through our field consultants, who maintain regular and frequent communication with the stores by phone and by site visits. The field consultants also review and discuss store operating results with the franchisee and provide advice and guidance in improving store profitability and in developing and executing store marketing and merchandising programs.
As of March 31, 2022, no units were operating in Canada and one unit was operating in Qatar. Co-Branding In August 2009, we entered into a Master License Agreement with Kahala Franchise Corp.
As of February 28, 2023, three units were operating under the agreement. ● In May 2017, we entered into a Licensing Agreement in the Republic of Panama. As of February 28, 2023, one unit was operating under the agreement. Co-Branding In August 2009, we entered into a Master License Agreement with Kahala Franchise Corp.
In order to assure a continuous supply of chocolate and certain nuts, we frequently enter into purchase contracts of between six to eighteen months for these products. Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall.
Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall.
Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our wholly-owned subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates self-serve frozen yogurt cafés. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products.
Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionary products. We also sell our candy in select locations outside of our system of retail stores.
Marketing General We rely primarily on in-store promotion and point-of-purchase materials to promote the sale of our products. The monthly marketing fees collected from franchisees are used by us to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update our local store marketing handbooks.
The monthly marketing fees collected from franchisees are used by us to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update our local store marketing guides and materials. We focus on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and brochures generated by our in-house Creative Services department.
Our trucking operations enable us to deliver our products to the stores quickly and cost-effectively. In addition, we back-haul our own ingredients and supplies, as well as products from third parties, on return trips, which helps achieve even greater efficiencies and cost savings.
In addition, we back-haul our own ingredients and supplies, as well as products from third parties, on return trips, which helps achieve even greater efficiencies and cost savings. 10 Table of Contents Marketing General We rely primarily on in-store promotion and point-of-purchase materials to promote the sale of our products.
New stores must also comply with landlord and developer criteria. Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises. We are also subject to the Federal Trade Commission regulations relating to disclosure requirements in the sale of franchises and ongoing disclosure obligations.
Difficulties or failures in obtaining the required licensing or approvals could delay or prevent the opening of new stores. New stores must also comply with landlord and developer criteria. Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises.
Regional Centers As of February 28, 2022, there were Rocky Mountain Chocolate Factory stores in approximately 30 regional centers, including a location in the Mall of America in Bloomington, Minnesota. Although they often provide favorable levels of foot traffic, regional centers typically involve more expensive rent structures and competing food and beverage concepts.
Although they often provide favorable levels of foot traffic, regional centers typically involve more expensive rent structures and competing food and beverage concepts. 7 Table of Contents Tourist Areas, Street Fronts, Airports and Other Entertainment-Oriented Shopping Centers As of February 28, 2023, there were approximately 27 Rocky Mountain Chocolate Factory stores in locations considered to be tourist areas.
Rocky Mountain Chocolate Factory domestic franchise locations in operation as of February 28, 2022 include: Outlet Centers 20.8 % Regional Centers 19.5 % Festival/Community Centers 19.5 % Tourist Areas 17.5 % Street Fronts 10.4 % Airports 5.8 % Other 6.5 % COVID-19 has had a significant impact on the operation of traditional high traffic environments.
Rocky Mountain Chocolate Factory domestic franchise locations in operation as of February 28, 2023, include: Outlet Centers 20.9 % Festival/Community Centers 20.3 % Regional Centers 18.9 % Tourist Areas 17.6 % Street Fronts 10.5 % Airports 5.9 % Other 5.9 % Outlet Centers As of February 28, 2023, there were approximately 32 Rocky Mountain Chocolate Factory stores in outlet centers.
We use only the finest chocolates, nutmeats and other wholesome ingredients in our candies and continually strive to offer new confectionery items in order to maintain the excitement and appeal of our products.
We use the finest chocolates, nutmeats and other wholesome ingredients in our candies and continually strive to offer new confectionery items in order to maintain the excitement and appeal of our products. We develop special packaging for the Christmas, Valentine's Day and Easter holidays, and customers can have their purchases packaged in decorative boxes and fancy tins throughout the year.
Locations developed or modified under the agreement will remain franchisees of Cold Stone Creamery and will be licensed to offer the Rocky Mountain Chocolate Factory brand.
Locations developed or modified under the agreement will remain franchisees of Cold Stone Creamery and will be licensed to offer the Rocky Mountain Chocolate Factory brand. As of February 28, 2023, Cold Stone Creamery franchisees operated 101 stores under this agreement. Additionally, we allow U-Swirl brands to offer Rocky Mountain Chocolate Factory products under terms similar to other co-branding agreements.
Tourist Areas, Street Fronts, Airports and Other Entertainment-Oriented Shopping Centers As of February 28, 2022, there were approximately 27 Rocky Mountain Chocolate Factory stores in locations considered to be tourist areas. Tourist areas are very attractive locations because they offer high levels of foot traffic and favorable customer spending characteristics, and greatly increase our visibility and name recognition.
Tourist areas are very attractive locations because they offer high levels of foot traffic and favorable customer spending characteristics, and greatly increase our visibility and name recognition. We believe there are a number of other environments that have the characteristics necessary for the successful operation of Rocky Mountain Chocolate Factory stores such as airports and casinos.
U-Swirl franchisees are required to complete a similar training program. Topics covered in the training course include our philosophy of store operation and management, customer service, merchandising, pricing, cooking, inventory and cost control, quality standards, record keeping, labor scheduling and personnel management.
We have established a training center at our Durango headquarters in the form of a full-sized replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store. Topics covered in the training course include our philosophy of store operation and management, customer service, merchandising, pricing, cooking, inventory and cost control, quality standards, record keeping, labor scheduling and personnel management.
We use our own proprietary recipes, primarily developed by our master candy makers. A typical Rocky Mountain Chocolate Factory store offers up to 100 of our chocolate candies throughout the year and as many as 200, including many packaged candies, during the holiday seasons.
A typical Rocky Mountain Chocolate Factory store offers up to 100 of our chocolate candies throughout the year and as many as 200, including many packaged candies, during the holiday seasons. Individual stores also offer numerous varieties of gourmet caramel apples as well as other products prepared in the store from Company recipes.
Company-owned stores provide a training ground for Company-owned store personnel and district managers and a controllable testing ground for new products and promotions, operating and training methods and merchandising techniques, which may then be incorporated into the franchise store operations.
Our flagship store, located in Durango, Colorado, (“Flagship Store”) provides a training ground for Company personnel and a controllable testing ground for new products and promotions, operating and training methods and merchandising techniques, which may then be incorporated into the franchise store operations. 9 Table of Contents Manufacturing Operations General We manufacture our chocolate candies at our manufacturing facility in Durango, Colorado.
These manuals cover general operations, factory ordering, merchandising, advertising and accounting procedures. Through their regular visits to franchised stores, our field consultants audit performance and adherence to our standards. We have the right to terminate any franchise agreement for non‑compliance with our operating standards.
Through their regular visits to franchised stores, our field consultants audit performance and adherence to our standards. We have the right to terminate any franchise agreement for non‑compliance with our operating standards. Products sold at the stores and ingredients used in the preparation of products approved for on-site preparation must be purchased from us or from approved suppliers.
Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year.
Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year. 11 Table of Contents Regulation Company-owned and franchised Rocky Mountain Chocolate Factory stores are subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located.
Co-branding can also be used to more efficiently manage rent structure, payroll and other operating costs in environments that have not historically supported stand-alone Rocky Mountain Chocolate Factory stores. As of February 28, 2022, Cold Stone Creamery franchisees operated 97 co-branded locations, our U-Swirl franchisees operated six co-branded locations and three Company-owned co-branded units were in operation.
Co-branding a location is a vehicle to exploit retail environments that would not typically support a stand-alone Rocky Mountain Chocolate Factory store. Co-branding can also be used to more efficiently manage rent structure, payroll and other operating costs in environments that have not historically supported stand-alone Rocky Mountain Chocolate Factory stores.
We focus on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and mail order catalogs generated by our in-house Creative Services department. The department works directly with franchisees to implement local store marketing programs. We have not historically, and do not intend to, engage in national traditional media advertising in the near future.
The department works directly with franchisees to implement local store marketing programs. We have not historically, and do not intend to, engage in national traditional media advertising in the near future. Consistent with our commitment to community support, we seek opportunities to participate in local and regional events, sponsorships and charitable causes.
Training and Support Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a comprehensive training program in store operations and management. We have established a training center at our Durango headquarters in the form of a full-sized replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store.
As of February 28, 2023, there were 10 U-Swirl cafés offering Rocky Mountain Chocolate Factory products. Training and Support Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a comprehensive training program in store operations and management.
For additional information, wee Item 1A. “Rick Factors” - The Availability and Price of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our Control . Business Strategy Our objective is to build on our position as a leading international franchisor and manufacturer of high-quality chocolate, other confectionery products and frozen yogurt.
For additional information, see Item 1A. “Risk Factors” - The Availability and Price of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our Control . “Item 7.
Our operating objectives include providing knowledge and expertise in merchandising, marketing and customer service to all front-line store level employees to maximize their skills and ensure that they are fully versed in our proven techniques. We provide ongoing support to franchisees through our field consultants, who maintain regular and frequent communication with the stores by phone and by site visits.
Additionally, and importantly, trainees are provided with a complete orientation to our operations by working in key factory operational areas and by meeting with members of our senior management. 8 Table of Contents Our operating objectives include providing knowledge and expertise in merchandising, marketing and customer service to all front-line store level employees to maximize their skills and ensure that they are fully versed in our proven techniques.
