Rocky Mountain Chocolate Factory, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended February 28, 2021. The filing also reports fourth-quarter results; “2020 Q4” in the request does not match the fiscal year covered by this 10-K.
Business context and reporting period
The company manufactures confectionery products, operates a small number of company-owned retail locations, and franchises and licenses chocolate and frozen-yogurt stores. Most revenue comes from factory product sales and franchise royalties and fees. COVID-19 restrictions disrupted store traffic, operations, and franchisee orders. Edible Arrangements became a significant specialty-market customer during the year.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $23.48 million | $31.85 million |
| Operating income (loss) | $(3.47) million | $1.39 million |
| Net income (loss) | $(0.90) million | $1.03 million |
| Operating cash flow | $0.07 million | $4.40 million |
| Cash and cash equivalents at year-end | $5.63 million | $4.82 million |
| Working capital | $9.00 million | $8.00 million |
| Long-term debt | None reported | None reported |
- Revenue fell 26.3%. Factory sales declined 19.5%, retail sales 42.0%, franchise fees 30.2%, and royalty and marketing fees 40.1%.
- Gross margin dollars fell to $3.06 million from $6.50 million. Factory gross margin was 10.7%, versus 20.6% in FY2020; retail gross margin was 65.3%, versus 64.9%.
- The net loss included $1.55 million of PPP loan forgiveness income and a $210,000 insurance recovery. The company also recorded about $1.3 million of bad-debt expense and $476,000 of goodwill and intangible-asset impairment expense.
- Operating cash flow was nearly breakeven; investing activities used $71,000 and financing activities provided $815,000. Cash increased by $811,000 during the year.
- The company repaid its $3.4 million credit-line borrowing in February 2021. At year-end, $5.0 million was available under its $5.0 million line, subject to borrowing-base limits; the facility was due for renewal in September 2021. The $1.5 million PPP loans were forgiven.
- Current ratio was 3.4, compared with 2.4 a year earlier. Operating lease liabilities totaled about $1.96 million. Management said cash and operating cash flows were expected to meet needs for at least 12 months, while noting future financing might be needed.
Material changes versus the prior comparable period
- FY2021 shifted from operating and net profits to losses as pandemic-related closures and restrictions reduced franchise orders, company-store sales, and royalties.
- System-wide domestic same-store sales fell 24.8% at Rocky Mountain Chocolate Factory locations and 39.4% at frozen-yogurt franchise locations. Same-store pounds purchased by franchisees and licensees fell 30.0%; factory production declined 23.8%.
- Edible revenue rose to approximately $3.5 million, or 15% of total revenue, from approximately $320,000, or 1%, in FY2020. This helped increase specialty-market shipments but created significant customer concentration.
- Cash rose despite weak operating cash flow, supported by PPP proceeds, suspension of dividends, and other cash-preservation measures. The company paid a $0.12-per-share dividend in March 2020, then suspended future quarterly dividends.
- Fourth-quarter revenue was $8.22 million and net income was $2.17 million; quarterly results included the seasonally important holiday period and should not be viewed as a full-year run rate.
Outlook, risks, contingencies, and unusual items
- Management gave no specific revenue or earnings forecast. For FY2022 it described a conservative view of U.S. market conditions, emphasized online growth and the Edible relationship, and anticipated approximately $775,000 of capital expenditures.
- After year-end, disagreements arose with Edible regarding the strategic alliance and e-commerce agreements. Discussions were ongoing and the outcome was undetermined; future Edible sales are uncertain. The agreements’ expected benefits were not assured.
- The company initiated legal proceedings against its Canadian licensee, Immaculate Confections, over alleged unauthorized use of trademarks and intellectual property. Mediation was ongoing; the company said a likely result could be the loss of its branded Canadian locations.
- COVID-19 remained a central risk: as of February 28, approximately 53 stores had not reopened, and the filing elsewhere cites approximately 54. The company said the timing of a return to pre-pandemic operations was unclear.
- Other key risks include dependence on franchisee health and a limited number of specialty-market customers, lower consumer traffic, ingredient and labor cost increases, supply-chain disruption, seasonal sales, and further impairments or credit losses.
- The filing reports a conditional warrant issued to Edible for up to 960,677 shares at $8.76 per share, tied to revenue thresholds. The audited financial statements received an unqualified opinion; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the Edible agreements remain in force, the resolution of the post-year-end disagreements, and the durability of Edible’s 15% revenue contribution.
- The exact number and status of stores closed or reopened; the filing gives both approximately 53 and approximately 54 closures as of February 28, 2021.
- The credit-line renewal and borrowing availability, and whether liquidity remains adequate if operating cash flow stays weak.
- The extent of franchisee arrears, bad-debt exposure, future store closures, and any additional asset impairments.
- The reported FY2021 EPS differs across filing sections: audited statements and quarterly data show $(0.15) per share, while selected financial data shows $(0.16). Verify the intended figure.