Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q ("Quarterly Report") includes statements of
our expectations, intentions, plans and beliefs that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and are intended to come within the safe harbor protection
provided by those sections. These forward-looking statements involve various
risks and uncertainties. The nature of our operations and the environment in
which we operate subject us to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. The statements, other than
statements of historical fact, included in this Quarterly Report are
forward-looking statements. Many of the forward-looking statements contained in
this document may be identified by the use of forward-looking words such as
"will," "intend," "believe," "expect," "anticipate," "should," "plan,"
"estimate," "potential," or similar expressions. Factors which could cause
results to differ include, but are not limited to: the impact of the novel
coronavirus (COVID-19) on our business, including, among other things,
disruptions to our supply chain, including, but not limited to, raw materials
and freight costs, the availability of qualified labor, online sales, factory
sales, retail sales and royalty and marketing fees, our liquidity, our cost
cutting and capital preservation measures, achievement of the anticipated
potential benefits of the strategic alliance with Edible (as defined herein),
our ability to provide products to Edible under the strategic alliance, the
ability to increase our online sales through the agreements with Edible, the
outcome of the legal proceedings initiated against Immaculate Confections, the
operator of RMCF locations in Canada, changes in the confectionery business
environment, seasonality, consumer interest in our products, general economic
conditions, the success of our frozen yogurt business, receptiveness of our
products internationally, consumer and retail trends, costs and availability of
raw materials, competition, the success of our co-branding strategy, the success
of international expansion efforts and the effect of government regulations.
Government regulations which we and our franchisees and licensees either are, or
may be, subject to and which could cause results to differ from forward-looking
statements include, but are not limited to: local, state and federal laws
regarding health, sanitation, safety, building and fire codes, franchising,
licensing, employment, manufacturing, packaging and distribution of food
products and motor carriers. For a detailed discussion of the risks and
uncertainties that may cause our actual results to differ from the
forward-looking statements contained herein, please see the section entitled
"Risk Factors" contained in Item 1A. of our Annual Report on Form 10-K for the
fiscal year ended February 28, 2021, as amended by Amendment No. 1 on Form
10-K/A filed on June 28, 2021. Additional factors that might cause such
differences include, but are not limited to: the length and severity of the
current COVID-19 pandemic and its effect on among other things, factory sales,
retail sales, royalty and marketing fees and operations, the effect of any
governmental action or mandated employer-paid benefits in response to the
COVID-19 pandemic, our ability to manage costs and reduce expenditures in the
current economic environment and the availability of additional financing if and
when required. These forward-looking statements apply only as of the date of
this Quarterly Report. As such they should not be unduly relied upon for more
current circumstances. Except as required by law, we undertake no obligation to
release publicly any revisions to these forward-looking statements that might
reflect events or circumstances occurring after the date of this Quarterly
Report or those that might reflect the occurrence of unanticipated events.
Unless otherwise specified, the "Company," "we," "us" or "our" refers to Rocky
Mountain Chocolate Factory, Inc., a Delaware corporation, and its consolidated
subsidiaries (including its operating subsidiary with the same name, Rocky
Mountain Chocolate Factory, Inc., a Colorado corporation ("RMCF")).
Overview
We are an international franchisor, confectionery manufacturer and retail
operator. Founded in 1981, we are headquartered in Durango, Colorado and
manufacture an extensive line of premium chocolate candies and other
confectionery products. Our subsidiary, U-Swirl International, Inc. ("U-Swirl"),
franchises and operates soft-serve frozen yogurt cafés. Our revenues and
profitability are derived principally from our franchised/license system of
retail stores that feature chocolate, frozen yogurt and other confectionary
products. We also sell our candy outside of our system of retail stores and
license the use of our brand with certain consumer products. As of November 30,
2021, there were two Company-owned, 97 licensee-owned and 161 franchised Rocky
Mountain Chocolate Factory stores operating in 37 states, South Korea, Panama,
and the Philippines. As of November 30, 2021, U-Swirl operated three
Company-owned cafés and 66 franchised cafés located in 22 states and Qatar.
U-Swirl operates self-serve frozen yogurt cafés under the names "U-Swirl,"
"Yogurtini," "CherryBerry," "Yogli Mogli Frozen Yogurt," "Fuzzy Peach Frozen
Yogurt," "Let's Yo!" and "Aspen Leaf Yogurt".