For FY 2022, nearly all of our revenues were derived from domestic sources, with approximately 1% derived from international sources.
For FY 2023, nearly all of our revenues were derived from domestic sources, with less than 1% derived from international sources. As described below, the Company sold its frozen yogurt business subsequent to the end of FY 2023.
Our employees are not covered by a collective bargaining agreement. We consider our employee relations to be good. Available Information The Internet address of our website is www.rmcf.com . Additional websites specific to our franchise opportunities are www.sweetfranchise.com and www.u-swirl.com .
All of these materials are available on our web site at https://ir.rmcf.com/corporate-governance/governance-documents . Available Information The Internet address of our website is www.rmcf.com . Additional websites specific to our franchise opportunities and investor relations are www.sweetfranchise.com and https://ir.rmcf.com , respectively.
The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores are open seven days a week. Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6 p.m. on Sundays.
The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores are open seven days a week. In January 2007, we began testing co-branded locations, such as the co-branded stores with Cold Stone Creamery.
Our concept has been rated as an outstanding franchise opportunity by publications and organizations rating such opportunities.
Our concept has been rated as an outstanding franchise opportunity by publications and organizations rating such opportunities. The Rocky Mountain Chocolate Factory concept has frequently been ranked in the Top 500 Franchises by Entrepreneur Magazine. As of February 28, 2023, there were 157 franchised stores in the Rocky Mountain Chocolate Factory system.
Typically, franchisees have obtained their own sources of such financing and have not required our assistance. In the normal course of business, we extend credit to customers, primarily franchisees that satisfy pre-defined credit criteria, for inventory and other operational costs. During FY 2014, we began an initiative to finance entrepreneurial graduates of the Missouri Western State University (“MWSU”) entrepreneurial program.
In the normal course of business, we extend credit to customers, primarily franchisees that satisfy pre-defined credit criteria, for inventory and other operational costs. In select instances, we have provided limited financing to franchisees. As a result, as of February 28, 2023, we have approximately $200,000 of notes receivable as a result of financing our franchisees.
We continually seek opportunities to profitably expand our business. To accomplish this objective, we employ a business strategy that includes the elements set forth below. Product Quality and Variety We maintain the gourmet taste and quality of our chocolate candies by using only the finest chocolate and other wholesome ingredients.
Product Quality and Variety We maintain the gourmet taste and quality of our chocolate candies by using the finest chocolate and other wholesome ingredients. We use our proprietary recipes, primarily developed by our master candy makers.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese provisions will: ● limit the business at special meetings to the purpose stated in the notice of the meeting; ● authorize the issuance of “blank check” preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover attempt and that the Board of Directors can create and issue without prior stockholder approval; ● establish advance notice requirements for submitting nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting; ● require the affirmative vote of the “disinterested” holders of a majority of our common stock to approve certain business combinations involving an “interested stockholder” or its affiliates, unless either minimum price criteria and procedural requirements are met, or the transaction is approved by a majority of our “continuing directors” (known as “fair price provisions”).
Biggest changeThese provisions include the following: ● Authorize the issuance of “blank check” preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover attempt and that the Board of Directors can create and issue without prior stockholder approval; ● Establish advance notice requirements for submitting nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting; ● Prohibit stockholder actions by written consent, which means all stockholder actions must be taken at a meeting of our stockholders; and ● Require super-majority voting to amend some provisions in our certificate of incorporation and to amend our bylaws.
Our same store sales, defined as year-over-year sales for a store that has been open at least one year, have fluctuated significantly in the past on an annual and quarterly basis and are expected to continue to fluctuate in the future.
Our same store sales, defined as year-over-year sales for a store that has been open for at least one year, have fluctuated significantly in the past on an annual and quarterly basis and are expected to continue to fluctuate in the future.
A finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time, and could have a material adverse effect on us and our results of operations.
A finding of failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time, and could have a material adverse effect on us and our results of operations.
These breaches may result from human errors, equipment failure, or fraud or malice on the part of employees or third parties. We expend financial resources to protect against such threats and may be required to further expend financial resources to alleviate problems caused by physical, electronic, and cyber security breaches.
These breaches may result from human errors, equipment failure, fraud, or malice on the part of employees or third parties. We expend financial resources to protect against such threats and may be required to further expend financial resources to alleviate problems caused by physical, electronic, and cyber security breaches.
Our performance is subject to factors that affect worldwide economic conditions, including employment, consumer debt, reductions in net worth based on severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, public health, value of the U.S. dollar versus foreign currencies and other macroeconomic factors.
Our performance is subject to factors that affect worldwide economic conditions, including employment, consumer debt, reductions in net worth based on severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, public health, the value of the U.S. dollar versus foreign currencies and other macroeconomic factors.
Franchisees' sales of products manufactured by us generate higher revenues to us than sales of store-made or other products. We have seen a significant increase in system-wide sales of store-made and other products, which has led to a decrease in purchases from us and had an adverse effect on our revenues.
Franchisees' sales of products manufactured by us generate higher revenues to us than sales of store-made or other products. We have seen a significant increase in system-wide sales of store-made and other products, which has led to a decrease in purchases from us and has had an adverse effect on our revenues.
Many factors, which are outside our control, may cause the market price of our common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section and this Annual Report, as well as the following: ● our operating and financial performance and prospects; ● our quarterly or annual earnings or those of other companies in our industry compared to market expectations; ● conditions that impact demand at our stores and for our products; ● future announcements concerning our business or our competitors’ businesses; ● the public’s reaction to our press releases, other public announcements and filings with the SEC; ● the size of our public float, and the trading volume of our common stock; ● coverage by or changes in financial estimates by securities analysts or failure to meet their expectations; ● market and industry perception of our success, or lack thereof, in pursuing our growth strategy; ● strategic actions by us or our competitors, such as acquisitions or restructurings; 19 Table of Contents ● changes in laws or regulations which adversely affect our industry or us; ● changes in accounting standards, policies, guidance, interpretations or principles; ● changes in senior management or key personnel; ● issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock; ● changes in our dividend policy; ● adverse resolution of new or pending litigation against us; and ● changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, pandemics, public health crises, acts of war and responses to such events.
Many factors, which are outside our control, may cause the market price of our common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section and this Annual Report, as well as the following: ● Our operating and financial performance and prospects; ● Our quarterly or annual earnings or those of other companies in our industry compared to market expectations; ● Conditions that impact demand at our stores and for our products; ● Future announcements concerning our business or our competitors’ businesses; ● The public’s reaction to our press releases, other public announcements and filings with the SEC; ● The size of our public float, and the trading volume of our common stock; ● Coverage by or changes in financial estimates by securities analysts or failure to meet their expectations; ● Market and industry perception of our success, or lack thereof, in pursuing our growth strategy; ● Strategic actions by us or our competitors, such as acquisitions or restructurings; ● Changes in laws or regulations which adversely affect our industry or us; ● Changes in accounting standards, policies, guidance, interpretations or principles; ● Changes in senior management or key personnel; 18 Table of Contents ● Issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock; ● Changes in our dividend policy; ● Adverse resolution of new or pending litigation against us; and ● Changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, pandemics, public health crises, acts of war and responses to such events.
Any breaches that may occur could expose us to increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.
Any breaches that may occur could expose us to an increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.
Proceedings related to theft of credit and debit card information may be brought by payment card providers, banks, and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit), and federal and state regulators.
Proceedings related to the theft of credit and debit card information may be brought by payment card providers, banks, and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit), and federal and state regulators.
Furthermore, the importance of such information technology systems and networks increased in FY 2021 and continued into FY 2022 due to many of our employees working remotely as a result of the COVID-19 pandemic.
Furthermore, the importance of such information technology systems and networks increased in FY 2021 and continued into FY 2022 and FY 2023 due to many of our employees working remotely as a result of the COVID-19 pandemic.
Additionally, unforeseen problems with our point-of-sale system may affect our operational abilities and internal controls and we may incur additional costs in connection with such upgrades and expansion. 17 Table of Contents If We, our Business Partners, or our Franchisees Are Unable to Protect our Customers ’ Data, We Could Be Exposed to Data Loss, Litigation, Liability and Reputational Damage.
Additionally, unforeseen problems with our point-of-sale system may affect our operational abilities and internal controls and we may incur additional costs in connection with such upgrades and expansion. 16 Table of Contents If We, Our Business Partners, Or Our Franchisees Are Unable To Protect Our Customers ’ Data, We Could Be Exposed To Data Loss, Litigation, Liability And Reputational Damage.
Privacy and information security laws and regulations change over time, and compliance with those changes may result in cost increases due to necessary system and process changes. We Are Subject to Periodic Litigation, Which Could Result in Unexpected Expense of Time and Resources. From time to time, we are called upon to defend ourselves against lawsuits relating to our business.
Privacy and information security laws and regulations change over time, and compliance with those changes may result in cost increases due to necessary system and process changes. We Are Subject To Periodic Litigation, Which Could Result In Unexpected Expenses Of Time And Resources. From time to time, we are called upon to defend ourselves against lawsuits relating to our business.
We and our franchisees are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Because a significant number of our employees are paid at rates related to the federal minimum wage, increases in the minimum wage would increase our labor costs.
We and our franchisees are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Because a significant number of our employees are paid at rates related to the state minimum wage, increases in the minimum wage would increase our labor costs.
We rely in part on our franchisees and the manner in which they operate their stores to develop and promote our business.
We rely in large part on our franchisees and the manner in which they operate their stores to develop and promote our business.
