Rocky Mountain Chocolate Factory, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended February 28, 2015. This annual filing includes unaudited fourth-quarter results; it is not a standalone quarterly filing. The company is a chocolate manufacturer and franchisor, and consolidates U-Swirl, a frozen-yogurt franchisor and operator. Effective March 1, 2015, it completed a holding-company reorganization.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $41.51 million | $39.18 million | +5.9% |
| Operating income | $5.96 million | $5.24 million | +13.9% |
| Net income attributable to RMCF | $3.94 million | $4.39 million | -10.3% |
| Basic / diluted EPS | $0.64 / $0.61 | $0.72 / $0.68 | Both decreased |
| Operating cash flow | $5.87 million | $5.66 million | +$0.21 million |
| Cash and cash equivalents | $7.16 million | $5.86 million | +$1.30 million |
Consolidated net income was $3.74 million, compared with $3.13 million in FY2014. The higher FY2014 loss attributable to non-controlling interests explains why RMCF-attributable income fell even as consolidated net income increased. Revenue growth reflected higher royalties and marketing fees, including U-Swirl acquisitions, and increased factory shipments to customers outside the franchise network. Domestic RMCF same-store sales rose 3.1%.
- Factory sales were $25.89 million (+2.7%); retail sales were $6.21 million (-3.7%); royalty and marketing fees were $8.82 million (+24.8%); franchise fees were $0.59 million (+29.8%).
- Adjusted gross margin, a non-GAAP measure, was 37.0%, down from 38.1%; factory adjusted gross margin declined to 30.3% from 31.4%. Management cited material-cost increases. Depreciation and amortization rose 40.3% to $1.44 million, largely due to acquired intangible assets.
- Cash from investing activities was $0.21 million; cash used in financing was $4.78 million, including $3.13 million of share repurchases and $2.71 million of dividends. Cash increased by $1.30 million during the year.
Liquidity, debt and capital allocation
At year-end, current assets were $17.66 million and current liabilities $8.29 million, implying working capital of approximately $9.37 million and a current ratio of 2.1. Long-term debt was $6.29 million, including $1.21 million due within one year. The $5 million revolving credit line was undrawn, subject to borrowing-base limits; it was due for renewal in July 2015. The company reported compliance with its own bank debt covenants.
The company declared $0.45 per share in dividends for FY2015 and repurchased 246,106 shares for approximately $3.13 million. It anticipated FY2016 capital expenditures of approximately $830,000 and said operating cash flow should fund planned capital expenditures and working capital needs.
Changes, outlook and principal risks
- U-Swirl covenant breach: U-Swirl failed to meet the EBITDA covenant on its loan from RMCF. Required adjusted EBITDA was $1.804 million; reported adjusted EBITDA was $1.284 million. RMCF disclosed potential remedies including a 15% default interest rate, acceleration and foreclosure. The filing also states that settling through conversion to preferred stock could require 70% more preferred shares than if U-Swirl had complied. RMCF held a 39% interest and had conversion rights that could raise its ownership to approximately 72%.
- U-Swirl operating performance: The yogurt subsidiary has a history of losses. Its FY2015 segment loss was approximately $0.25 million, before unallocated corporate costs. U-Swirl acquisitions contributed substantially to royalty growth but also involved integration, restructuring and financing risks.
- Margin and customer concentration: A manufacturing customer generated approximately $5.2 million, or 13% of company revenue. One customer represented 68% of shipments to specialty markets; specialty-market sales were approximately 24% of product sales. The company warned that reduced purchases by this customer could affect results.
- Franchise-system trends: Average domestic RMCF franchise locations declined as closures exceeded openings. Management noted that a shift toward store-made or third-party products can reduce factory purchases and revenue. Same-store factory pounds purchased were unchanged overall for FY2015.
- Outlook: Management took a conservative view of U.S. market conditions for FY2016, emphasizing disciplined operations and flexibility, with international development, co-branding, licensing, wholesale channels and acquisitions as growth avenues. No specific revenue or earnings forecast was provided.
- Other risks and unusual items: Results are seasonal, with stronger sales around holidays and during summer. Commodity, labor and occupancy costs, competition, consumer demand, franchisee financing and suitable site availability are key risks. FY2015 included $0.81 million of restructuring and acquisition-related charges, including U-Swirl restructuring and holding-company reorganization costs. No material legal proceedings were reported.
Important facts for investors to verify
- Whether U-Swirl’s covenant default was cured, waived or otherwise resolved, and the implications for RMCF’s loan, collateral and conversion rights.
- U-Swirl’s subsequent EBITDA, cash generation, store performance and integration progress, and the likelihood of further restructuring or dilution.
- Whether the concentrated manufacturing customer maintained purchases and whether specialty-market sales remain sustainable.
- Renewal terms for the revolving credit line and compliance with all company-level debt covenants.
- Underlying margin trends, including raw-material costs and factory shipments per comparable franchise location.
- FY2016 performance against the company’s conservative outlook and planned capital expenditures; the filing provides no numerical earnings guidance.
The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting as of February 28, 2015; the auditor did not express an opinion on internal control.