Rocky Mountain Chocolate Factory, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended August 31, 2020; interim financial statements are unaudited. The company is a chocolate manufacturer, franchisor and retailer, with frozen-yogurt operations through U-Swirl. Results were heavily affected by COVID-19 disruptions. As of August 31, 401 of 413 reported system locations were open; approximately 27 stores had not reopened.
Financial performance
| Metric | Three months ended Aug. 31, 2020 | Six months ended Aug. 31, 2020 | Prior-year comparable |
|---|---|---|---|
| Revenue | $5.33 million, down 27.9% | $8.03 million, down 49.2% | $7.39 million and $15.81 million |
| Operating income (loss) | $119,000 | $(4.71) million | $1.25 million and $2.19 million |
| Net income (loss) | $76,000; EPS $0.01 | $(3.59) million; EPS $(0.59) | $918,000 and $1.63 million |
| Operating cash flow | Not presented separately | $(3.06) million | $2.90 million for six months |
- Six-month factory sales fell 44.2%, retail sales 61.1%, and royalty and marketing fees 58.1%. Franchisee and licensee purchasing and store traffic were sharply reduced.
- Factory gross margin was negative 1.2% for the six-month period, versus positive 23.1% a year earlier, as lower production left fixed costs and idle labor underabsorbed. Retail gross margin was 65.1%, versus 66.3%.
- Six-month general and administrative expense rose to $3.97 million from $1.98 million, including higher bad-debt expense and impairment charges. The company recorded approximately $1.47 million in provisions for losses on accounts and notes receivable and approximately $545,000 of impairment and store-closure losses.
- Cash and equivalents were $5.92 million at August 31, up from $4.82 million at February 29, primarily reflecting new borrowing. Working capital was $5.5 million and the current ratio was 1.5, down from 2.4.
Debt, liquidity and other developments
- The company had drawn $3.45 million on its revolving credit line and had a $1.54 million Paycheck Protection Program (PPP) loan outstanding. The credit line carries interest at LIBOR plus 2.25% and is secured by substantially all company assets, subject to stated exceptions.
- The company was not compliant with the credit-line covenant requiring $1.5 million of trailing-12-month adjusted EBITDA. Wells Fargo issued reservation-of-rights letters on June 26 and October 5, 2020, reserving, among other rights, the ability to demand immediate repayment and restricting further draws. The company planned to seek covenant amendments; lender agreement was not assured. The line was due for renewal in September 2021.
- Management said cash and operating cash flows should meet liquidity and capital needs for at least 12 months, while warning that additional financing may be needed and may not be available on acceptable terms.
- The board suspended quarterly dividends to preserve cash. The company reduced expenses, production and discretionary capital spending, and extended vendor payment terms.
- The Edible Arrangements alliance contributed approximately $949,000 of revenue in the six-month period; related receivables were approximately $718,000. The company also reported approximately $80,000 of FTD-related receivables and $226,000 of inventory, with approximately $146,000 of reserves; recovery remains uncertain following FTD’s bankruptcy.
- PPP loans bear 1% interest and may be forgiven subject to program conditions. The company believed proceeds had been used for qualifying expenses, but forgiveness was not assured. No specific revenue or earnings guidance was provided.
Investor facts to verify
- Whether the company and Wells Fargo reached a covenant waiver or amendment, and whether any repayment demand or additional draw restrictions followed.
- Cash burn, borrowing availability, and the company’s ability to maintain liquidity as pandemic-related operating conditions change.
- Store reopening and closure trends, franchisee purchasing, factory utilization and gross-margin recovery.
- Collectability of franchisee and other receivables, including Edible and FTD balances, and whether further credit-loss or impairment charges are required.
- PPP forgiveness outcome and the extent to which Edible-related sales and online growth offset weakness in the retail and franchise network.