In FY 2020 and early FY 2021, we entered into a long-term strategic alliance and
ecommerce agreements with Edible, whereby it is intended that we would become
the exclusive provider of certain branded chocolate products to Edible, its
affiliates and its franchisees. Under the strategic alliance, Rocky Mountain
Chocolate Factory branded products are intended to be available for purchase
both on Edible's website as well as through over 1,000 franchised Edible
locations nationwide. In addition, due to Edible's significant e-commerce
expertise and scale, we have also executed an ecommerce licensing agreement with
Edible, whereby Edible is expected to sell a wide variety of chocolates, candies
and other confectionery products produced by the Company or its franchisees
through Edible's websites. There is no assurance that the strategic alliance and
ecommerce agreements will be deployed into our operations and to our
satisfaction, or that we will achieve the expected full benefits from these
agreements. During the nine months ended November 30, 2021, certain
disagreements arose between RMCF and Edible related to the strategic alliance
and ecommerce agreements resulting in continuing discussions, the result of
which are not currently determinable. There can be no assurance historical
revenue levels will be indicative of future revenues.
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COVID-19
As discussed in more detail throughout this Quarterly Report on Form 10-Q for
the nine months ended November 30, 2021 (this "Quarterly Report"), we have
experienced significant business disruptions resulting from efforts to contain
the rapid spread of the novel coronavirus ("COVID-19"), including the vast
mandated self-quarantines of customers throughout the United States and
internationally. During the year ended February 28, 2021 nearly all of the
Company-owned and franchise stores were directly and negatively impacted by
public health measures taken in response to COVID-19, with nearly all locations
experiencing reduced operations as a result of, among other things, modified
business hours and store and mall closures. As a result, franchisees and
licensees were not ordering products for their stores in line with historical
amounts. This trend has negatively impacted, and may continue to negatively
impact, among other things, factory sales, retail sales and royalty and
marketing fees. Beginning in May 2020, most stores previously closed for much of
March 2020 and April 2020 in response to the COVID-19 pandemic, began to
re-open. During the year ended February 28, 2021, approximately 53 stores closed
and have not re-opened and the future of these locations is uncertain. That is a
closure rate significantly higher than historical levels. As of the date of this
report, most stores have met or exceeded pre-COVID-19 sales levels, however,
many retail environments have continued to be adversely impacted by changes to
consumer behavior as a result of COVID-19. Most stores re-opened subject to
various local health restrictions and often with reduced operations. Strong
consumer spending and other macro-economic trends as well as the roll out of
vaccines and relaxing of most local health restrictions have resulted in
significant increases in sales at our franchise stores during the nine months
ended November 30, 2021. Our ability to meet the increase in franchise store
demand has been impacted by labor and supply chain constraints. We are unsure
how the emergence of COVID-19 variants, such as Delta and Omicron, will impact
the positive recovery trends.
Labor and Supply Chain
As a result of macro-economic inflationary trends and disruptions to the global
supply chain, we have experienced and expect to continue experiencing higher raw
material, labor, and freight costs. We have begun to see labor and logistics
challenges, which we believe have contributed to lower factory, retail and
e-commerce sales of our products due to the availability of material, labor and
freight. In addition, we could experience additional lost sale opportunities if
our products are not available for purchase as a result of continued disruptions
in our supply chain relating to an inability to obtain ingredients or packaging,
labor challenges at our logistics providers or our manufacturing facility, or if
we or our franchisees experience delays in stocking our products.
Contested Solicitation of Proxies
During the three and nine months ended November 30, 2021, the Company incurred
substantial costs associated with a stockholder's contested solicitation of
proxies in connection with our 2021 annual meeting of stockholders. During the
three and nine months ended November 30, 2021, the Company incurred
approximately $800,000 and $1.7 million of costs, respectively, associated with
the contested solicitation of proxies, compared with no comparable costs
incurred in the three and nine months ended November 30, 2020. These costs are
recognized as general and administrative expense in the Consolidated Statement
of Operations. Additionally, as a result of the contested solicitation of
proxies and the resulting changes to the composition of the Company's Board of
Directors, the Company incurred $1.9 million of accrued severance costs and
accelerated restricted stock unit expense during the three and nine months ended
November 30, 2021. As previously announced, Bryan J. Merryman agreed to
voluntarily step down as President and Chief Executive Officer ("CEO") of the
Company upon the hiring of a new President and CEO for the Company. The Company
is actively engaged in the search for a new CEO to succeed Mr. Merryman who will
continue until such time in the capacity of interim CEO.
