Rocky Mountain Chocolate Factory(RMCF) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's interim financial statements, management's analysis of financial performance and liquidity, and disclosures regarding market risk and internal controls Financial Statements The financial statements reveal a net loss of $114,941 for the quarter, driven by increased expenses despite a slight revenue rise, with operating cash flow significantly reduced Consolidated Statements of Operations The company reported a net loss of $114,941 for the quarter, a reversal from prior-year income, due to a 14.8% increase in costs and expenses despite a 3.1% revenue growth Consolidated Statements of Operations Highlights (Three Months Ended May 31) | Financial Metric | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $7,826,572 | $7,593,711 | +3.1% | | Total costs and expenses | $7,975,909 | $6,947,807 | +14.8% | | Income (Loss) from Operations | ($149,337) | $645,904 | -123.1% | | Consolidated Net Income (Loss) | ($114,941) | $579,805 | -119.8% | | Diluted Earnings (Loss) per Share | ($0.02) | $0.09 | -122.2% | - General and administrative expenses nearly doubled, increasing from $844,821 in Q1 2021 to $1,631,223 in Q1 2022, primarily driving the operating loss[9] Consolidated Balance Sheets Total assets increased to $27.5 million, while cash and cash equivalents decreased to $6.0 million, offset by a new $1.3 million restricted cash balance Key Balance Sheet Figures | Balance Sheet Item | May 31, 2022 (unaudited) | February 28, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,989,510 | $7,587,374 | | Restricted cash | $1,344,813 | $0 | | Total current assets | $15,426,280 | $14,997,966 | | Total Assets | $27,491,591 | $26,880,761 | | Total current liabilities | $5,699,244 | $5,311,732 | | Total stockholders' equity | $19,416,582 | $19,399,926 | Consolidated Statements of Cash Flows Net cash from operating activities significantly decreased to $11,298, primarily due to the net loss and increased inventories, impacting overall cash flow Cash Flow Summary (Three Months Ended May 31) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,298 | $385,811 | | Net cash used in investing activities | ($264,349) | ($229,465) | | Net Increase (Decrease) in Cash | ($253,051) | $156,346 | Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity slightly decreased to $19.42 million due to the $114,941 net loss, reducing retained earnings for the quarter - Retained earnings decreased by $114,941 due to the net loss, contrasting with a $579,805 increase from net income in the prior-year period[15] Notes to Interim (Unaudited) Consolidated Financial Statements Key disclosures include revenue sources, store network details, $305,000 in proxy solicitation costs, and a $1.34 million rabbi trust for a former CEO's termination payment - The company's revenue is derived from three main sources: sales of confectionery products to franchisees, franchise fees and royalties, and sales at Company-owned stores[19] - As of May 31, 2022, the company's network consisted of 338 total locations, including franchised, licensed, and company-owned stores for both Rocky Mountain Chocolate Factory and U-Swirl brands[21] - The company incurred approximately $305,000 in costs during the quarter related to a stockholder's contested solicitation of proxies for the 2022 annual meeting[65] - The company established a rabbi trust and contributed $1,344,813 for the termination payment to its former CEO, classified as restricted cash[66] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased by 3.1% due to higher sales and royalties, but a 93.1% surge in G&A expenses, including proxy contest costs, led to an operating loss and impacted liquidity Results of Operations Total revenues grew 3.1% to $7.8 million, driven by factory sales and royalty fees, but a 93.1% increase in G&A expenses led to a net loss Revenue Breakdown (Three Months Ended May 31) | Revenue Source | 2022 ($ thousands) | 2021 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Factory sales | $5,157.6 | $5,040.7 | +2.3% | | Retail sales | $792.7 | $789.5 | +0.4% | | Royalty and marketing fees | $1,809.1 | $1,707.3 | +6.0% | | Total | $7,826.6 | $7,593.7 | +3.1% | - The increase in royalty and marketing fees was primarily due to a 3.9% increase in same-store sales at all domestic franchise locations, with frozen yogurt cafés showing a strong 20.5% increase[79] - General and administrative costs surged by 93.1%, from $844,800 to $1,631,200, mainly due to increased professional fees related to board support, CEO transition, and a contested proxy solicitation[81][87] - Factory gross margin decreased by 70 basis points to 14.2%, attributed to wage and material inflation, partially offset by price increases effective May 1, 2022[83] Liquidity and Capital Resources Working capital stood at $9.7 million, but cash and cash equivalents decreased by $1.6 million due to a $1.3 million trust funding, with minimal operating cash flow - Working capital was $9.7 million as of May 31, 2022[92] - Cash and cash equivalents decreased by $1.6 million, largely due to a $1.3 million increase in restricted cash used to fund a rabbi trust for former CEO severance[93] - The company has a $5.0 million credit line, fully available as of May 31, 2022, and subject to renewal in September 2022[41] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, the registrant is exempt from providing quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[102] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of May 31, 2022, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of May 31, 2022[103] - No material changes occurred in the company's internal control over financial reporting during the quarter[104] PART II. OTHER INFORMATION This section addresses legal proceedings, confirms no material changes to risk factors, reports on equity sales, and lists filed exhibits Legal Proceedings Management anticipates that the resolution of ordinary course legal proceedings will not materially adversely affect the company's financial condition or operations - Management believes that the resolution of various legal proceedings arising in the ordinary course of business will not have a material adverse effect on the Company's financial position, results of operations or cash flows[106] Risk Factors No material changes have occurred in the company's risk factors since the Annual Report on Form 10-K for the fiscal year ended February 28, 2022 - No material changes have occurred in the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended February 28, 2022[107] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the reporting period - None[108] Exhibits This section lists exhibits filed with the Form 10-Q, including the CEO offer letter and Sarbanes-Oxley Act certifications - Exhibits filed include the CEO offer letter and certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[113]