Business context and reporting period
Rocky Mountain Chocolate Factory, Inc. is a confectionery manufacturer, franchisor and retail operator, with frozen-yogurt operations through U-Swirl. This unaudited Form 10-Q covers the quarter and nine months ended November 30, 2022; comparisons are with the corresponding 2021 periods. At quarter-end, the company reported 338 operating and sold-not-yet-open locations across its brands.
Key financial results
| Metric | Three months ended Nov. 30, 2022 | Three months ended Nov. 30, 2021 | Nine months ended Nov. 30, 2022 | Nine months ended Nov. 30, 2021 |
|---|---|---|---|---|
| Revenue | $9.48 million | $8.51 million | $24.83 million | $24.03 million |
| Operating loss | $0.22 million | $1.96 million | $2.59 million | $1.05 million |
| Net loss | $0.21 million | $1.48 million | $3.97 million | $0.70 million |
| Basic and diluted loss per share | $0.03 | $0.24 | $0.64 | $0.11 |
| Gross margin (factory and retail, as reported) | 26.3% | 25.8% | 24.8% | 26.4% |
| Operating cash flow | Not separately presented | Not separately presented | Cash used: $3.58 million | Cash provided: $0.86 million |
Quarterly revenue rose 11.4%; factory sales increased 14.2%, while royalty and marketing fees grew 1.4%. Quarterly factory gross margin improved to 22.9% from 22.2%, but nine-month factory margin fell to 19.9% from 21.2%. Management cited pricing gains in the quarter, offset in part by higher labor and material costs and inventory obsolescence; year-to-date margins also faced inflation and the absence of prior-year Employee Retention Credits.
Nine-month sales and marketing expense increased 35.2% to $1.62 million and general and administrative expense rose 18.8% to $7.81 million. The latter included approximately $2.9 million of proxy-contest costs; the company also recorded $934,000 of severance costs related to former CEO Edward Dudley’s retirement. A full valuation allowance against deferred tax assets contributed to a $1.39 million income tax expense for the nine months despite the pretax loss. The filing reports no income tax benefit for the quarter.
Financial position, liquidity and cash flow
At November 30, 2022, cash and cash equivalents were $3.22 million, down from $7.59 million at February 28, 2022. Working capital was $7.4 million, compared with $9.7 million at fiscal year-end; the current ratio decreased to 2.2 from 2.8. Inventory rose to $6.20 million from $4.35 million. Nine-month operating cash use was $3.58 million, with cash tied up notably in inventory and receivables. Investing activities used $0.79 million, including $0.81 million of property and equipment purchases; financing activities had no cash flows.
The company had no borrowings on its $5.0 million revolving credit line, which was available subject to borrowing-base limitations; it reported compliance with covenants. The line is secured by substantially all company assets other than retail store assets. Operating lease liabilities totaled $2.58 million. The filing does not report other outstanding conventional debt.
Outlook, commentary and notable items
- Management said operating cash flow should be sufficient to fund fiscal 2023 capital expenditures and working capital needs, with the credit line available if necessary. No revenue or earnings guidance was provided.
- The company reported higher raw-material, labor and freight costs and supply-chain and logistics challenges, which it said had contributed to lower factory, retail and e-commerce sales and could constrain future sales.
- Seasonality is significant: sales are typically strongest around holidays and during summer, so interim results may not indicate full-year performance.
- On December 14, 2022, after quarter-end, the company settled litigation with activist stockholders, agreed to reimburse $1.075 million of their fees and expenses, and agreed to appoint a qualifying director designated by them, subject to board approval. The lawsuits were dismissed with prejudice on December 16. Management expected material additional costs in the fiscal fourth quarter related to the proxy contest and settlement.
- The company terminated its strategic supplier and e-commerce licensing agreements with Edible Arrangements effective November 1, 2022. No warrants under the related agreement had vested by quarter-end.
- The company reported effective disclosure controls as of November 30, 2022, and no material changes to internal control over financial reporting during the quarter. It reported no material changes in risk factors from its latest Form 10-K.
Important facts for investors to verify
- Whether sales growth and pricing can offset persistent inflation, supply-chain constraints and weaker third-party/e-commerce shipments.
- Whether the company can return to positive operating cash flow as inventory and receivables absorb cash, and how liquidity evolves after the quarter-end settlement payment and related costs.
- The full earnings and cash impact of proxy-contest, litigation-settlement and former-CEO severance costs, including costs expected in the fourth quarter.
- The assumptions supporting the full deferred-tax-asset valuation allowance and whether future taxable income could support any release.
- Future borrowing availability under the credit line, covenant headroom, and obligations from leases and equipment arrangements.