During the past five fiscal years, same store sales results at Rocky Mountain Chocolate Factory franchise stores have fluctuated as follows: (a) from (24.8%) to 62.4% for annual results; and (b) from (29.3%) to 58.5% for quarterly results.
During the past five fiscal years, same store sales results at Rocky Mountain Chocolate Factory franchise stores have fluctuated as follows: (a) from (24.8%) to 62.4% for annual fiscal year comparisons; and (b) from (29.3%) to 58.5% for quarterly comparisons.
We may find it more difficult in our markets to secure desirable locations and to hire, motivate and keep qualified employees. 18 Table of Contents Issues Or Concerns Related To The Quality And Safety Of Our Products, Ingredients Or Packaging Could Cause A Product Recall And/Or Result In Harm To The Company ’ s Reputation, Negatively Impacting Our Results of Operations.
We may find it more difficult in new markets to secure desirable locations and to hire, motivate and keep qualified employees. 17 Table of Contents Issues Or Concerns Related To The Quality And Safety Of Our Products, Ingredients Or Packaging Could Cause A Product Recall And/Or Result In Harm To The Company ’ s Reputation, Negatively Impacting Our Results Of Operations.
In FY 2022, approximately 49% of franchised stores' revenues are generated by sales of products manufactured by and purchased from us, 48% by sales of products made in the stores with ingredients purchased from us or approved suppliers and 3% by sales of products purchased from approved suppliers for resale in the stores.
In FY 2023, approximately 49% of franchised stores' revenues are generated by sales of products manufactured by and purchased from us, 48% by sales of products made in the stores with ingredients purchased from us or approved suppliers and 3% by sales of products purchased from approved suppliers for resale in the stores.
Although we have developed criteria to evaluate and screen prospective developers and franchisees, we cannot be certain that the developers and franchisees we select will have the business acumen or financial resources necessary to open and operate successful franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise arrangements.
Although we have developed, and continue to develop, evolving criteria to evaluate and screen prospective developers and franchisees, we cannot be certain that the developers and franchisees we select will have the business acumen or financial resources necessary to open and operate successful franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise arrangements.
Numerous other factors that we cannot control, such as economic conditions, demographic trends, traffic patterns and weather conditions, influence the sale of our products. Changes in any of these factors could have a material adverse effect on us and our results of operations. 16 Table of Contents We Are Subject to Federal, State and Local Regulation.
Numerous other factors that we cannot control, such as economic conditions, demographic trends, traffic patterns and weather conditions, influence the sale of our products. Changes in any of these factors could have a material adverse effect on us and our results of operations. 15 Table of Contents We Are Subject To Federal, State And Local Regulations.
Disruption to our manufacturing operations or our supply chain could result from a number of factors, including: natural disaster, pandemic, outbreak of disease, weather, fire or explosion, terrorism or other acts of violence, labor strikes or other labor activities, unavailability of raw or packaging materials, and operational and/or financial instability of key suppliers and other vendors or service providers.
Disruption to our manufacturing facility or to our supply chain could result from a number of factors, including natural disasters, pandemics, outbreak of disease, weather, fire or explosion, terrorism or other acts of violence, labor strikes or other labor activities, unavailability of raw or packaging materials, and operational and/or financial instability of key suppliers and other vendors or service providers.
Although we have established criteria to evaluate prospective franchisees and have been successful in attracting franchisees, there can be no assurance that franchisees will be able to operate successfully in their franchise areas in a manner consistent with our concepts and standards. Increases in Costs Could Adversely Affect Our Operations.
Although we have established criteria to evaluate prospective franchisees and have been successful in attracting franchisees, there can be no assurance that franchisees will be able to operate successfully in their franchise areas in a manner consistent with our concepts and standards.
It is possible, especially in light of the COVID-19 pandemic that additional franchisees could file for bankruptcy, become delinquent in their payments to us, or simply shut down which could have a significant adverse impact on our business due to loss or delay in payments of royalties, contributions to our marketing fund and other fees.
It is possible that additional franchisees could file for bankruptcy, become delinquent in their payments to us, or simply shut down which could have a significant adverse impact on our business due to loss of factory sales and loss or delay in payments of royalties, contributions to our marketing fund and other fees.
Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors.
Our amended and restated certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors.
However, if we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted.
However, if we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing facility or supply chain, our financial condition and results of operations could be negatively impacted. 20 Table of Contents ITEM 1B. UNRESOLVED STAFF COMMENTS None.
Our growth is dependent upon the ability of franchisees to operate their stores successfully, promote and develop our store concepts, and maintain our reputation for an enjoyable in-store experience and high-quality products.
Our continued growth and success are dependent in part upon our ability to attract, retain and contract with qualified franchisees. Our growth is dependent upon the ability of franchisees to operate their stores successfully, promote and develop our store concepts, and maintain our reputation for an enjoyable in-store experience and high-quality products.
ITEM 1A. RISK FACTORS Risks Specific to Our Company and Strategy Our Sales to Specialty Market Customers, Customers Outside Our System of Franchised Stores, Are Concentrated Among a Small Number of Customers. The Company has historically sold its product to relatively few customers outside its network of franchised and licensed locations (specialty markets).
ITEM 1A. RISK FACTORS Risks Specific to Our Company and the Industry in Which We Operate Our Sales To Omni-Channel Customers, Customers Outside Our System Of Franchised Stores, Are Concentrated Among A Small Number Of Customers. The Company has historically sold its product to relatively few customers outside its network of franchised and licensed locations (Omni-channel customers).
Inflationary factors such as increases in the costs of ingredients, energy and labor directly affect our operations. Most of our leases provide for cost-of-living adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease costs for new facilities may reflect potentially escalating costs of real estate and construction.
Most of our leases provide for cost-of-living adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease costs for new facilities may reflect potentially escalating costs of real estate and construction.
Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year.
Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year. The Retailing Of Confectionery Products Is Highly Competitive And Many Of Our Competitors Have Competitive Advantages Over Us.
Disruption To Our Manufacturing Operations Or Supply Chain Could Impair Our Ability To Produce Or Deliver Finished Products, Resulting In A Negative Impact On Our Results of Operations. All of our manufacturing operations are located in Durango, Colorado.
Insolvency of key suppliers could also cause similar business interruptions and negatively impact our business. Disruption To Our Manufacturing Facility Or Supply Chain Could Impair Our Ability To Produce Or Deliver Finished Products, Resulting In A Negative Impact On Our Results Of Operations. All of our manufacturing operations are located in Durango, Colorado.
If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalty revenues and the impact on our profitability could be greater than the percentage decrease in the royalty revenues. Closure of franchised stores was higher during FY 2021 as a result of the COVID-19 pandemic.
If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalty revenues and the impact on our profitability could be greater than the percentage decrease in the royalty revenues.
If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could decline significantly, which would reduce our royalty revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees. 22 Table of Contents A Significant Shift by Franchisees from Company-Manufactured Products to Products Produced by Third Parties Could Adversely Affect Our Operations.
If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could decline significantly, which would reduce our royalty revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.
Consumers in any new markets we enter will not be familiar with our brands, and we will need to build brand awareness in those markets through significant investments in advertising and promotional activity.
Our Expansion Into New Markets May Present Increased Risks Due To Our Unfamiliarity With Those Areas And Our Target Customers ’ Unfamiliarity With Our Brands. Consumers in any new markets we enter will not be familiar with our brands, and we will need to build brand awareness in those markets through significant investments in advertising and promotional activity.
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays and summer vacation season than at other times of the year, which causes fluctuations in our quarterly results of operations.
The Seasonality Of Our Sales And New Store Openings Can Have A Significant Impact On Our Financial Results From Quarter To Quarter. Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during key holidays and summer vacation season than at other times of the year, which causes fluctuations in our quarterly results of operations.
While we are responsible for ensuring the success of our entire system of stores and for taking a longer-term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests.
While we are responsible for ensuring the success of our entire system of stores and for taking a longer-term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may not be able to secure adequate financing to open or continue operating their Rocky Mountain Chocolate Factory stores.
There is no assurance that we will be able to obtain suitable locations for our franchised stores in this environment at a cost that will allow such stores to be economically viable.
There is no assurance that we will be able to obtain suitable locations for our franchised stores in this environment at a cost that will allow such stores to be economically viable. 14 Table of Contents Same Store Sales Have Fluctuated and Will Continue to Fluctuate on a Regular Basis.
Changes in Consumer Tastes and Trends Could Have a Material Adverse Effect on Our Operations. The sale of our products is affected by changes in consumer tastes and eating habits, including views regarding consumption of chocolate and frozen yogurt.
Competitive market conditions could have a material adverse effect on us and our results of operations and our ability to expand successfully. Changes In Consumer Tastes And Trends Could Have A Material Adverse Effect On Our Operations. The sale of our products is affected by changes in consumer tastes and health concerns, including views regarding the consumption of chocolate.
We also receive and maintain certain personal information about our customers, including information received through our marketing programs, franchisees and business partners. The use of this information by us is regulated at the federal and state levels.
We also receive and maintain certain personal information about our customers, including information received through our marketing programs, franchisees and business partners. Our collection, storage, handling, use, disclosure and security of this information is regulated by U.S. federal, state and local and foreign laws and regulations.
Price Increases May Not Be Sufficient To Offset Cost Increases And Maintain Profitability Or May Result In Sales Volume Declines Associated With Pricing Elasticity.
If we are unable to pass along cost increases we may realize a decrease in gross margin on products we sell and produce. Price Increases May Not Be Sufficient To Offset Cost Increases And Maintain Profitability Or May Result In Sales Volume Declines Associated With Pricing Elasticity.