Results of Operations
Three Months Ended November 30, 2021 Compared to the Three Months Ended November
30, 2020
Results Summary
Basic earnings per share decreased from $0.09 per share in the three months
ended November 30, 2020 to a loss of $(0.24) per share in the three months ended
November 30, 2021. Revenues increased 17.7% from $7.2 million in the three
months ended November 30, 2020 to $8.5 million in the three months ended
November 30, 2021. Income from operations decreased from $399,000 in the three
months ended November 30, 2020 to a loss from operations of $(1,959,000) in the
three months ended November 30, 2021. Net income decreased from $524,000 in the
three months ended November 30, 2020 to a net loss of $(1,478,000) in the three
months ended November 30, 2021. The increase in revenue was due primarily to the
impacts from the COVID-19 pandemic during the three months ended November 30,
2020, including its impact on our operation and the operations of our
franchised, licensed and Company-owned locations. During the three months ended
November 30, 2021 most of the disruptions experienced as a result of the
COVID-19 pandemic were no longer impacting our network of franchised and
licensed retail stores and many of our locations have exceeded, pre-pandemic
levels. The decrease in income from operations and net income was due primarily
to the costs associated with the contested solicitation of proxies and the
associated accrued severance and stock compensation costs.
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Revenues
Three Months Ended
November 30, %
($'s in thousands) 2021 2020 Change Change
Factory sales $ 6,376.4 $ 5,570.4 $ 806.0 14.5 %
Retail sales 636.0 531.4 104.6 19.7 %
Franchise fees 61.7 46.1 15.6 33.8 %
Royalty and marketing fees 1,433.5 1,081.0 352.5 32.6 %
Total $ 8,507.6 $ 7,228.9 $ 1,278.7 17.7 %
Factory Sales
The increase in factory sales for the three months ended November 30, 2021
compared to the three months ended November 30, 2020 was primarily due to a
37.8% increase in sales of product to our network of franchised and licensed
retail stores, partially offset by a 31.1% decrease in shipments of product to
customers outside our network of franchised retail stores. Purchases by the
Company's largest customer, Edible Arrangements LLC ("Edible"), during the three
months ended November 30, 2021 were approximately $413,400, or 4.9% of the
Company's revenues, compared to $1.2 million, or 16.3% of the Company's revenues
during the three months ended November 30, 2020. The increase in sales of
product to our network of franchised and licensed retail stores was primarily
the result of the COVID-19 pandemic and the associated public health measures in
place during the three months ended November 30, 2020, which significantly
reduced traffic in our stores. During the three months ended November 30, 2021
most of the disruptions experienced as a result of the COVID-19 pandemic were no
longer impacting our network of franchised and licensed retail stores and many
of our locations had exceeded, pre-pandemic levels. During the nine months ended
November 30, 2021, certain disagreements arose between RMCF and Edible related
to the strategic alliance and ecommerce agreements resulting in continuing
discussions, the result of which are not currently determinable. There can be no
assurance historical revenue levels will be indicative of future revenues. Same
store pounds purchased by domestic franchise and licensed locations increased
2.6% during the three months ended November 30, 2021, when compared to the three
months ended November 30, 2019 (the most recent comparable period prior to the
business disruptions of COVID-19).
Retail Sales
Retail sales at Company-owned stores increased 19.7% during the three months
ended November 30, 2021 compared to the three months ended November 30, 2020 as
a result of all of our Company-owned stores being open during the three months
ended November 30, 2021 compared to the limited operations of all of our
Company-owned stores for much of the three months ended November 30, 2020. The
limited operations of our Company-owned stores in the prior year period was the
result of the COVID-19 pandemic and the associated public health measures in
place during the three months ended November 30, 2020. As of November 30, 2021,
all Company-owned stores had substantially resumed full operations following
COVID-19 related closure.
Royalties, Marketing Fees and Franchise Fees
The increase in royalties and marketing fees from the three months ended
November 30, 2020 to the three months ended November 30, 2021 was primarily due
to the majority of our franchise locations having resumed normal operations
during the three months ended November 30, 2021, due to the relaxing of
restrictions related to the COVID-19 pandemic and the associated public health
measures in place during the three months ended November 30, 2020 as well as the
rollout of vaccines. Nearly all of our franchised locations experienced reduced
operations during the three months ended November 30, 2020. Same store sales at
domestic franchise locations increased 22.4% during the three months ended
November 30, 2021 when compared to the three months ended November 30, 2019 (the
most recent comparable period prior to the business disruptions of COVID-19).
The increase in franchise fee revenue for the three months ended November 30,
2021 compared to the three months ended November 30, 2020 was the result of an
increase in revenue resulting from the closure of franchise locations and the
associated recognition of revenue in the three months ended November 30, 2021,
with no comparable revenue during the three months ended November 30, 2020. This
increase was partially offset by fewer franchise stores in operation and the
associated recognition of revenue over the terms of the various franchise
agreements.
