Rocky Mountain Chocolate Factory(RMCF) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This section presents the unaudited consolidated financial statements for the three and six months ended August 31, 2021, and 2020, including detailed notes on accounting policies and financial items Consolidated Statements of Operations For the three months ended August 31, 2021, the company reported total revenues of $7.9 million and a net income of $196,933, with six-month revenues at $15.5 million and net income of $776,738, a significant improvement from the prior-year net loss Three Months Ended August 31, 2021 vs 2020 | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Revenue | $7,926,077 | $5,327,402 | | Income from Operations | $257,825 | $119,357 | | Consolidated Net Income | $196,933 | $76,132 | | Diluted EPS | $0.03 | $0.01 | Six Months Ended August 31, 2021 vs 2020 | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Revenue | $15,519,788 | $8,029,839 | | Income (Loss) from Operations | $903,729 | $(4,709,606) | | Consolidated Net Income (Loss) | $776,738 | $(3,591,265) | | Diluted EPS (Loss) | $0.12 | $(0.59) | Consolidated Balance Sheets As of August 31, 2021, total assets increased to $27.4 million from $25.0 million at February 28, 2021, driven by higher cash and inventories, with total stockholders' equity also increasing to $20.0 million Balance Sheet Summary (as of August 31, 2021) | Account | August 31, 2021 ($) | February 28, 2021 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | $6,731,330 | $5,633,279 | | Inventories, net | $5,188,433 | $4,062,885 | | Total current assets | $15,204,875 | $12,776,823 | | Total Assets | $27,417,592 | $24,951,152 | | Total current liabilities | $5,022,547 | $3,780,320 | | Total Liabilities | $7,403,661 | $5,983,583 | | Total stockholders' equity | $20,013,931 | $18,967,569 | Consolidated Statements of Cash Flows For the six months ended August 31, 2021, net cash provided by operating activities was $1.4 million, a significant turnaround from the $3.1 million used in the prior-year period, with investing activities using $329,405 and no financing activities Cash Flow Summary (Six Months Ended August 31) | Activity | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net cash from operating activities | $1,427,456 | $(3,056,480) | | Net cash used in investing activities | $(329,405) | $(104,905) | | Net cash from financing activities | $0 | $4,263,021 | | Net Increase in Cash | $1,098,051 | $1,101,636 | Notes to Interim (Unaudited) Consolidated Financial Statements The notes detail the company's operations, revenue recognition, segment performance, and significant events, including COVID-19 impact, strategic alliance disagreements, legal proceedings, and proxy solicitation costs - The company is an international franchisor and confectionery manufacturer with revenues from product sales, franchise fees, and company-owned stores[19][20] - Disagreements have arisen with Edible Arrangements® regarding their strategic alliance, and purchases from Edible decreased to $797,000 (5.1% of revenue) in the first six months of fiscal 2022 from $949,000 (11.8% of revenue) in the prior year period[21] - The company incurred approximately $907,000 in costs during the three months ended August 31, 2021, related to a stockholder's contested solicitation of proxies[75] - A change in control has occurred due to changes in the Board of Directors, which may trigger severance payments of approximately $2.2 million and accelerated RSU vesting of $690,000 if certain executives are terminated[76][77] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a strong recovery from the COVID-19 pandemic's impact, with significant revenue and net income increases, improved liquidity, and working capital, despite substantial proxy solicitation costs Results of Operations - Three Months Ended August 31, 2021 For the three months ended August 31, 2021, revenues increased 48.8% to $7.9 million, and net income rose to $197,000 from $76,000 year-over-year, driven by product sales growth, partially offset by $907,000 in proxy solicitation costs Revenue Breakdown (Three Months Ended August 31) | Revenue Source | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $5,161.4 | $3,498.8 | 47.5% | | Retail sales | $782.6 | $495.4 | 58.0% | | Royalty and marketing fees | $1,935.0 | $1,259.6 | 53.6% | | Total | $7,926.1 | $5,327.4 | 48.8% | - Same-store pounds purchased by domestic franchise locations increased 20.0% compared to the pre-pandemic period of Q2 2019[92] - General and administrative costs increased 136.4% to $1.86 million, primarily due to $907,000 in costs associated with a contested proxy solicitation[96][102] - Factory gross margin improved significantly to 26.1% from 16.9% in the prior year, driven by higher production volume and the benefit of Employee Retention Credits[97][98] Results of Operations - Six Months Ended August 31, 2021 For the six months ended August 31, 2021, the company reported a net income of $777,000, a reversal from a $3.6 million net loss in the prior-year period, with revenues growing 93.3% to $15.5 million, reflecting strong recovery despite proxy contest costs Revenue Breakdown (Six Months Ended August 31) | Revenue Source | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $10,202.2 | $5,633.4 | 81.1% | | Retail sales | $1,572.1 | $683.0 | 130.2% | | Royalty and marketing fees | $3,642.3 | $1,584.8 | 129.8% | | Total | $15,519.8 | $8,029.8 | 93.3% | - General and administrative costs decreased primarily due to lower bad debt expense and the absence of asset impairment charges that were recorded in the prior year, partially offset by $917,000 in proxy contest costs[120] - Factory gross margin increased to 20.6% from -1.2% in the prior year period, due to a 55.0% increase in production volume and higher average selling prices[116] Liquidity and Capital Resources The company's financial position strengthened, with working capital increasing by $1.2 million to $10.2 million and cash balances growing by $1.1 million to $6.7 million as of August 31, 2021, supported by positive operating cash flow - Working capital increased to $10.2 million as of August 31, 2021, from $9.0 million at February 28, 2021[128] - Cash and cash equivalents increased by $1.1 million to $6.7 million during the first six months of the fiscal year[129] - Net cash provided by operating activities was $1.4 million for the six months ended August 31, 2021, compared to net cash used of $3.1 million in the same period of 2020[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide this information - The company is not required to provide information for this item as it qualifies as a smaller reporting company[137] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of August 31, 2021, 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 August 31, 2021[139] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[140] PART II. OTHER INFORMATION This section provides information on legal proceedings, risk factors, equity security sales, and filed exhibits Item 1. Legal Proceedings The company is involved in various legal proceedings, but management does not expect a material adverse effect on financial condition or results of 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[141] Item 1A. Risk Factors There have been no material changes to the 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 risk factors from those disclosed in the Annual Report on Form 10-K for the fiscal year ended February 28, 2021[142] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no issuer purchases of equity securities during the period - There were no issuer purchases of equity securities[143] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, a cooperation agreement, and Sarbanes-Oxley Act certifications - Exhibits filed include the Cooperation Agreement with Global Value Investment Corp., and certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[148]