Rocky Mountain Chocolate Factory(RMCF) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Q1 2021 financial statements show significant recovery, with revenue up 181% to $7.6 million and a shift from net loss to net income Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Three Months Ended May 31) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $7,593,711 | $2,702,437 | +181.0% | | Income (Loss) from Operations | $645,904 | $(4,828,963) | N/A | | Consolidated Net Income (Loss) | $579,805 | $(3,667,397) | N/A | | Diluted Earnings (Loss) per Share | $0.09 | $(0.61) | N/A | - The company experienced a significant turnaround, moving from a substantial operating loss in Q1 2020 to an operating profit in Q1 2021, primarily due to the recovery from COVID-19 pandemic impacts[9] Consolidated Balance Sheets Consolidated Balance Sheet Highlights | Metric | May 31, 2021 | February 28, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,789,625 | $5,633,279 | | Total current assets | $13,267,445 | $12,776,823 | | Total Assets | $25,802,627 | $24,951,152 | | Total current liabilities | $3,617,399 | $3,780,320 | | Total stockholders' equity | $19,693,531 | $18,967,569 | Consolidated Statements of Cash Flows Consolidated Cash Flow Highlights (Three Months Ended May 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $385,811 | $(1,598,042) | | Net cash used in investing activities | $(229,465) | $(46,127) | | Net cash provided by (used in) financing activities | $0 | $4,263,021 | | Net Increase in Cash | $156,346 | $2,618,852 | | Cash and Cash Equivalents, End of Period | $5,789,625 | $7,440,923 | - Cash flow from operations turned positive in Q1 2021, a significant improvement from the cash burn in Q1 2020. The prior year's financing activities included proceeds from long-term debt and a line of credit to manage liquidity during the pandemic[14] Notes to Financial Statements - The company is an international franchisor and confectionery manufacturer with revenues from product sales, franchise fees, and company-owned stores[18][19] - A strategic alliance with Edible Arrangements® is intended to make the company an exclusive provider of certain chocolate products, but disagreements arose in Q1 2021, with the outcome currently undeterminable[20] - The company initiated legal proceedings against its Canadian operator, Immaculate Confections (IC), for unauthorized use of trademarks. A court order declared the development agreement expired, and the company has removed IC's 48 locations from its store count[21][22][23] - Due to the COVID-19 pandemic's impact, the company suspended its quarterly cash dividend in May 2020 to preserve cash[28][53] - In Q1 2020, the company recorded $545,000 in impairment expenses for goodwill, trademarks, and other long-lived assets due to the significant impact of the COVID-19 pandemic. No such impairment charges were recorded in Q1 2021[45][46][47] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2021's significant operational improvement to COVID-19 recovery, with revenues up 181% to $7.6 million and a shift to net income COVID-19 Impact - The business was significantly disrupted by COVID-19 in the prior year, with most stores experiencing reduced operations or closures. By May 31, 2021, many stores had met or exceeded pre-pandemic sales levels, though some retail environments remain adversely impacted[83] - In response to the pandemic's impact, the Board of Directors suspended quarterly cash dividends starting in May 2020 to preserve cash and provide financial flexibility[84] Results of Operations Revenue Breakdown (Three Months Ended May 31) | Revenue Source | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $5,040.7 | $2,134.6 | +136.1% | | Retail sales | $789.5 | $187.6 | +320.8% | | Royalty and marketing fees | $1,707.3 | $325.2 | +425.0% | | Total | $7,593.7 | $2,702.4 | +181.0% | - The increase in factory sales was driven by a 281% rise in product sales to the franchise network as stores reopened. Same-store pounds purchased by domestic franchise locations increased 11.3% compared to the pre-pandemic period of Q1 2019[87][88] - Royalty and marketing fees surged as most franchise locations resumed normal operations. Same-store sales at domestic franchise locations increased 14.0% compared to the pre-pandemic period of Q1 2019[90] Gross Margin Analysis (Three Months Ended May 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Factory gross margin | 14.9% | -30.7% | | Retail gross margin | 67.5% | 50.6% | - Factory gross margin improved significantly due to a 129% increase in production volume, which allowed fixed costs to be spread over a larger base, unlike the prior year where idle labor costs exceeded revenue[94] - General and administrative costs decreased by 73.4% primarily due to lower bad debt expense and the absence of intangible asset impairment charges that were recorded in Q1 2020[99] Liquidity and Capital Resources - Management believes cash flows from operations and existing cash reserves will be sufficient to meet liquidity and capital needs for at least the next twelve months, following defensive measures taken in 2020 like suspending dividends and reducing expenses[105] - Working capital increased by $700,000 to $9.7 million as of May 31, 2021, compared to February 28, 2021, due to improved operating results[106] - Operating activities provided $385,811 in cash for Q1 2021, a stark contrast to the $1,598,042 used in Q1 2020, highlighting the operational recovery[108] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[115] Controls and Procedures Management, including CEO and CFO, concluded disclosure controls were effective as of May 31, 2021, with no material changes to internal control over financial reporting - Based on an evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of May 31, 2021[118] - There were no changes in internal control over financial reporting during the quarter ended May 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[119] PART II. OTHER INFORMATION Legal Proceedings Management believes the resolution of various legal proceedings will not materially adversely affect the company's financial condition or results - 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[121] Risk Factors No material changes to risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended February 28, 2021 - There have been no material changes in the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended February 28, 2021[122] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or issuer purchases of equity securities during the period - There were no issuer purchases of equity securities during the reporting period[123] Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed with this report include Sarbanes-Oxley Act certifications (31.1, 32.1) and XBRL Interactive Data Files[128]