Rocky Mountain Chocolate Factory, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended August 31, 2021; fiscal year began March 1, 2021. The interim financial statements are unaudited. The company is a confectionery manufacturer, franchisor and retail operator, including frozen-yogurt brands.
Financial results
| Metric | Three months ended Aug. 31, 2021 | Three months ended Aug. 31, 2020 | Six months ended Aug. 31, 2021 | Six months ended Aug. 31, 2020 |
|---|---|---|---|---|
| Revenue | $7.93 million | $5.33 million | $15.52 million | $8.03 million |
| Operating income (loss) | $258,000 | $119,000 | $904,000 | $(4.71) million |
| Net income (loss) | $197,000 | $76,000 | $777,000 | $(3.59) million |
| Basic EPS | $0.03 | $0.01 | $0.13 | $(0.59) |
| Combined factory and retail gross margin | 31.5% | 23.5% | 26.8% | 6.0% |
Quarterly sales were $5.94 million and franchise and royalty fees were $1.98 million. For the six months, sales were $11.77 million and franchise and royalty fees were $3.75 million. Management attributed the year-over-year recovery largely to stores and factory operations resuming from pandemic-related disruption; domestic franchise same-store sales were up 14.2% for the quarter and 14.6% for the six months versus 2019.
Cash flow and liquidity: Six-month operating cash flow was $1.43 million, versus cash used of $3.06 million a year earlier. Investing used $329,000, including $571,000 of property and equipment purchases, partly offset by $206,000 of asset-sale or distribution proceeds. Cash rose to $6.73 million from $5.63 million at February 28, 2021. Working capital was $10.2 million; the company reported a 3.2:1 current ratio. No financing cash flows occurred in the six-month period.
Debt and obligations: No borrowings were outstanding on the $5.0 million revolving credit line at August 31, 2021; the full amount was available subject to borrowing-base limits, and the company reported covenant compliance. The line was due for renewal in September 2021; the filing text does not provide a clear value for its post-renewal status. Operating lease liabilities totaled approximately $2.07 million. The company had about $90,000 in commodity purchase commitments.
Material changes and unusual items
- Revenue rose 48.8% in the quarter and 93.3% in the six-month comparison, against periods substantially affected by COVID-19 closures and reduced operations. Factory sales and royalties rebounded; franchise-fee revenue declined.
- Six-month 2020 results included substantial bad-debt and impairment/store-closure charges. The current six-month period included a $167,000 insurance recovery gain and approximately $155,000 in factory payroll-tax benefits from Employee Retention Credits.
- General and administrative expense included approximately $907,000 of proxy-contest costs in the quarter and $917,000 for the six months. Management expected material additional costs in the near term; total costs were not determinable.
Outlook, risks and contingencies
- Management said cash on hand and operating cash flow should meet liquidity and capital needs for at least 12 months, while noting additional financing could be needed and might not be available on acceptable terms.
- No specific earnings or revenue guidance was provided. Management cautioned that the six-month results are not necessarily indicative of the full fiscal year; sales are seasonal, with holidays and summer typically stronger.
- COVID-19 effects remained uncertain: approximately 53 stores closed during FY2021 and had not reopened, and management said it was unclear whether or when all operations would return to pre-pandemic levels. Dividends remained suspended.
- The company reported disagreements with Edible Arrangements over strategic-alliance and e-commerce agreements. Edible purchases were about $797,000, or 5.1% of six-month revenue, compared with $949,000, or 11.8%, a year earlier; future benefits and revenue levels were uncertain.
- In September 2021, a primary yogurt distributor notified the company it would discontinue supplying components used by nine franchised cafés, approximately 13% of those cafés. The company was working to mitigate the constraint and warned further COVID-related supply disruptions could occur.
- After a court declared the Canada development agreement expired, the company and its Canadian operator reached a September 2021 settlement providing a six-month negotiation period. The operator could continue using the brand during that period; if no solution is reached, de-identification provisions apply. The operator had 49 locations, and the company recognized no revenue from them in either six-month period.
- A change in control was deemed to have occurred following board changes. If triggering terminations occur, estimated cash severance and benefits were approximately $2.2 million, with accelerated unvested restricted stock units carrying about $690,000 of unrecognized expense; potential tax effects could add to the liability.
Important facts for investors to verify
- Whether the revolving credit line was renewed after its September 2021 renewal date, and whether availability or covenants changed.
- Progress and commercial outcomes of the Edible agreements, including the unresolved disagreements and customer concentration.
- Whether the yogurt supply disruption was resolved and whether other supply-chain constraints affected franchisees or production.
- Outcome of the Canada negotiations and any effects on brand licensing, litigation costs or future revenue.
- Further proxy-contest costs and any executive triggering terminations or related change-in-control payments.
- Durability of the recovery relative to pre-pandemic levels, given seasonal sales, store closures and the unusually weak prior-year comparison.