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Costs and Expenses
Cost of Sales
Three Months Ended
November 30, $ %
($'s in thousands) 2021 2020 Change Change
Cost of sales - factory $ 4,960.9 $ 4,505.4 $ 455.5 10.1 %
Cost of sales - retail 239.8 182.6 57.2 31.3 %
Franchise costs 458.5 440.7 17.8 4.0 %
Sales and marketing 377.2 382.5 (5.3 ) (1.4 )%
General and administrative 3,865.9 788.7 3,077.2 390.2 %
Retail operating 420.3 361.4 58.9 16.3 %
Total $ 10,322.6 $ 6,661.3 $ 3,661.3 55.0 %
Gross Margin
Three Months Ended
November 30, $ %
($'s in thousands) 2021 2020 Change Change
Factory gross margin $ 1,415.5 $ 1,065.0 $ 350.5 32.9 %
Retail gross margin 396.2 348.8 47.4 13.6 %
Total $ 1,811.7 $ 1,413.8 $ 397.9 28.1 %
Three Months Ended
November 30, % %
2021 2020 Change Change
(Percent)
Factory gross margin 22.2 % 19.1 % 3.1 % 16.1 %
Retail gross margin 62.3 % 65.6 % (3.3 )% (5.1 )%
Total 25.8 % 23.2 % 2.7 % 11.5 %
Adjusted Gross Margin
Three Months Ended
November 30, $ %
($'s in thousands) 2021 2020 Change Change
Factory gross margin $ 1,415.5 $ 1,065.0 $ 350.5 32.9 %
Plus: depreciation and amortization 155.2 157.6 (2.4 ) (1.5 )%
Factory adjusted gross margin 1,570.7 1,222.6 348.1 28.5 %
Retail gross margin 396.2 348.8 47.4 13.6 %
Total Adjusted Gross Margin $ 1,966.9 $ 1,571.4 $ 395.5 25.2 %
Factory adjusted gross margin 24.6 % 21.9 % 2.7 % 12.2 %
Retail gross margin 62.3 % 65.6 % (3.3 )% (5.1 )%
Total Adjusted Gross Margin 28.0 % 25.8 % 2.3 % 8.9 %
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures.
Adjusted gross margin is equal to the sum of our factory adjusted gross margin
plus our retail gross margin calculated in accordance with GAAP. Factory
adjusted gross margin is equal to factory gross margin plus depreciation and
amortization expense. We believe adjusted gross margin and factory adjusted
gross margin are helpful in understanding our past performance as a supplement
to gross margin, factory gross margin and other performance measures calculated
in conformity with GAAP. We believe that adjusted gross margin and factory
adjusted gross margin are useful to investors because they provide a measure of
operating performance and our ability to generate cash that is unaffected by
non-cash accounting measures. Additionally, we use adjusted gross margin and
factory adjusted gross margin rather than gross margin and factory gross margin
to make incremental pricing decisions. Adjusted gross margin and factory
adjusted gross margin have limitations as analytical tools because they exclude
the impact of depreciation and amortization expense and you should not consider
them in isolation or as a substitute for any measure reported under GAAP. Our
use of capital assets makes depreciation and amortization expense a necessary
element of our costs and our ability to generate income. Due to these
limitations, we use adjusted gross margin and factory adjusted gross margin as
measures of performance only in conjunction with GAAP measures of performance
such as gross margin and factory gross margin.
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Cost of Sales and Gross Margin
Factory gross margins increased to 22.2% in the three months ended November 30,
2021 compared to 19.1% the three months ended November 30, 2020, due primarily
to higher average sell prices and a 12.5% increase in production volume in the
three months ended November 30, 2021 compared to the three months ended November
30, 2020, partially offset by increased costs of materials and labor. The
increase in production volume was the result of an increase in factory sales.
Retail gross margins decreased from 65.6% during the three months ended November
30, 2020 to 62.3% during the three months ended November 30, 2021. This decrease
was primarily due to increased costs.
Franchise Costs
The increase in franchise costs in the three months ended November 30, 2021
compared to the three months ended November 30, 2020 was due primarily to an
increase in professional fees. As a percentage of total royalty and marketing
fees and franchise fee revenue, franchise costs decreased to 30.7% in the three
months ended November 30, 2021 from 39.1% in the three months ended November 30,
2020. This decrease as a percentage of royalty, marketing and franchise fees is
primarily a result of an increase in royalty revenues.
Sales and Marketing
Sales and marketing costs were comparable for the three months ended November
30, 2021 and the three months ended November 30, 2020.