Consumer purchases of discretionary items, including our products, generally decline during weak economic periods, such as the recent economic downturn caused by the COVID-19 pandemic, and other periods where disposable income is adversely affected.
Consumer purchases of discretionary items, including our products, often decline during weak economic periods where disposable income is adversely affected.
Our franchisees may not be able to secure adequate financing to open or continue operating their Rocky Mountain Chocolate Factory stores or U-Swirl cafés. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience financial distress or even bankruptcy.
If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience financial distress or even bankruptcy.
Many of these competitors have greater name recognition and financial, marketing and other resources than we do. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees. Competitive market conditions could have a material adverse effect on us and our results of operations and our ability to expand successfully.
The retailing of confectionery products is highly competitive. We and our franchisees compete with numerous businesses that offer similar products. Many of these competitors have greater name recognition and financial, marketing and other resources than we do. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees.
If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our results of operations. Anti-Takeover Provisions In Our Certificate Of Incorporation And Bylaws May Delay Or Prevent A Third Party Acquisition Of The Company, Which Could Decrease The Value Of Our Common Stock.
If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our results of operations.
Risks related to Our Franchisees The Financial Performance of Our Franchisees Can Negatively Impact Our Business. Our financial results are dependent in part upon the operational and financial success of our franchisees. We receive royalties, franchise fees, contributions to our marketing fund, and other fees from our franchisees.
Our financial results are dependent in part upon the operational and financial success of our franchisees. Franchisees purchase product from us and we receive royalties, franchise fees, contributions to our marketing fund, and other fees from our franchisees. We have established operational standards and guidelines for our franchisees; however, we have limited control over how our franchisees’ businesses are run.
In addition, price volatility may be greater if the public float and trading volume of our common stock is low. As a result, you may suffer a loss on your investment. Our Quarterly Dividend has Been Suspended and Our Decision to Pay Dividends on our Common Stock in the Future is Subject to the Discretion of our Board of Directors.
In addition, price volatility may be greater if the public float and trading volume of our common stock is low. As a result, you may suffer a loss on your investment. Risks Related to the Economy Global Or Regional Health Pandemics Or Epidemics Could Negatively Impact Our Business Operations, Financial Performance And Results Of Operations.
The nature of the COVID-19 pandemic makes it impossible to predict how our business and operations will be affected in the near and long term. 21 Table of Contents General Economic Conditions Could Have a Material Adverse Effect on our Business, Results of Operations and Liquidity or our Franchisees, with Adverse Consequences to Us.
Any of these disruptions could have a negative impact on our business operations, financial performance, results of operations and stock price, and this impact could be material. General Economic Conditions Could Have A Material Adverse Effect On Our Business, Results Of Operations And Liquidity Or Our Franchisees, With Adverse Consequences To Us.
Our Growth is Dependent Upon Attracting and Retaining Qualified Franchisees and Their Ability to Operate Their Franchised Stores Successfully. Our continued growth and success is dependent in part upon our ability to attract, retain and contract with qualified franchisees.
We cannot be certain that we will be successful in managing these or any other significant risks that we encounter as a result of divesting the U-Swirl business. Our Growth Is Dependent Upon Attracting And Retaining Qualified Franchisees And Their Ability To Operate Their Franchised Stores Successfully.
Removed
Until 2019 much of the revenue generated from sales to specialty markets was derived from sales to FTD Companies, Inc. In June 2019 FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11 bankruptcy proceedings.
Added
During FY 2023 our sales to Omni-channel customers were approximately $3.5 million or 11.5% of our total revenue. Of this amount, approximately 77% or $2.7 million was the result of sales to three customers. The Divestiture Of Our U-Swirl Business May Have Material Adverse Effects On Our Financial Condition, Results Of Operations Or Cash Flows.
Removed
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. The Company does not expect future revenues from FTD to be significant.
Added
In May 2023, subsequent to our fiscal year-end, we announced that we had completed the sale of substantially all of the assets of U-Swirl, our wholly-owned subsidiary and frozen yogurt business.
Removed
Beginning in FY 2020 and continuing through FY 2022 the Company began selling its products to Edible under a strategic alliance. Sales to Edible constituted much of our revenue derived from sales to specialty markets during FY 2021 and FY 2022.
Added
The consummation of the sale of the U-Swirl business involves risks, including retention of uncertain contingent liabilities related to the divested business and risks associated with the collection of notes receivable contemplated in the sale, any of which could result in a material adverse effect to our financial condition, results of operations or cash flows.
Removed
Revenue from Edible represented approximately $1.7 million or 5.3% of our total revenues during the year ended February 28, 2022, compared to revenue of approximately $3.5 million or 15.1% of our total revenues during the year ended February 28, 2021.
Added
As a result, we may realize a reduction in number of units in operation or fail to achieve our opening targets. Increases In Costs Could Adversely Affect Our Operations. Inflationary factors such as increases in the costs of ingredients, energy and labor directly affect our operations.
Removed
The loss of Edible, or any other specialty markets customer could have a material adverse effect on our revenue and profitability. There is no assurance that the strategic alliance and ecommerce agreements will be deployed into our operations and to our satisfaction, or that we will achieve the expected full benefits from these agreements.
Added
If same store sales decline, we may experience a decrease in demand for products we sell and a decrease in revenue from royalty and marketing fees. Higher Labor Costs, Increased Competition For Qualified Team Members And Ensuring Adequate Staffing Increases The Cost Of Doing Business.
Removed
During FY 2022, certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable. There can be no assurance historical revenue levels will be indicative of future revenues.
Added
Additionally, Changes In Employment And Labor Laws, Including Health Care Legislation And Minimum Wage Increases, Could Increase Costs For Our System-Wide Operations. Our success depends in part on our and our franchisees’ ability to recruit, motivate, train and retain a qualified workforce to work in our stores in an intensely competitive environment.
Removed
There is also no assurance that we will be able to obtain locations with suitable foot traffic as a result of the impacts of the COVID-19 pandemic and the impact it has had on consumer’s ability to shop in person when compared to historical shopping patterns. 15 Table of Contents Same Store Sales Have Fluctuated and Will Continue to Fluctuate on a Regular Basis.
Added
We and our franchisees have experienced, and could continue to experience, a shortage of labor for stores positions due to job market trends and conditions, which could decrease the pool of available qualified talent for key functions.
Removed
During the past five fiscal years, same store sales results at U-Swirl franchise stores have fluctuated as follows: (a) from (39.4%) to 65.1% for annual results; and (b) from (29.5%) to 43.9% for quarterly results.
Added
Our ability to attract and retain hourly employees in our stores and factory has been impacted by these trends and conditions, and we expect staffing and labor challenges to continue into 2024.
Removed
If We Face Labor Shortages or Increased Labor Costs, our Results of Operations and our Growth Could Be Adversely Affected. Labor is a primary component of operating our business.
Added
Increased costs associated with recruiting, motivating and retaining qualified employees to work in the Company-owned stores, franchised stores and our factory have had, and may in the future have, a negative impact on our Company-owned store and factory margins and the margins of franchised stores.
Removed
If we experience labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, or increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), operating expenses could increase and our growth could be adversely affected.
Added
Competition for qualified drivers for both our stores and supply-chain function also continues to increase as more companies compete for drivers or enter the delivery space, including third party aggregators.
Removed
The COVID-19 pandemic has resulted in a labor shortage and has also increased our labor cost as a result of limited applicants for manufacturing jobs requiring on-site work. Labor shortages and increased labor costs may continue to be realized as a result of the COVID-19 pandemic.
Added
Additionally, economic actions, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us (including our ability to recruit and retain talent) or our franchisees and suppliers. Social media may be used to foster negative perceptions of employment with our Company in particular or in our industry generally, and to promote strikes or boycotts.
Removed
We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum wage and increases in the minimum wage will increase our labor costs. The federal minimum wage has been $7.25 per hour since July 24, 2009. Federally-mandated, state-mandated or locally-mandated minimum wages may be raised in the future.
Added
We are also subject to federal, state and foreign laws governing such matters as minimum wage requirements, overtime compensation, benefits, working conditions, citizenship requirements and discrimination and family and medical leave and employee related litigation. Labor costs and labor-related benefits are primary components in the cost of operation.
Removed
As of the date hereof, many states and the District of Columbia have set a minimum wage level higher than the federal minimum wage, including Colorado, where we employ the majority of our employees and minimum wage as of the date hereof is $12.56.
Added
Labor shortages, increased employee turnover and health care mandates could increase our system-wide labor costs. A significant number of hourly personnel are paid at rates at or above the federal and state minimum wage requirements.
Removed
We may be unable to increase our prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected.
Added
Accordingly, the enactment of additional state or local minimum wage increases above federal wage rates or regulations related to exempt employees has increased and could continue to increase labor costs for our domestic system-wide operations. A significant increase in the federal minimum wage requirement could adversely impact our financial condition and results of operations.
Removed
Labor market trends have recently required, and may continue to require, that we pay employees at rates significantly higher than state minimum wage in order to be competitive in the labor market. We have limited options available to us to recruit and retain employees in the event that the labor market remains highly competitive in the long term.
Added
Provisions In Our Organizational Documents, As Well As Provisions Of Delaware Law, Could Make It More Difficult Or Costly For A Third Party To Acquire Us, Even If Doing So Would Benefit Our Stockholders, And Could Limit Attempts To Make Changes In Our Management.
Removed
Our primary manufacturing facility is located in a region that may experience different or more sever labor challenges than the broader labor market. The Seasonality of Our Sales and New Store Openings Can Have a Significant Impact on Our Financial Results from Quarter to Quarter.
