Rocky Mountain Chocolate Factory, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2025, three months ended May 31, 2024. The filing was signed July 15, 2024. The company is a chocolate manufacturer, franchisor and retail operator; U-Swirl is reported as discontinued operations.
Financial results
| Metric | Quarter ended May 31, 2024 | Prior-year comparable quarter |
|---|---|---|
| Revenue | $6.407 million | $6.436 million |
| Gross margin | $(0.307) million; (5.8)% | $0.258 million; 5.1% |
| Operating loss | $(1.630) million | $(1.541) million |
| Continuing-operations loss | $(1.658) million; $(0.26) per share | $(1.527) million; $(0.24) per share |
| Net loss | $(1.658) million | $(0.823) million, including $0.704 million of discontinued-operations earnings |
| Cash used in operating activities | $(2.157) million | $(0.422) million |
| Cash and cash equivalents | $0.637 million at May 31, 2024 | $2.082 million at February 29, 2024 |
| Capital expenditures | $0.417 million | $0.550 million |
Revenue was nearly flat year over year. Product and retail sales rose 5.2% to $5.279 million, while royalty and marketing fees fell 23.1% to $1.058 million; franchise fees increased to $0.070 million. Management attributed stronger product sales to improved franchisee demand and inventory management, and lower royalties primarily to fewer royalty-paying stores. Manufacturing reported a segment loss of $0.656 million, versus segment profit of $0.047 million a year earlier; franchising profit was $0.243 million, down from $0.381 million.
Gross margin deteriorated primarily because of higher raw-material and labor costs. Cost of sales increased 17.4% to $5.586 million despite the slight decline in total revenue. General and administrative expense declined 35.9% to $1.239 million, mainly because the prior-year quarter included legal costs related to a contested proxy solicitation. The prior-year net loss comparison also benefited from the U-Swirl disposal gain and discontinued-operations earnings.
Liquidity, debt and financial position
- Working capital was $0.8 million, down from $1.5 million at February 29, 2024; the current ratio was 1.10, versus 1.19 at fiscal year-end.
- The company had $2.0 million outstanding on a $4.0 million revolving credit line, with $2.0 million available subject to borrowing-base limits. The line bears interest at SOFR plus 2.37% (7.71% at May 31) and matures September 30, 2024.
- The company breached the credit agreement’s minimum current-ratio covenant of 1.5. The lender may demand immediate repayment; the company reported it did not have enough cash to repay the line if demanded. The company requested a waiver, but its approval is not assured. The line is secured by substantially all company assets other than retail store assets.
- Management and the filing identify substantial doubt about the company’s ability to continue as a going concern within one year after issuance. The financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
- Total liabilities were $10.002 million and stockholders’ equity was $9.018 million at May 31. Lease liabilities totaled approximately $1.486 million.
Operating cash outflow worsened from the prior-year period. Investing activities used $0.038 million, while financing activities provided $0.750 million from additional line-of-credit borrowings. The company held $1.056 million of current assets for sale, including land and manufacturing equipment.
Outlook, risks and notable items
- Management plans to pursue lender waivers or amend the credit facility, seek supplemental financing, sell held-for-sale assets, reduce manufacturing overhead, raise chocolate prices to franchise and specialty-market customers, and improve profitability and gross margins. It also expects holiday-season sales to help. There are no assurances these plans will succeed; no quantified earnings or revenue guidance is provided.
- On July 10, 2024, after quarter-end, the company sold its Durango land for approximately $0.9 million. It recorded a $0.1 million impairment on factory machinery classified as held for sale; no impairment was recorded on the land.
- Management cites inflation and supply-chain disruption as contributors to higher ingredient, labor and freight costs and potential lost sales. Other stated risks include seasonality, product availability, consumer demand, competition, raw-material costs, franchise growth and co-branding strategy.
- The company reported 264 stores across company-owned, franchised and licensed/co-branded formats at May 31, 2024. Five domestic franchise stores closed during the quarter; the store table also reports two Cold Stone co-branded openings and two closures.
- No material legal proceedings were reported. The company disclosed approximately $0.3 million of purchase obligations, primarily for manufacturing commodities.
Facts investors should verify
- Whether the lender granted the requested covenant waiver, and whether the credit line was renewed, amended or repaid by its September 30, 2024 maturity.
- Whether asset-sale proceeds and other liquidity actions were sufficient to address the going-concern uncertainty and operating cash burn.
- Whether cost increases can be offset by pricing, manufacturing efficiencies and improved gross margins, particularly given the quarter’s negative gross margin.
- Whether store closures, royalty-paying location counts and franchisee product demand continue to affect royalty revenue and manufacturing performance.