Rocky Mountain Chocolate Factory, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2022, compared with the three months ended May 31, 2021. The company is a confectionery manufacturer, franchisor and retail operator, including frozen-yogurt brands.
Financial performance
| Metric | Three months ended May 31, 2022 | Prior period | Change |
|---|---|---|---|
| Revenue | $7.83 million | $7.59 million | +3.1% |
| Operating income (loss) | $(149,000) | $646,000 | Declined |
| Net income (loss) | $(115,000) | $580,000 | Declined |
| Basic and diluted EPS | $(0.02) | $0.09 | Declined |
| Cash from operations | $11,000 | $386,000 | Declined |
| Capital expenditures | $290,000 | $457,000 | Declined |
- Factory sales were $5.16 million (+2.3%); retail sales were $793,000 (+0.4%); franchise fees were $67,000 (+19.6%); and royalty and marketing fees were $1.81 million (+6.0%).
- Factory gross margin was 14.2%, down from 14.9%; retail gross margin was 62.7%, down from 67.5%. The company’s combined factory-and-retail gross margin was 20.6%, versus 22.0%. Management attributed margin pressure mainly to higher material and wage costs, partly offset by product price increases effective May 1.
- Cash and cash equivalents were $5.99 million, with $1.34 million of restricted cash, at May 31. Working capital was $9.7 million and the current ratio was 2.7. Operating cash flow was nearly breakeven, with inventory growth of about $751,000 a significant cash use.
- No revolving-credit borrowings were outstanding; $5.0 million was available subject to borrowing-base limits. The facility was due for renewal in September 2022, and management expected renewal on similar terms. Lease liabilities totaled about $2.12 million.
Changes, unusual items and management commentary
- Revenue grew modestly, but operating results swung to a loss. General and administrative expense rose $786,000 to $1.63 million, principally reflecting higher professional fees and compensation. Approximately $305,000 related to a contested proxy solicitation; management warned future related costs could materially affect results.
- The prior-year comparison included a $167,000 insurance-recovery gain, with no comparable gain in 2022. The 2022 quarter also included a $31,755 income-tax benefit, versus a $237,793 tax provision in the prior-year quarter.
- Management cited inflation and supply-chain disruption as drivers of higher raw-material, labor and freight costs, and said availability challenges had contributed to lower factory, retail and e-commerce sales. The company cannot assure it can pass higher costs on to customers. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
- The company reported continuing disagreements and discussions with Edible Arrangements regarding strategic-alliance and e-commerce agreements. Edible purchases were about $311,000, or 4.0% of revenue, compared with $484,000, or 6.4%, a year earlier; future revenue from the relationship is uncertain.
- Negotiations with Canadian operator Immaculate Confections continued after the parties’ negotiation period expired in March 2022. The settlement agreement requires de-identification of approximately 49 Canadian locations if no solution is reached. The company recognized about $30,000 of factory revenue from those locations in the quarter.
- A $1.345 million rabbi trust was funded for payments to the former CEO and is reported as restricted cash; the related obligation is included in accrued salaries and wages. Separately, following board changes, potential change-in-control payments to certain executives were estimated at about $859,000 in cash and benefits, plus accelerated unvested awards with approximately $108,000 of unrecognized expense, contingent on a triggering termination.
- There was no quantified earnings or revenue guidance. The $5.0 million credit facility was reported covenant-compliant. Management concluded disclosure controls were effective as of May 31, 2022; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether factory and retail pricing can offset continued inflation, labor and logistics costs without further margin deterioration.
- Progress, commercial benefits and future sales implications of the Edible agreements and ongoing discussions.
- Outcome and financial impact of the Canadian operator negotiations and any related legal proceedings.
- Further proxy-contest expenses and any executive severance or change-in-control payments.
- Renewal terms for the revolving credit facility and the company’s ability to generate operating cash while inventory and other working-capital needs fluctuate.