Added
Our business and financial results could be negatively impacted by pandemics or epidemics. The severity, magnitude and duration of global or regional pandemics or epidemics are uncertain and hard to predict.
Removed
The Retailing of Confectionery and Frozen Dessert Products is Highly Competitive and Many of Our Competitors Have Competitive Advantages Over Us. The retailing of confectionery and frozen dessert products is highly competitive. We and our franchisees compete with numerous businesses that offer similar products.
Added
COVID-19 significantly impacted economic activity and markets around the world, and resulted in broader supply, transportation and labor disruptions resulting in inflation and generally higher operating costs in our business. Relatedly, commodity and transportation costs have become more volatile and generally increased since the COVID-19 pandemic, as have supply chain disruptions, and transportation and labor shortages.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeDuring FY 2008, we conducted a study of factory capacity. As a result of this study, we believe the factory has the capacity to produce approximately 5.3 million pounds per year, subject to certain assumptions about product mix.
Biggest changeWe believe our manufacturing facility has the capacity to produce approximately 5.3 million pounds per year, subject to certain assumptions about product mix, which we believe is sufficient for our current operating needs.
ITEM 2. PROPERTIES Our manufacturing operations and corporate headquarters are located at a 53,000 square foot manufacturing facility, which we own, in Durango, Colorado. During FY 2022, our factory produced approximately 1.88 million pounds of chocolate candies, which was an increase of approximately 27.4% from the approximately 1.47 million pounds produced in FY 2021.
ITEM 2. PROPERTIES Our manufacturing operations and corporate headquarters are located at 265 Turner Drive, Durango, Colorado 81303, which is a 53,000 square foot manufacturing facility that we own. During FY 2023, our manufacturing operations produced approximately 1.69 million pounds of chocolate candies, which was a decrease of approximately 9.9% from the approximately 1.88 million pounds produced in FY 2022.
We currently have three café leases in place, which range between $5,800 and $8,900 per month, exclusive of common area maintenance charges and taxes. For information as to the amount of our rental obligations under leases on both Company-owned and franchised stores, see Note 10 “Leasing Arrangements” to our consolidated financial statements included in Item 8 of this Annual Report.
We do not deem this store lease to be material in relation to our overall operations. For information as to the amount of our rental obligations under leases on both Company-owned and franchised stores, see Note 10 “Leasing Arrangements” to our consolidated financial statements included in Item 8 of this Annual Report. ITEM 3. LEGAL PROCEEDINGS Item 1.
Removed
In January 1998, we acquired a two-acre parcel adjacent to our factory to ensure the availability of adequate space to expand the factory as volume demands. U-Swirl’s principal offices are the same as the Company’s and located at 265 Turner Drive, Durango, Colorado 81303.
Added
In addition to our manufacturing facility, we own a two-acre parcel adjacent to our manufacturing facility to ensure the availability of adequate space to expand as volume demands. As of February 28, 2023, the Company had obligations for one non-cancelable lease for our Flagship Store having an expiration date of January 31, 2026, which contains an optional ten-year renewal right.
Removed
As of February 28, 2022, the Company had obligations for two non-cancelable leases of five to ten years for Rocky Mountain Chocolate Factory Company-owned stores having varying expiration dates from January 2026 to July 2026, one of which contain optional five or ten-year renewal rights.
Added
Legal Proceedings The information set forth in Note 1 to the consolidated financial statements under the caption “ Subsequent Events ” appearing in Item 1 of Part I of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2022 , is incorporated by reference herein.
Removed
We do not deem any individual store lease to be significant in relation to our overall operations. The leases for our U-Swirl Company-owned cafés range from approximately 1,600 to 3,000 square feet and have varying expiration dates from April 2024 to May 2026, some of which contain optional five or 10-year renewal rights.
Added
The Company is a party to various other legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. 21 Table of Contents PART II.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock trades on the Nasdaq Global Market under the trading symbol “RMCF.” Holders On May 16, 2022, there were approximately 430 record holders of our common stock.
Biggest changeITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our shares of common stock trade on the Nasdaq Global Market tier of The Nasdaq Stock Market under the trading symbol “RMCF.” Holders On May 19, 2023, there were approximately 430 record holders of our common stock.
Removed
We believe that there are significantly more beneficial owners of our common stock. Dividends The Company paid a quarterly cash dividend of $0.12 per common share on March 13, 2020 to stockholders of record on February 28, 2020.
Added
This figure does not include an estimate of the number of beneficial holders whose shares are held of record by banks, broker or other nominees. Dividends Although we have previously paid cash dividends on our common stock, we have no present intention to pay cash dividends on our common stock.
Removed
Due to the impacts of the COVID-19 pandemic and other related factors, on May 11, 2020, the Company announced that the Board of Directors suspended any future quarterly dividends until the Board of Directors determines that resumption of dividend payments is in the best interest of us and our stockholders.
Added
Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our existing and any future debt and other factors that our board of directors deems relevant. ITEM 6. RESERVED
Removed
There is no assurance that we will resume dividend payments in the future, or if we do, at the same levels as declared in the past.
Removed
Future declarations of dividends will depend on, among other things, our results of operations, financial condition, cash flows and capital requirements, and on such other factors as the Board of Directors may in its discretion consider relevant and in the best long-term interest of stockholders.
Removed
We are subject to various financial covenants related to our line of credit and other long-term debt, however, those covenants do not restrict the Board of Director’s discretion of the future declaration of cash dividends. Performance Graph As a smaller reporting company, we are not required to provide the information required by this Item. ITEM 6. RESERVED

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe decrease in loss from operations and net loss was due primarily to recovery from the COVID-19 pandemic and the associated impact on revenue FY 2021 partially offset by the costs associated with the contested solicitation of proxies and the associated accrued severance and stock compensation costs during FY 2022.
Biggest changeThe decrease in loss from operations and net loss was due primarily to recovery from the COVID-19 pandemic and the associated impact on revenue during FY 2021 partially offset by the costs associated with the contested solicitation of proxies and the associated accrued severance and stock compensation costs during FY 2022. 26 Table of Contents REVENUES For the Year Ended ($'s in thousands) February 28, $ % 2022 2021 Change Change Factory sales $ 22,374.2 $ 17,321.0 $ 5,053.2 29.2 % Retail sales 1,160.3 896.8 263.5 29.4 % Franchise fees 179.7 178.1 1.6 0.9 % Royalty and marketing fees 5,774.4 3,367.3 2,407.1 71.5 % Total $ 29,488.6 $ 21,763.2 $ 7,725.4 35.5 % Factory Sales The increase in factory sales for FY 2022 compared to FY 2021 was primarily due to a 70.0% increase in sales of product to our network of franchised and licensed retail stores partially offset by a 40.7% decrease in shipments of product to customers outside our network of franchised retail stores.
There is no assurance that the Company will be able to pass on increased costs to its customers. Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost.
There is no assurance that the Company will be able to pass on increased costs to its customers. Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on the current replacement cost.
This change was primarily the result of the Company’s increased debt as a result of measures taken during the three months ended May 31, 2020 to ensure adequate liquidity during the COVID-19 pandemic. During FY 2021, the Company borrowed $3.4 million from its line of credit and borrowed $1.5 million of loans under the Paycheck Protection Program.
This change was primarily the result of the Company’s increased debt as a result of measures taken during the three months ended May 31, 2020 to ensure adequate liquidity during the COVID-19 pandemic. During FY 2021, the Company borrowed $3.4 million from its line of credit and borrowed $1.4 million of loans under the Paycheck Protection Program.
Beginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of the associated agreement, which is generally a period of 10-15 years. Prior to FY 2019, franchise fee revenue was recognized upon opening of the franchise store, or upon execution of an international license agreement.
Beginning in FY 2019, upon adoption of ASC 606, the Company began recognizing franchise fees and license fees over the term of the associated agreement, which is generally a period of 10 years. Prior to FY 2019, franchise fee revenue was recognized upon opening of the franchise store, or upon execution of an international license agreement.
The line of credit was paid in full and Paycheck Protection Program loans were fully forgiven during FY 2021. The Company recognized a gain on insurance recovery of $167,100 during FY 2022, compared with $210,500 recognized during FY 2021. The Company recognized forgiveness of debt of $1.5 million during FY 2021, with no comparable amount recognized during FY 2022.
The line of credit was paid in full and Paycheck Protection Program loans were fully forgiven during FY 2021. The Company recognized a gain on insurance recovery of $167,100 during FY 2022, compared with $210,500 recognized during FY 2021. The Company recognized forgiveness of debt of $1.4 million during FY 2021, with no comparable amount recognized during FY 2022.
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 may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the creditworthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.
Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
During FY 2022, the Company incurred approximately $1.7 million of costs associated with the contested solicitation of proxies and $2.0 million in change in control severance expense, compared with no comparable costs incurred in FY 2021. As a percentage of total revenues, general and administrative expenses increased to 23.3% in FY 2022 compared to 22.4% in FY 2021.
During FY 2022, the Company incurred approximately $1.7 million of costs associated with the contested solicitation of proxies and $2.0 million in change in control severance expense, compared with no comparable costs incurred in FY 2021. As a percentage of total revenues, general and administrative expenses increased to 25.3% in FY 2022 compared to 22.7% in FY 2021.
This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of higher royalty fees partially offset by higher costs. 29 Table of Contents Sales and Marketing The decrease in sales and marketing costs during FY 2022 compared to FY 2021 was primarily due to a decrease in online advertising costs.
This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of higher royalty fees partially offset by higher costs. Sales and Marketing The decrease in sales and marketing costs during FY 2022 compared to FY 2021 was primarily due to a decrease in online advertising costs.
