Rocky Mountain Chocolate Factory, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended February 28, 2022. Although the request refers to “2021 Q4,” this filing reports FY2022; fourth-quarter results are noted separately below.
Business context
The company manufactures and sells confectionery, operates a small number of company-owned chocolate and frozen-yogurt stores, and earns revenue through franchise and license fees and royalties. At March 31, 2022, its system included 159 franchised Rocky Mountain Chocolate Factory stores, 99 licensee-owned stores and 63 franchised or licensed U-Swirl cafés, in addition to company-owned locations. Manufacturing is concentrated at its Durango, Colorado facility.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $32.34 million | $23.48 million |
| Operating loss | $484,000 | $3.47 million |
| Net loss | $342,000 | $900,000 |
| Basic and diluted loss per share | $0.06 | $0.15 |
| Cash from operating activities | $2.86 million | $67,000 |
| Cash and cash equivalents at year-end | $7.59 million | $5.63 million |
- Revenue grew 37.7% year over year, primarily as franchise and license stores recovered from pandemic-related restrictions. Factory sales increased 29.2%, retail sales 53.5%, and royalty and marketing fees 69.4%; franchise fee revenue declined 5.6%.
- Factory gross margin was 18.9%, up from 10.7%; retail gross margin was 64.5%, down from 65.3%. The company also reported total gross margin of 24.0% versus 16.0%, calculated on the factory and retail sales base. Management cited increased production volume, higher average selling prices and Employee Retention Credits, partly offset by higher material and labor costs.
- Operating cash flow improved to $2.86 million. Investing activities used $605,000, including $948,000 of property and equipment purchases; financing activities used $299,000.
- Working capital was $9.7 million, versus $9.0 million; the current ratio was 2.8 versus 3.4. The company reported no outstanding line-of-credit borrowings at year-end and $5.0 million available, subject to borrowing-base limits. The facility was due for renewal in September 2022. Lease liabilities totaled approximately $1.81 million; the filing reports no year-end funded debt balance.
- Fourth-quarter FY2022 revenue was $8.32 million and net income was $359,000, or $0.06 per share. The comparable quarter reported revenue of $8.22 million and net income of $2.17 million, reflecting materially different year-over-year items.
Material changes, outlook and risks
- The recovery from FY2021’s pandemic disruption drove a substantial rebound: domestic same-store retail sales increased 62.4% at Rocky Mountain Chocolate Factory locations and 65.1% at frozen-yogurt franchise locations versus FY2021. Same-store pounds purchased by franchisees and licensees rose 58.9% year over year and were 11.7% above FY2020.
- Despite the improvement, FY2022 remained loss-making. Results included about $1.7 million of proxy-contest costs and approximately $1.87 million of costs under the CEO/CFO letter agreement, including severance and accelerated stock compensation. General and administrative expense rose 43.6%. FY2021 included $1.5 million of forgiven PPP loans and $533,000 of impairment expense; neither had a comparable FY2022 charge or benefit.
- Revenue from Edible Arrangements fell to approximately $1.7 million, or 5.3% of revenue, from $3.5 million, or 15.1%, in FY2021. The company disclosed disagreements with Edible over strategic alliance and e-commerce agreements; discussions continued and their outcome was uncertain.
- Management described its FY2023 view of U.S. market conditions as conservative. It expects approximately $1.7 million of FY2023 capital expenditures, principally for machinery and equipment replacement, and stated that cash, operating cash flow and liquidity were expected to cover needs for at least 12 months. Management cautioned that additional financing might be needed and could not be assured on acceptable terms.
- Key risks include inflation and availability of ingredients, labor and freight; constrained production or lost sales from supply-chain issues; continued uncertainty from COVID-19 and consumer behavior; dependence on franchisee health and specialty-market customers; and the uncertain Edible relationship. The company reported that about 53 stores closed and had not reopened during FY2021.
- The quarterly dividend remained suspended. The company also continued negotiations with its Canadian licensee, Immaculate Confections; the agreement could require the licensee to de-identify its 49 locations if no solution is reached. Management said other pending legal matters were not expected to have a material adverse effect.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of February 28, 2022; the auditor was not engaged to opine on internal-control effectiveness.
Important facts for investors to verify
- Whether Edible disagreements are resolved, and whether Edible revenue and expected e-commerce and alliance benefits can be sustained.
- Renewal terms and borrowing-base availability of the $5.0 million credit line, including covenant compliance after renewal.
- Whether the recovery in store sales, factory purchases and operating cash flow continues, and whether labor, ingredient and freight inflation erodes margins.
- Execution and funding of the planned $1.7 million FY2023 capital program, and progress toward profitability and management’s stated liquidity outlook.
- Outcome of the Canadian licensee negotiations and any resulting brand, legal or revenue effects; also verify the status of CEO transition and any remaining change-in-control obligations.