Rocky Mountain Chocolate Factory, Inc. — Q3 FY2022 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended November 30, 2021; the comparable periods ended November 30, 2020. Rocky Mountain Chocolate Factory manufactures and sells confectionery, franchises and licenses stores, and operates a small number of retail and frozen-yogurt locations. At quarter-end, its network included 342 open locations across its brands and formats.
Financial results
| Metric | Three months ended Nov. 30, 2021 | Nine months ended Nov. 30, 2021 |
|---|---|---|
| Revenue | $8.51 million, up 17.7% | $24.03 million, up 57.5% |
| Operating income (loss) | $(1.96) million | $(1.05) million |
| Net income (loss) | $(1.48) million; $(0.24) per diluted share | $(0.70) million; $(0.11) per diluted share |
| GAAP gross margin | 25.8%, versus 23.2% | 26.4%, versus 14.4% |
| Operating cash flow | Not separately presented | $0.86 million provided |
| Capital expenditures | Not separately presented | $0.70 million |
Revenue and margins. Quarterly growth reflected higher factory sales to the franchise and license network, royalties, and retail sales as locations recovered from pandemic disruptions. For the nine months, factory sales rose 48.0% and royalties and marketing fees rose 90.4%. Domestic franchise same-store sales were up 17.8% versus the comparable pre-pandemic 2019 period. Factory gross margin was 21.2% for the nine months, compared with 8.9% a year earlier; management attributed improvement to higher production volume, selling prices, and Employee Retention Credits, partly offset by higher material and labor costs. The company also reported non-GAAP adjusted gross margin of 28.9% for the nine months, versus 18.3%.
Cash, liquidity, and obligations. At November 30, cash was $6.02 million and working capital was approximately $9.0 million, unchanged from February 28, 2021. The current ratio was 2.5, down from 3.4. Current assets were $15.08 million and current liabilities $6.12 million. The company reported no outstanding line-of-credit borrowings or PPP debt. Its $5.0 million revolving credit line was fully available, subject to borrowing-base limits; the company was in covenant compliance and the facility was due for renewal in September 2022. Operating leases carried $1.90 million in present-value liabilities. Management said available cash and operating cash flows were expected to meet liquidity needs for at least 12 months, while noting future financing might be needed.
Changes, outlook, and risks
- Prior-period comparison: The nine-month net loss narrowed from $3.07 million to $0.70 million, as revenue and gross margins recovered from pandemic-related weakness. The quarter nevertheless swung from $0.52 million net income to a $1.48 million loss.
- Unusual expenses: The quarter included about $0.8 million of costs from a contested proxy solicitation and approximately $1.87 million of accrued severance and accelerated stock-compensation expense related to CFO/interim CEO Bryan Merryman. For the nine months, proxy-solicitation costs were about $1.7 million. These costs materially affected general and administrative expense and results.
- Management and governance: Merryman agreed to step down as CEO when a successor is hired and remains interim CEO and CFO. The board approved acceleration of 66,667 restricted stock units; the company was searching for a new CEO.
- Edible relationship: The strategic alliance and e-commerce agreements with Edible were subject to continuing disagreements and discussions whose outcome was undetermined. Edible purchases fell to about $1.2 million, or 5.0% of nine-month revenue, from $2.1 million, or 13.9%, a year earlier. The company cautioned that expected benefits and future revenue levels were uncertain.
- Operating risks: Management cited labor, freight, supply-chain and inflation pressures that could constrain production and sales, as well as uncertainty from COVID-19 variants. About 53 stores had closed during FY2021 and had not reopened as of the filing’s discussion; the company said most operating locations had recovered to or exceeded pre-pandemic sales levels.
- Contingencies: The company was in a six-month negotiation period with Canadian operator Immaculate Confections after a court declared the parties’ original development agreement expired. IC continued to operate 49 Canadian locations during negotiations; absent a solution, the agreement provides for de-identification. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Other items: Quarterly dividends remained suspended. The company recorded a $61,276 payment to redeem its shareholder-rights-plan rights. No numerical earnings or revenue guidance was provided. Results are seasonal and management cautioned that interim results are not necessarily indicative of the full fiscal year.
Most important facts for investors to verify
- Whether the Edible agreements progress, and the related impact on factory, online, and royalty revenue.
- Whether reported sales recovery and margin improvement persist after pandemic comparisons, Employee Retention Credits, and changing operating costs.
- The final cost and any triggering severance obligations associated with the proxy contest, board changes, and CEO transition.
- Whether labor, supply-chain, freight, and inflation constraints affect production, fulfillment, and margins.
- The outcome of negotiations with Immaculate Confections and the status of the Canadian locations.
- Renewal terms for the $5.0 million credit facility before its September 2022 renewal date, and the company’s liquidity relative to ongoing needs.