Nearly all of our franchised locations experienced reduced operations and periods of full closure during FY 2021. Same store sales at domestic franchise locations increased 18.9% in FY 2022 when compared to FY 2020 (the most recent comparable period prior to the business disruptions of COVID-19).
Nearly all of our franchised locations experienced reduced operations and periods of full closure during FY 2021. Same store sales at domestic franchise locations increased 23.6% in FY 2022 when compared to FY 2020 (the most recent comparable period prior to the business disruptions of COVID-19).
“ Risk Factors. ” Overview Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”) (collectively, the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery manufacturer and retail operator.
“ Risk Factors. ” Overview Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”) (referred to as the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery manufacturer and retail operator.
The income tax expense in FY 2022 was primarily the result of differences in the valuation of restricted stock awards and the realization of $155,000 of employee retention credits that reduced the loss that could be carried back to prior periods.
The low effective income tax rate in FY 2022 was primarily the result of differences in the valuation of restricted stock awards and the realization of $155,000 of employee retention credits that reduced the loss that could be carried back to prior periods.
We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores’ gross retail sales and a royalty fee based on gross retail sales.
We recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory stores’ gross retail sales and a royalty fee based on gross retail sales.
For FY 2023 the Company anticipates making approximately $1.7 million of capital expenditures. The planned increase is the result of expected investment in machinery and equipment to replace equipment that has reached the end of its useful life. Impact of Inflation Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations.
For FY 2024 the Company anticipates making approximately $2.8 million in capital expenditures. The planned increase is the result of expected investment in machinery and equipment to replace equipment that has reached the end of its useful life. Impact of Inflation Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations.
Operating activities provided cash of $2.9 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being an increase in accrued liabilities of $1.3 million, depreciation and amortization of $1.2 million and stock compensation expense of $1.1 million. During FY 2021, we had a net loss of $900,000.
During FY 2022, we had a consolidated net loss of $342,000. Operating activities provided cash of $2.9 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being an increase in accrued liabilities of $1.3 million, depreciation and amortization of $740,000 and stock compensation expense of $1.1 million.
Franchise Costs The increase in franchise costs in FY 2022 compared to FY 2021 was due primarily to an increase in professional fees, the result of litigation with IC, our licensee in Canada. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 30.7% in FY 2022 from 39.9% in FY 2021.
Franchise Costs The increase in franchise costs in FY 2022 compared to FY 2021 was due primarily to an increase in professional fees, the result of litigation with IC, our licensee in Canada. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 32.2% in FY 2022 from 40.7% in FY 2021.
The closure or limited operation of our Company-owned stores was the result of COVID-19 and the associated public health measures in place during the FY 2021. Retail operating expenses, as a percentage of retail sales, decreased from 74.4% during FY 2021 to 60.6% in FY 2022.
The closure or limited operation of our Company-owned stores was the result of COVID-19 and the associated public health measures in place during the FY 2021. Retail operating expenses, as a percentage of retail sales, decreased from 53.4% during FY 2021 to 52.3% in FY 2022.
General and Administrative The increase in general and administrative costs during FY 2022 compared to FY 2021 is primarily due to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholders and the compensation costs associated with the letter agreement between the Company and Mr. Merryman.
General and Administrative The increase in general and administrative costs during FY 2022 compared to FY 2021 is primarily due to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholders and the compensation costs associated with the letter agreement between the Company and our former Chief Executive Officer and Chief Financial Officer.
Other Income (Expense) Other income decreased to $178,000 during FY 2022 compared to other income of $1.7 million during FY 2021. This change was primarily the result of debt forgiveness income during FY 2021 with no comparable amounts realized during FY 2022. Net interest income was $11,000 in FY 2022 compared to net interest expense of $77,000 during FY 2021.
This change was primarily the result of debt forgiveness income during FY 2021 with no comparable amounts realized during FY 2022. Net interest income was $11,000 in FY 2022 compared to net interest expense of $77,000 during FY 2021.
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in resort or tourist locations, and the nature of the products we sell, which are highly seasonal.
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in resort or tourist locations, and the nature of the products we sell, which are highly seasonal. Historically, the strongest sales of our products have occurred during key holidays and summer vacation seasons.
Rebates related to Company-owned locations are offset against operating costs. Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such reduction is based on our review of inventories on hand compared to estimated future usage and demand for our products.
Inventories - Our inventories are stated at the lower of cost or net realizable value and are reduced for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such reduction is based on our review of inventories on hand compared to estimated future usage and demand for our products.
The Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations.
The Company recognizes no royalty on franchised stores’ retail sales of products purchased from the Company’s manufacturing facility and recognizes a ten percent (10%) royalty on all other sales of product sold at franchise locations including products made in the store.
This excess capacity cost, in the form of idle labor, was included in cost of sales. Retail gross margins decreased from 65.3% during FY 2021 to 64.5% during FY 2022. The decrease in retail gross margins was primarily the result of higher costs.
This excess capacity cost, in the form of idle labor, was included in cost of sales. Retail gross margins decreased from 63.8% during FY 2021 to 60.6% during FY 2022. The decrease in retail gross margins was primarily the result of higher costs.
We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements. During FY 2022, we had a net loss of $342,000.
We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements. During FY 2023, we had a consolidated net loss of $5.7 million.
Cost of Sales and Gross Margin Factory gross margins increased to 18.9% in FY 2022 compared to a gross margin of 10.7% during FY 2021, due primarily to a 27.4% increase in production volume, higher average sell prices, and the impacts of Employee Retention Credits in FY 2022 compared to FY 2021, partially offset by increased costs of materials and labor.
Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin. 28 Table of Contents Cost of Sales and Gross Margin Factory gross margins increased to 18.9% in FY 2022 compared to a gross margin of 10.7% during FY 2021, due primarily to a 27.4% increase in production volume, higher average sell prices, and the impacts of Employee Retention Credits in FY 2022 compared to FY 2021, partially offset by increased costs of materials and labor.
During FY 2022, certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable. There can be no assurance historical revenue levels will be indicative of future revenues.
During FY 2022, certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements resulting in termination of the agreements in FY 2023, as described herein. There can be no assurance historical revenue levels will be indicative of future revenues.
This decrease is primarily the result of higher retail sales partially offset by higher retail operating expenses. Depreciation and Amortization Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $586,000 during FY 2022, a decrease of 17.5% from $711,000 incurred during FY 2021.
This decrease is primarily the result of higher retail sales partially offset by higher retail operating expenses. Depreciation and Amortization Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $119,000 during FY 2022, a decrease of 21.9% from $153,000 incurred during FY 2021. This decrease was the result of certain assets becoming fully depreciated.
We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We base our estimates on analyses, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe that the following represent our critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.
Income Tax Expense We incurred $35,400 of income tax expense in FY 2022 on a loss before income taxes of $306,000, compared to an income tax benefit of $891,900 realized in FY 2021 on a loss before income taxes of $1.8 million.
Income Tax Expense We realized $17,000 of income tax benefit in FY 2022 on a loss before income taxes of $517,000, compared to an income tax benefit of $745,000 realized in FY 2021 on a loss before income taxes of $1.2 million.
Cash and cash equivalent balances increased from $5.6 million as of February 28, 2021 to $7.6 million as of February 28, 2022 as a result of cash flows generated by financing activities. Our current ratio was 2.8 to 1.0 at February 28, 2022 compared to 3.4 to 1.0 at February 28, 2021.
Cash and cash equivalent balances decreased from $7.6 million as of February 28, 2022 to $4.7 million as of February 28, 2023 as a result of cash used by operating and investing activities. Our current ratio was 2.2 to 1.0 on February 28, 2023 compared to 2.8 to 1.0 on February 28, 2022.
Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our wholly-owned subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates self-serve frozen yogurt stores. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products.
Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionary products.
During FY 2022, investing activities used cash of $605,000, primarily due to the purchases of property and equipment of $950,000, partially offset by proceeds received from an insurance recovery of $206,000.
In comparison, investing activities used cash of $605,000 during FY 2022 primarily due to the purchases of property and equipment of $941,000, partially offset by proceeds received from an insurance recovery of $206,000. There were no cash flows from financing activities during FY 2023 compared to financing activities using $299,000 during the prior year.
In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our manufacturing facility, or if we or our franchisees experience delays in stocking our products.
In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our manufacturing facility, or if we or our franchisees experience delays in stocking our products. 22 Table of Contents During FY 2023 and FY 2022, the Company incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 and 2021 annual meeting of stockholders.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator.
Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. Our testing and impairment are described in Note 7 to the financial statements.
During FY 2022, same store pounds purchased from the factory by franchised and co-branded licensed stores increased approximately 325.5% in the first quarter, increased approximately 63.8% in the second quarter, increased approximately 20.9% in the third quarter, increased approximately 21.1% in the fourth quarter, and increased 58.9% overall in FY 2022 as compared to the same periods in FY 2021.
During FY 2023, same store pounds purchased from our manufacturing facility by franchised and co-branded licensed stores increased by approximately 3.9% in the first quarter, declined by approximately 15.4% in the second quarter, increased by approximately 5.7% in the third quarter, declined approximately 8.0% in the fourth quarter, and declined 3.3% overall in FY 2023 as compared to the same periods in FY 2022.
Results of Operations Fiscal 2022 Compared To Fiscal 2021 Results Summary Basic earnings per share increased from a net loss of $(0.15) per share in FY 2021 to a net loss of $(0.06) per share in FY 2022. Revenues increased 37.7% from $23.5 million for FY 2021 to $32.3 million for FY 2022.
