Rocky Mountain Chocolate Factory, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2021, compared with the three months ended May 31, 2020. The company is a chocolate manufacturer, franchisor and retail operator, including frozen-yogurt brands. The prior-year quarter was heavily affected by COVID-19 closures and operating restrictions, so the sharp year-over-year recovery is against a depressed comparison.
Financial performance and position
| Metric | Quarter ended May 31, 2021 | Prior-year quarter / comparison |
|---|---|---|
| Total revenue | $7.59 million | $2.70 million; up 181% |
| Sales revenue | $5.83 million | $2.32 million |
| Franchise and royalty fees | $1.76 million | $0.38 million |
| Operating income (loss) | $645,904 | $(4.83) million |
| Net income (loss) | $579,805 | $(3.67) million |
| Basic and diluted EPS | $0.09 | $(0.61) |
| Operating / net margin | 8.5% / 7.6% | Negative in the prior-year quarter |
| Cash from operating activities | $385,811 provided | $1.60 million used |
| Capital expenditures | $457,435 | $22,488 |
- Factory gross margin improved to 14.9% from negative 30.7%; retail gross margin rose to 67.5% from 50.6%. The company’s non-GAAP adjusted gross margin was 24.6%, compared with negative 17.4%.
- Cash and cash equivalents were $5.79 million at May 31, 2021, up from $5.63 million at February 28, 2021. Current assets were $13.27 million and current liabilities $3.62 million; reported working capital was $9.7 million and the current ratio was 3.7 to 1.
- No line-of-credit or PPP debt was outstanding at quarter-end. The $5.0 million revolving facility was fully available, subject to borrowing-base limits, and due for renewal in September 2021. The company reported compliance with its covenants. Operating lease liabilities totaled approximately $2.25 million.
Changes versus the prior comparable period
- Revenue and profitability rebounded as many stores reopened and returned to, or exceeded, pre-pandemic levels. Factory sales increased 136%, retail sales 321%, and royalty and marketing fees 425% year over year.
- The prior-year quarter included substantial COVID-related disruption, including about $545,000 of impairment and store-closure charges, elevated bad-debt expense and factory idle-labor costs. No long-lived-asset impairment trigger was identified in the current quarter.
- Operating cash flow turned positive. Investing activities used $229,465, including $457,435 of property and equipment purchases, partly offset by $206,336 of insurance proceeds. There were no financing cash flows in the current quarter.
Outlook, commentary and risks
- Management said cash on hand and operating cash flows should cover liquidity and capital expenditure needs for at least the next 12 months, but noted additional financing could be needed and may not be available on acceptable terms.
- No quantified revenue or earnings guidance was provided. Management cautioned that quarterly results are seasonal and the quarter is not necessarily indicative of full-year results.
- COVID-19 effects remained uncertain: some stores continued to face restrictions or changed customer behavior, and approximately 53 stores had not reopened as of February 28, 2021. The filing said it was unclear whether or when operations would return fully to pre-pandemic levels.
- Disagreements with Edible Arrangements arose during the quarter regarding the strategic alliance and e-commerce agreements; the outcome of continuing discussions was undetermined. Edible purchases were approximately $484,000, or 6.4% of quarterly revenue. The expected benefits and deployment of the agreements are not assured.
- The company was pursuing legal claims against its Canadian licensee, Immaculate Confections, over alleged unauthorized use of trademarks and intellectual property. A June 2021 court order declared the parties’ original Canadian development agreement expired; a trial was scheduled for August 2021. The company reported no revenue from the licensee’s Canadian locations in either comparative quarter.
- The board had suspended quarterly cash dividends, citing uncertainty and cash preservation. Other identified risks include raw-material and labor inflation, the ability to pass on higher costs, commodity purchase commitments of approximately $234,000, and competition and general economic conditions.
Important facts for investors to verify
- Whether the Edible agreements proceed, and the extent to which they contribute revenue and earnings.
- Developments and financial consequences of the Canadian litigation and the August 2021 trial schedule.
- Whether post-reopening sales levels persist, including the status of locations that had not reopened and the impact of seasonality.
- Renewal terms for the $5.0 million credit facility in September 2021, covenant compliance and continuing liquidity needs.
- The quality and repeatability of reported earnings, including the $167,123 insurance-recovery gain and the unusually weak COVID-affected prior-year comparison.