Rocky Mountain Chocolate Factory(RMCF) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's unaudited consolidated financial statements and management's discussion and analysis for the period Financial Statements Unaudited consolidated financial statements for the three and nine months ended November 30, 2021, covering operations, balance sheets, and cash flows Consolidated Statements of Operations Total revenue increased 17.7% year-over-year for the three months ended November 30, 2021, but surging G&A expenses led to a net loss Consolidated Statements of Operations | Financial Metric | Three Months Ended Nov 30, 2021 | Three Months Ended Nov 30, 2020 | Nine Months Ended Nov 30, 2021 | Nine Months Ended Nov 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $8,507,634 | $7,228,867 | $24,027,422 | $15,258,706 | | Income (Loss) from Operations | $(1,958,708) | $398,564 | $(1,054,979) | $(4,311,042) | | Consolidated Net Income (Loss) | $(1,477,646) | $523,695 | $(700,908) | $(3,067,570) | | Diluted Earnings (Loss) per Share | $(0.24) | $0.08 | $(0.11) | $(0.51) | Consolidated Balance Sheets As of November 30, 2021, total assets increased to $27.3 million, driven by higher current assets, with total liabilities rising to $8.4 million Consolidated Balance Sheets | Balance Sheet Item | November 30, 2021 (unaudited) | February 28, 2021 | | :--- | :--- | :--- | | Total Current Assets | $15,079,748 | $12,776,823 | | Total Assets | $27,298,664 | $24,951,152 | | Total Current Liabilities | $6,118,602 | $3,780,320 | | Total Liabilities | $8,384,069 | $4,983,583 | | Total Stockholders' Equity | $18,914,595 | $18,967,569 | Consolidated Statements of Cash Flows For the nine months ended November 30, 2021, net cash from operating activities turned positive, leading to an increase in cash and cash equivalents Consolidated Statements of Cash Flows | Cash Flow Activity | Nine Months Ended Nov 30, 2021 | Nine Months Ended Nov 30, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $857,048 | $(2,012,609) | | Net cash (used in) provided by investing activities | $(407,457) | $198,438 | | Net cash provided by (used in) financing activities | $(61,276) | $4,263,021 | | Net Increase (Decrease) in Cash | $388,315 | $2,448,850 | | Cash and Cash Equivalents, End of Period | $6,021,594 | $7,270,921 | Notes to Financial Statements Notes detail operations, accounting policies, and financial items, covering COVID-19 recovery, Edible Arrangements disagreements, and significant one-time costs - The company is experiencing a strong recovery from COVID-19, with most stores meeting or exceeding pre-pandemic sales levels. However, this recovery is partially constrained by labor and supply chain issues[30] - Disagreements have arisen with Edible Arrangements regarding their strategic alliance, and the outcome is currently indeterminable. Purchases by Edible decreased significantly to $1.2 million in the first nine months of FY22 from $2.1 million in the prior year[23] - The company incurred substantial costs of approximately $1.7 million in the nine months ended Nov 30, 2021, related to a stockholder's contested solicitation of proxies[85] - A letter agreement with the interim CEO, Bryan J. Merryman, resulted in accrued severance compensation of $1,344,813 and accelerated restricted stock unit compensation expense of $525,000 during the third quarter[89][88] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue recovery, profitability impacts from one-time costs, and emerging headwinds from labor shortages and supply chain disruptions Results of Operations - Three Months Ended November 30, 2021 Total revenues increased 17.7% year-over-year to $8.5 million, but a 390.2% surge in G&A expenses led to an operating loss for the quarter Revenue Stream - Three Months Ended November 30, 2021 | Revenue Stream | Q3 2021 ($ thousands) | Q3 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $6,376.4 | $5,570.4 | 14.5% | | Retail sales | $636.0 | $531.4 | 19.7% | | Royalty and marketing fees | $1,433.5 | $1,081.0 | 32.6% | | Total | $8,507.6 | $7,228.9 | 17.7% | - General and administrative costs surged by $3.1 million (390.2%) due to costs from a contested proxy solicitation ($800k) and change in control severance expenses ($1.9 million)[112][97] - Factory gross margin improved to 22.2% from 19.1% in the prior year, driven by higher production volume and average selling prices, which offset increased material and labor costs[108] Results of Operations - Nine Months Ended November 30, 2021 Revenues grew 57.5% for the nine-month period, narrowing the operating loss, despite significant proxy and severance costs impacting overall profitability Revenue Stream - Nine Months Ended November 30, 2021 | Revenue Stream | Nine Months 2021 ($ thousands) | Nine Months 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $16,578.5 | $11,203.7 | 48.0% | | Retail sales | $2,208.1 | $1,214.4 | 81.8% | | Royalty and marketing fees | $5,075.8 | $2,665.9 | 90.4% | | Total | $24,027.4 | $15,258.7 | 57.5% | - Factory gross margin expanded significantly to 21.2% from 8.9% in the prior year, attributed to a 39.4% increase in production volume, higher prices, and Employee Retention Credits[127] - General and administrative costs for the nine months included approximately $1.7 million for the contested proxy solicitation and $1.9 million in change in control severance expenses[132] Liquidity and Capital Resources The company maintained a stable liquidity position with $6.0 million in cash and positive cash flow from operations, deemed sufficient for the next twelve months - Cash and cash equivalents increased by approximately $400,000 to $6.0 million as of November 30, 2021, compared to February 28, 2021[140] - The company has a $5.0 million credit line which was fully available as of November 30, 2021[52] - The Board of Directors suspended the quarterly cash dividend in May 2020 to preserve cash, and it remains suspended[31][54] 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 exempt from this disclosure requirement due to its status as a smaller reporting company[148] Controls and Procedures Management concluded disclosure controls and procedures were effective as of November 30, 2021, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[150] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[151] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, and other miscellaneous items, confirming no material changes or unreported events Legal Proceedings Management believes that ongoing legal proceedings arising in the ordinary course of business will not materially impact the company's financial condition - Management believes that ongoing legal proceedings will not materially impact the company's financial position, results of operations, or cash flows[153] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - The company reports no material changes to its risk factors from those disclosed in its most recent Form 10-K[154] Other Items (Items 2, 3, 4, 5, 6) This section confirms no unregistered equity sales, no senior security defaults, and no other material information for the period - No information was reported for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), or Item 5 (Other Information)[155][156][157]