Fiscal 2022 Compared To Fiscal 2021 Results Summary Basic earnings per share from continuing operations decreased from a net loss from continuing operations of $(0.07) per share in FY 2021 to a net loss from continuing operations of $(0.08) per share in FY 2022. Revenues increased 35.5% from $21.8 million for FY 2021 to $29.5 million for FY 2022.
These costs are recognized as general and administrative expense in the Consolidated Statement of Operations. Additionally, as a result of the contested solicitation of proxies and the resulting changes to the composition of the Company’s Board of Directors, the Company incurred $2.0 million of accrued severance costs and accelerated restricted stock unit expense during FY 2022.
Additionally, as a result of the contested solicitation of proxies and the resulting changes to the composition of the Company’s Board of Directors, at the 2021 annual meeting of stockholders, the Company incurred $1.1 million of accrued severance costs and accelerated restricted stock unit expense during FY 2023 and incurred $1.9 million of accrued severance costs and accelerated restricted stock unit expense during FY 2022.
During FY 2022, the Company incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholders. During FY 2022, the Company incurred approximately $1.7 million of costs associated with the contested solicitation of proxies, compared with no comparable costs incurred in FY 2021.
During FY 2023, the Company incurred approximately $4.1 million of costs associated with the contested solicitation of proxies, compared with $1.7 million of costs associated with a contested solicitation of proxies during FY 2022.
As a result of macro-economic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs. We have seen labor and logistics challenges, which we believe have contributed to lower factory, retail and e-commerce sales of our products due to the availability of material, labor and freight.
We have seen labor and logistics challenges, which we believe have contributed to lower factory, retail and e-commerce sales of our products due to the availability of material, labor and freight.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive. Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria.
Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria.
Same store pounds purchased by domestic franchise and licensed locations increased 11.7% during FY 2022 when compared to FY 2020 (the most recent comparable period prior to the business disruptions of COVID-19). 27 Table of Contents Retail Sales The increase in retail sales for FY 2022 compared to FY 2021 was primarily due to all of our Company-owned stores being open during FY 2022 compared to the closure or limited operations of all of our Company-owned stores for much of FY 2021.
Same store pounds purchased by domestic franchise and licensed locations increased 11.7% during FY 2022 when compared to FY 2020 (the most recent comparable period prior to the business disruptions of COVID-19).
Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2022, the Company was in compliance with all such covenants. The credit line is subject to renewal in September 2022 and the Company believes it is likely to be renewed on terms similar to the current terms.
The credit line is subject to renewal in September 2023 and the Company believes it is likely to be renewed on terms similar to the current terms. Contractual Obligations The table below presents significant contractual obligations of the Company at February 28, 2023.
Depreciation and amortization included in cost of sales decreased 0.8% from $626,000 during FY 2021 to $621,000 during FY 2022. This decrease was the result of certain assets becoming fully depreciated, partially offset by depreciation related to new assets acquired.
Depreciation and amortization included in cost of sales decreased 0.8% from $626,000 during FY 2021 to $621,000 during FY 2022.
The change in cash used in financing activities was primarily due to the receipt of PPP proceeds in FY 2021. Revolving Credit Line The Company has a $5.0 million credit line for general corporate and working capital purposes, of which $5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2022.
Revolving Credit Line The Company has a $5.0 million credit line for general corporate and working capital purposes, of which $5.0 million was available for borrowing (subject to certain borrowing base limitations) as of February 28, 2023. The credit line is secured by substantially all of the Company’s assets, except retail store assets.
REVENUES For the Year Ended ($'s in thousands) February 28, $ % 2022 2021 Change Change Factory sales $ 22,374.2 $ 17,321.0 $ 5,053.2 29.2 % Retail sales 2,853.3 1,858.5 994.8 53.5 % Franchise fees 213.9 226.7 (12.8 ) (5.6 )% Royalty and marketing fees 6,901.2 4,074.5 2,826.7 69.4 % Total $ 32,342.6 $ 23,480.7 $ 8,861.9 37.7 % Factory Sales The increase in factory sales for FY 2022 compared FY 2021 was primarily due to an 70.0% increase in sales of product to our network of franchised and licensed retail stores partially offset by a 40.7% decrease in shipments of product to customers outside our network of franchised retail stores.
Net loss from continuing operations increased from a net loss of $500,000 in FY 2022 to a net loss of $6.0 million in FY 2023. 23 Table of Contents REVENUES For the Year Ended ($'s in thousands) February 28, $ % 2023 2022 Change Change Factory sales $ 23,372.1 $ 22,374.2 $ 997.9 4.5 % Retail sales 1,084.8 1,160.3 (75.5 ) (6.5 )% Franchise fees 204.7 179.7 25.0 13.9 % Royalty and marketing fees 5,770.8 5,774.4 (3.6 ) (0.1 )% Total $ 30,432.4 $ 29,488.6 $ 943.8 3.2 % Factory Sales The increase in factory sales for FY 2023 compared to FY 2022 was primarily due to an 6.8%, $1.3 million, increase in sales of product to our network of franchised and licensed retail stores partially offset by a 6.8%, $257,000, decrease in shipments of product to customers outside our network of franchised retail stores.
Operating loss decreased from an operating loss of $(3.5) million in FY 2021 to an operating loss of $(484,000) in FY 2022. Net loss decreased from a net loss of $(900,000) in FY 2021 to a net loss of $(342,000) in FY 2022.
Operating loss decreased from an operating loss of $(2.7) million in FY 2021 to an operating loss of $(695,000) in FY 2022. Net loss from continuing operations increased from a net loss of $(410,000) in FY 2021 to a net loss of $(500,000) in FY 2022.
Operating activities provided cash of $67,000, with the principal adjustment to reconcile net income to net cash provided by operating activities being depreciation and amortization of $1.3 million and stock compensation expense of $512,000.
Operating activities used cash of $2.1 million, with the principal adjustment to reconcile net income to net cash provided by operating activities being expense associated with establishing a full reserve of deferred tax assets of $722,000, depreciation and amortization of $765,000, provision for obsolete inventory of $732,000 and stock compensation expense of $651,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management ’ s Discussion and Analysis ( “ MD&A ” ) is intended to assist in an understanding of our financial condition and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in Item 8 of this Annual Report.
(Amounts in thousands) Contractual Obligations Total Less than 1 year 2-3 Years 4-5 years More Than 5 years Operating leases $ 1,859 $ 579 $ 630 $ 211 $ 439 Purchase contracts 45 45 - - - Other long-term obligations 127 28 57 42 - Total $ 2,031 $ 652 $ 687 $ 253 $ 439 The Company made an average of $695,000 per year in capital expenditures during FY 2020 to FY 2022.
(Amounts in thousands) Contractual Obligations Total Less than 1 year 2-3 Years 4-5 years More Than 5 years Operating leases $ 1,883 $ 426 $ 785 $ 282 $ 390 Purchase contracts 384 384 - - - Other long-term obligations 709 335 342 32 - Total $ 2,976 $ 1,145 $ 1,127 $ 314 $ 390 30 Table of Contents The Company made an average of $766,000 per year in capital expenditures during FY 2021 to FY 2023.
Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year. 26 Table of Contents The most important factors in continued growth in our earnings are macroeconomic and retail sector post-COVID 19 recovery, ongoing online revenue growth, a shift in consumer behavior as a result of the COVID-19 pandemic, unit growth, increased same store sales and increased same store pounds purchased from the factory.
Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
COSTS AND EXPENSES Cost of Sales For the Year Ended February 28, $ % ($'s in thousands) 2022 2021 Change Change Cost of sales - factory $ 18,153.8 $ 15,473.8 $ 2,680.0 17.3 % Cost of sales - retail 1,013.9 644.8 369.1 57.2 % Franchise costs 2,183.7 1,715.6 468.1 27.3 % Sales and marketing 1,610.7 1,712.8 (102.1 ) (6.0 )% General and administrative 7,551.0 5,258.0 2,293.0 43.6 % Retail operating 1,727.7 1,381.8 345.9 25.0 % Total $ 32,240.8 $ 26,186.8 $ 6,054.0 23.1 % Gross Margin For the Year Ended February 28, $ % ($'s in thousands) 2022 2021 Change Change Factory gross margin $ 4,220.4 $ 1,847.2 $ 2,373.2 128.5 % Retail gross margin 1,839.4 1,213.7 625.7 51.6 % Total $ 6,059.8 $ 3,060.9 $ 2,998.9 98.0 % 28 Table of Contents Gross Margin For the Year Ended February 28, % % 2022 2021 Change Change (Percent) Factory gross margin 18.9 % 10.7 % 8.2 % 76.6 % Retail gross margin 64.5 % 65.3 % (0.8 )% (1.2 )% Total 24.0 % 16.0 % 8.0 % 50.0 % Adjusted Gross Margin For the Year Ended (a non-GAAP measure) February 28, $ % ($'s in thousands) 2022 2021 Change Change Factory gross margin $ 4,220.4 $ 1,847.2 $ 2,373.2 128.5 % Plus: depreciation and amortization 620.8 625.5 (4.7 ) (0.8 )% Factory adjusted gross margin 4,841.2 2,472.7 2,368.5 95.8 % Retail gross margin 1,839.4 1,213.7 625.7 51.6 % Total Adjusted Gross Margin $ 6,680.6 $ 3,686.4 $ 2,994.2 81.2 % Factory adjusted gross margin 21.6 % 14.3 % 7.3 % 51.0 % Retail gross margin 64.5 % 65.3 % (0.8 )% (1.2 )% Total Adjusted Gross Margin 26.5 % 19.2 % 7.3 % 38.0 % Adjusted gross margin and factory adjusted gross margin are non-GAAP measures.
