Rocky Mountain Chocolate Factory, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended November 30, 2020; filed January 13, 2021. The company is a chocolate manufacturer, franchisor and retailer, and operates frozen-yogurt brands. Results were materially affected by COVID-19 restrictions and store disruptions.
Financial performance
| Metric | Three months ended Nov. 30, 2020 | Three months ended Nov. 30, 2019 | Nine months ended Nov. 30, 2020 | Nine months ended Nov. 30, 2019 |
|---|---|---|---|---|
| Revenue | $7.23 million | $7.91 million | $15.26 million | $23.72 million |
| Operating income (loss) | $399,000 | $(98,000) | $(4.31) million | $2.09 million |
| Net income (loss) | $524,000 | $(72,000) | $(3.07) million | $1.56 million |
| Basic EPS | $0.09 | $(0.01) | $(0.51) | $0.26 |
| Gross margin | 23.2% | 23.6% | 14.4% | 27.4% |
- Quarterly revenue fell 8.6%; factory sales declined 3.7%, retail sales 24.5%, and royalty and marketing fees 19.4%. Quarterly operating results improved chiefly because prior-year general and administrative costs included about $771,000 for strategic-alternatives review and proxy-solicitation work.
- Nine-month revenue fell 35.7%. Factory sales declined 29.4%, retail sales 50.6%, and royalty and marketing fees 47.9%. Nine-month factory gross margin fell to 8.9% from 21.6%, primarily due to lower production volume; about $280,000 of idle labor costs were included in cost of sales. Nine-month adjusted gross margin, a non-GAAP measure, was 18.3% versus 29.8%.
- Quarterly net income included a $210,000 insurance-recovery gain and approximately $108,000 of PPP debt-forgiveness income. The nine-month loss also reflected about $545,000 of impairment and store-closure costs and increased credit-loss provisions. Management increased allowances for potentially uncollectible accounts and notes receivable to approximately $1.88 million from $639,000 at fiscal year-end.
Cash flow, financial position and debt
- At November 30, cash and cash equivalents were $7.27 million, versus $4.82 million at February 29, 2020. Working capital was $6.6 million, down from $8.0 million; the current ratio declined to 1.8 from 2.4.
- For the nine months, operating activities used $2.01 million of cash, versus providing $4.03 million in the prior-year period. Investing activities provided $198,000, including $305,000 of insurance-recovery proceeds; financing activities provided $4.26 million, primarily from borrowing.
- The company had $3.45 million outstanding on its $5.0 million revolving credit facility and $1.44 million of remaining PPP debt at November 30. The credit line is secured by substantially all company assets other than retail-store assets. PPP debt bears 1% interest; approximately $108,000 had been forgiven, and forgiveness of the remaining balance was not assured.
- The company breached the credit line’s trailing-12-month EBITDA covenant at November 30. The lender issued reservation-of-rights letters, including reserving a right to demand immediate repayment and restricting further draws. A December 22, 2020 amendment revised the covenant and COVID-19 provisions; the company stated it was compliant as of the filing date. The line was due for renewal in September 2021.
Outlook, risks and other material items
- Management said cash on hand and operating cash flows should meet liquidity and capital needs for at least the next 12 months, while cautioning that additional financing might be needed and may not be available on acceptable terms. It gave no specific earnings or revenue guidance.
- COVID-19 reduced store traffic, hours, product orders and royalties. Approximately 43 stores had not reopened by November 30, and their future was uncertain. Management said it was unclear when, or whether, operations would return to pre-pandemic levels. Cost reductions, lower production, reduced discretionary spending and suspended dividends were among its cash-preservation measures.
- The strategic alliance and e-commerce licensing arrangement with Edible were intended to expand product distribution and online sales. Edible-related purchases generated approximately $2.13 million of revenue in the nine months; Edible’s founder and CEO sits on the company’s board. The company also issued Edible a warrant for up to 960,677 shares, subject to revenue thresholds.
- FTD’s bankruptcy left approximately $221,000 of related inventory and $80,000 of receivables on the books, with approximately $146,000 reserved for expected losses. The company said full realization and future revenue were uncertain.
- The board suspended quarterly dividends amid pandemic uncertainty. A December 2020 federal law change allowing tax deductions for certain PPP-related expenses may affect the company’s effective tax rate.
Important facts for investors to verify
- Whether store reopenings, franchisee demand, factory volumes, royalties and online sales recover, and how the Edible alliance performs.
- The company’s cash burn, working-capital needs, credit-line renewal, compliance with amended covenants, and ability to repay or obtain forgiveness of remaining PPP debt.
- Whether receivable allowances and impairment estimates adequately reflect franchisee financial stress, COVID-19 impacts and potential additional store closures.
- The collectability of FTD-related balances and the timing or amount of any further insurance proceeds.
- The effect of the PPP tax-deduction change and other tax provisions on reported results and cash taxes.