Rocky Mountain Chocolate Factory, Inc. — FY2024 Form 10-K
Reporting period: Fiscal year ended February 29, 2024. This is an annual filing, not a quarterly report. Comparative figures are for the year ended February 28, 2023, unless stated otherwise.
Business context
RMCF manufactures confectionery products, operates a small number of company-owned stores, and earns revenue primarily through product sales to franchisees and other customers and fees from its franchised and licensed network. At year-end, it reported 2 company-owned stores, 152 franchised stores, and 115 licensee-owned stores. The company sold substantially all U-Swirl frozen-yogurt business assets in May 2023 and reports that business as discontinued operations.
Financial results and liquidity
| Metric | FY2024 | FY2023 |
|---|---|---|
| Revenue | $27.95 million | $30.43 million |
| Operating loss | $4.90 million | $4.89 million |
| Loss from continuing operations | $4.88 million | $5.49 million |
| Net loss | $4.17 million | $5.68 million |
| Basic loss per share | $0.66 | $0.91 |
| Cash used in operating activities | $2.43 million | $2.10 million |
- Revenue fell 8.2%. Product and retail sales declined 10.0% to $22.02 million; franchise, royalty and marketing fees were nearly flat at $5.93 million.
- Reported gross margin was $1.37 million, or 6.2% of revenue, versus $4.00 million, or 16.4%, in FY2023. Management attributed the deterioration primarily to higher cocoa and other input costs, overhead, lower production volume, and disruption during a packaging-line relocation.
- Domestic same-store retail sales decreased 1.9%. Production was approximately 1.61 million pounds, down 4.7% from FY2023.
- Cash and cash equivalents were $2.08 million at year-end, down from $4.72 million. Working capital was $1.5 million versus $6.2 million; the current ratio was 1.19 versus 2.24.
- The company drew $1.25 million on its $4.0 million revolving credit line; stated availability was $2.75 million, subject to borrowing-base limits. The line bears interest at SOFR plus 2.37% (7.69% at year-end) and matures September 30, 2024. The lender’s security covers substantially all company assets except retail-store assets.
- Capital expenditures were $3.02 million. Operating lease liabilities had a present value of approximately $1.69 million; undiscounted lease payments totaled $1.87 million.
- The U-Swirl sale generated reported discontinued-operations earnings of $0.70 million in FY2024, including a $0.63 million disposal gain. Consideration was approximately $2.75 million: $1.75 million cash and a $1.0 million secured three-year note.
Changes, outlook and risks
- Continuing-operations loss narrowed to $4.88 million from $5.49 million, while operating loss was essentially unchanged. Total net loss improved in part because discontinued operations contributed income in FY2024 versus a loss in FY2023.
- General and administrative expense fell 35.4%, principally because FY2023 included $4.1 million of proxy-contest costs; no comparable material proxy-contest costs were incurred in FY2024. FY2024 also included approximately $1.2 million of severance, retirement and related costs.
- Management cited inflation in ingredients, labor and freight, supply-chain and staffing constraints, and lower product availability as pressures on sales and margins. The packaging operation’s move to Salt Lake City contributed to order-fulfillment delays ahead of the holiday season.
- Management plans to strengthen liquidity and performance through measures including selling unused land near headquarters, reducing manufacturing overhead, raising product prices, improving margins, and pursuing additional financing or changes to the credit facility. It also expects capital spending in FY2025 at a level similar to the recent annual average, including an ERP system and equipment replacement. No quantified earnings or revenue guidance is provided.
- Going concern: The auditor’s report includes an explanatory paragraph stating substantial doubt about the company’s ability to continue as a going concern. The company reported recurring losses and negative operating cash flow. It breached the credit line’s minimum 1.5 current-ratio covenant (actual ratio 1.19); a waiver had been received by the financial-statement issuance date. The company said it did not have enough cash to repay the line if repayment were demanded. The facility’s September 2024 maturity adds refinancing risk.
- Other material risks include continued cost inflation and pricing effects, dependence on franchisee health and purchases of company-produced products, concentration among Specialty Market customers, seasonal sales, and potential disruption at the single Durango manufacturing facility. Specialty Market sales were approximately $2.7 million, or 10% of total revenue.
- Management said disclosure controls and internal control over financial reporting were effective at year-end and that a prior-year material weakness involving complex, non-routine accounting had been remediated. The auditor was not engaged to attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the revolving facility was renewed or refinanced before its September 30, 2024 maturity, and whether covenant compliance and waivers remain in place.
- Whether planned liquidity actions, including the unused-land sale and additional financing, generated sufficient cash to address going-concern uncertainty.
- Whether product availability, production volume, gross margin and same-store sales recover after the packaging-line relocation and cost increases.
- Whether the $1.0 million U-Swirl promissory note is collected as scheduled and whether any contingent liabilities remain from the divested business.
- How store closures, franchisee performance and product mix affect royalty income and purchases from the Durango plant.