Franchise fees were approximately unchanged during FY 2022 compared to FY 2021. 27 Table of Contents COSTS AND EXPENSES Cost of Sales For the Year Ended February 28, $ % ($'s in thousands) 2022 2021 Change Change Cost of sales - factory $ 18,153.8 $ 15,473.8 $ 2,680.0 17.3 % Cost of sales - retail 456.9 324.7 132.2 40.7 % Franchise costs 1,915.0 1,443.8 471.2 32.6 % Sales and marketing 1,474.8 1,623.2 (148.4 ) (9.1 )% General and administrative 7,456.3 4,938.1 2,518.2 51.0 % Retail operating 606.9 478.6 128.3 26.8 % Total $ 30,063.7 $ 24,282.2 $ 5,781.5 23.8 % Gross Margin For the Year Ended February 28, $ % ($'s in thousands) 2022 2021 Change Change Factory gross margin $ 4,220.4 $ 1,847.2 $ 2,373.2 128.5 % Retail gross margin 703.4 572.1 131.3 23.0 % Total $ 4,923.8 $ 2,419.3 $ 2,504.5 103.5 % Gross Margin For the Year Ended February 28, % % 2022 2021 Change Change (Percent) Factory gross margin 18.9 % 10.7 % 8.2 % 76.6 % Retail gross margin 60.6 % 63.8 % (3.2 )% (5.0 )% Total 20.9 % 13.3 % 7.6 % 57.1 % Adjusted Gross Margin For the Year Ended (a non-GAAP measure) February 28, $ % ($'s in thousands) 2022 2021 Change Change Factory gross margin $ 4,220.4 $ 1,847.2 $ 2,373.2 128.5 % Plus: depreciation and amortization 620.8 625.5 (4.7 ) (0.8 )% Factory adjusted gross margin (non-GAAP measure) 4,841.2 2,472.7 2,368.5 95.8 % Retail gross margin 703.4 572.1 131.3 23.0 % Total Adjusted Gross Margin (non-GAAP measure) $ 5,544.6 $ 3,044.8 $ 2,499.8 82.1 % Factory adjusted gross margin (non-GAAP measure) 21.6 % 14.3 % 7.3 % 51.0 % Retail gross margin 60.6 % 63.8 % (3.2 )% (5.0 )% Total Adjusted Gross Margin (non-GAAP measure) 23.6 % 16.7 % 6.9 % 41.3 % Non-GAAP Measures In addition to the results provided in accordance with U.S.
As of February 28, 2022, working capital was $9.7 million compared with $9.0 million as of February 28, 2021. The increase in working capital was due primarily to our efforts to preserve liquidity during the COVID-19 pandemic, including the receipt of PPP funds and the suspension of our quarterly dividend. We have historically generated excess operating cash flow.
Liquidity and Capital Resources As of February 28, 2023, working capital was $6.2 million compared with $9.7 million as of February 28, 2022. The decrease in working capital was due primarily to a strategic reduction of inventory on hand commensurate with the current product assortments actively marketed by us and our franchisees. We have historically generated excess operating cash flow.
In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report, particularly in Item 1A.
Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three fiscal years ended February 28, 2022, the Company recorded expense averaging $313,000 per year for potential inventory losses, or approximately 1.8% of total cost of sales for that period.
Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life.
The decrease in franchise fee revenue during FY 2022 compared to FY 2021 was the result of a decrease in revenue resulting from the closure of franchise locations and the associated recognition of revenue in FY 2021, with fewer comparable closures during FY 2022 and fewer franchise stores in operation and the associated recognition of revenue over the term of the various franchise agreements.
The increase in franchise fee revenue during FY 2023 compared to FY 2022 was primarily the result of store closures and the acceleration of unrecognized franchise fee revenue.
In comparison, investing activities used cash of $71,000 during FY 2021 primarily due to the purchases of property and equipment, intangible assets and deposits on future asset purchases of $461,000 partially offset by proceeds received from an insurance recovery of $305,000. Financing activities used cash of $299,000 during FY 2022 and provided cash of $815,000 during the prior year.
During FY 2023, investing activities used cash of $768,000, primarily due to the purchases of property and equipment of $1.0 million, partially offset by investing cash flow from discontinued operations of $197,000.
Write-offs of uncollectible accounts net of recoveries averaged approximately $358,000 over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over the past three fiscal years, the allowances for doubtful notes and accounts have ranged from 13.6% to 44.25% of gross receivables.
During the three years ended February 28, 2023, 2022 and 2021 we recorded expense of $(173,600), $0, and $1,257,010, respectively for potential uncollectible accounts. Write-offs of uncollectible accounts net of recoveries were $45,517, $471,118 and $441,776, respectively, over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income.
As a result of COVID-19 and the associated impact on the liquidity of our customers, we recorded higher expense for potentially uncollectable accounts and a higher allowance as a percentage of gross receivables during FY 2021. 32 Table of Contents Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery.
Over the past three fiscal years, the allowances for doubtful notes and accounts have ranged from 27.1% to 43.4% of gross receivables. Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery.
We also sell our candy in select locations outside of our system of retail stores and license the use of our brand with certain consumer products. We are also party to strategic alliance and ecommerce agreements with Edible Arrangements®, LLC and its affiliates (“Edible”), whereby we sell our candy in their store locations and through their ecommerce platform.
We also sell our candy in select locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of February 28, 2023, there was one Company-owned, 111 licensee-owned and 157 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, Panama, and the Philippines.
Removed
See “ Cautionary Note Regarding Forward-Looking Statements. ” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A.
Added
On May 1, 2023, subsequent to the end of FY 2023, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiary and frozen yogurt business, U-Swirl International, Inc. (“U-Swirl”).
Removed
As of March 31, 2022, there were two Company-owned, 99 licensee-owned and 159 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, South Korea, Panama, and the Philippines. As of March 31, 2022, U-Swirl operated three Company-owned stores and 63 franchised and licensed stores located in 22 states and Qatar.
Added
The aggregate sale price of U-Swirl was $2.75 million, consisting of (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year secured promissory note. The business divestiture of the U-Swirl segment was preceded by a separate sale of the Company’s three owned U-Swirl locations on February 24, 2023.
Removed
U-Swirl operates self-serve frozen yogurt cafes under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”. 25 Table of Contents In FY 2020 and early FY 2021, we entered into a long-term strategic alliance and ecommerce agreements, respectively, with Edible Arrangements®, LLC and its affiliates (“Edible”), whereby it is intended that we would become the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees.
Added
The consolidated financial statements present the historical financial results of the former U-Swirl segment as discontinued operations for all periods presented. See Note 20 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data“ , of this Annual Report for information on this divestiture.
Removed
Under the strategic alliance, Rocky Mountain Chocolate Factory branded products are intended to be available for purchase both on Edible’s website as well as through over 1,000 franchised Edible locations nationwide.
Added
With the sale of our frozen yogurt segment on May 1, 2023, we continue to focus on our confectionery business to further enhance our competitive position and operating margin, simplify our business model, and deliver sustainable value to our stockholders.
Removed
In addition, due to Edible’s significant e-commerce expertise and scale, we have also executed an ecommerce licensing agreement with Edible, whereby Edible is expected to sell a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites.
Added
Current Trends Affecting Our Business and Outlook As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs.
Removed
There is no assurance that the strategic alliance and ecommerce agreements will be deployed into our operations and to our satisfaction, or that we will achieve the expected full benefits from these agreements.
Added
During FY 2023, the Company incurred approximately $4.1 million of costs associated with the contested solicitation of proxies, compared with $1.7 million incurred in FY 2022. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations.
Removed
During FY 2022, certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable. Purchases by Edible during FY 2022 and FY 2021 were approximately $1.7 million and $3.5 million, or 5.3% and 15.1% of the Company’s revenues, respectively.
Added
These costs were incurred associated with the retirement of the Company’s former CEO and the retirement of the Company’s former Senior Vice President – Sales and Marketing.
Removed
There can be no assurance historical revenue levels will be indicative of future revenues.
Added
The most important factors in continued growth in our earnings are our ability to increase the sales of premium chocolate products manufactured in our manufacturing facility, the ability to manufacture more efficiently, supporting our franchisees in increasing the frequency and average value of customer transactions, ongoing online revenue growth, and unit growth.
Removed
Current Trends and Outlook As discussed in more detail throughout this Annual Report on Form 10-K for FY 2022 (this “Annual Report”), we have experienced significant business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus (“COVID-19”), including the vast mandated self-quarantines of customers throughout the United States and internationally.
Added
Termination of Strategic Partnership with Edible Arrangements On November 1, 2022, the Company sent a formal notice to Edible Arrangements®, LLC and its affiliates (“Edible”) terminating the strategic alliance and ecommerce agreements with Edible. Prior to such termination, the Company sold its confectionary products in Edible’s store locations and ecommerce platform.
Removed
During FY 2021, nearly all of the Company-owned and franchise stores were directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures.
Added
On November 1, 2022, the Company sent a formal notice to Edible terminating the Exclusive Supplier Operating Agreement, dated December 20, 2019 (“Exclusive Supplier Agreement”), by and between the Company and Edible, and the Ecommerce Licensing Agreement, dated March 16, 2020 (“Licensing Agreement”), by and between the Company and Edible.
Removed
As a result, franchisees and licensees were not ordering products for their stores in line with historical amounts. This trend has negatively impacted, and may continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees.

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