General and Administrative
The increase in general and administrative costs for the three months ended
November 30, 2021 compared to the three months ended November 30, 2020 is
primarily due to costs associated with a stockholder's contested solicitation of
proxies in connection with our 2021 annual meeting of stockholders and the
compensation costs associated with the letter agreement between the Company and
Mr. Merryman. During the three months ended November 30, 2021, the Company
incurred approximately $800,000 of costs associated with the contested
solicitation of proxies and $1.9 million in change in control severance expense,
compared with no comparable expenses incurred in the three months ended November
30, 2020. As a percentage of total revenues, general and administrative expenses
increased to 45.4% in the three months ended November 30, 2021 compared to 10.9%
in the three months ended November 30, 2020.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November
30, 2021 compared to the three months ended November 30, 2020 was due primarily
to the resumption of normal operations at most of our Company-owned stores so
that most stores were fully operational during the three months ended November
30, 2021 compared to the limited operations of all of our Company-owned stores
for much of the three months ended November 30, 2020. The limited operation of
our Company-owned stores was the result of COVID-19 and the associated public
health measures in place during the three months ended November 30, 2020. Retail
operating expenses, as a percentage of retail sales, decreased from 68.0% in the
three months ended November 30, 2020 to 66.1% in the three months ended November
30, 2021. This decrease is primarily the result of higher retail sales,
partially offset by higher retail operating expenses.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization
included in cost of sales, was $144,000 in the three months ended November 30,
2021, a decrease of 15.0% from $169,000 in the three months ended November 30,
2020. This decrease was the result of lower amortization of franchise rights,
the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the
consolidated financial statements for a summary of annual amortization of
intangible assets based upon existing intangible assets and current useful
lives. Depreciation and amortization included in cost of sales decreased 1.5%
from $158,000 in the three months ended November 30, 2020 to $155,000 in the
three months ended November 30, 2021.
Other Income (Expense)
Other income was $2,200 in the three months ended November 30, 2021 compared to
other income of $298,000 realized in the three months ended November 30, 2020.
This change was primarily the result of a gain on insurance recovery realized
and debt forgiveness income during the three months ended November 30, 2020 with
no comparable amounts realized during the three months ended November 30, 2021.
Net interest expense was $21,200 in the three months ended November 30, 2020
compared with net interest income of $2,200 during the three months ended
November 30, 2021. This change was primarily the result of the Company's
increased debt during the prior year as a result of measures taken to ensure
adequate liquidity during the COVID-19 pandemic. During the prior year, the
Company borrowed $3.4 million from its line of credit and borrowed $1.5 million
of loans under the Paycheck Protection Program. The line of credit was paid in
full and Paycheck Protection Program loans were fully forgiven during the year
ended February 28, 2021.
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Income Tax Expense
Our effective income tax rate for the three months ended November 30, 2021 was
24.5% compared to an effective tax rate in the three months ended November 30,
2020 of 24.8%.
Nine Months Ended November 30, 2021 Compared to the Nine Months Ended November
30, 2020
Results Summary
Basic earnings per share increased from a net loss of $(0.51) per share for the
nine months ended November 30, 2020 to a net loss of $(0.11) per share for the
nine months ended November 30, 2021. Revenues increased 57.5% from $15.3 million
for the nine months ended November 30, 2020 to $24.0 million for the nine months
ended November 30, 2021. Loss from operations decreased from an operating loss
of $(4.3) million for the nine months ended November 30, 2020 to an operating
loss of $(1.1) million for the nine months ended November 30, 2021. Net loss
decreased from a net loss of $(3.1) million for the nine months ended November
30, 2020 to a net loss of $(701,000) for the nine months ended November 30,
2021. The increase in revenue was due primarily to the impacts from the COVID-19
pandemic during the nine months ended November 30, 2020, including its impact on
our operation and the operations of our franchised, licensed and Company-owned
locations. During the nine months ended November 30, 2021 many of the
disruptions experienced as a result of the COVID-19 pandemic were no longer
impacting our network of franchised and licensed retail stores and many of our
locations had returned to, or exceeded, pre-pandemic levels. These increases
were partially offset by the costs associated with the contested solicitation of
proxies incurred during the nine months ended November 30, 2021 with no
comparable costs in the nine months ended November 30, 2020. The decrease in
loss from operations and net loss was due primarily to recovery from the
COVID-19 pandemic and the associated impact on revenue during the nine months
ended November 30, 2020 partially offset by the costs associated with the
contested solicitation of proxies and the associated accrued severance and stock
compensation costs during the nine months ended November 30, 2021.
Revenues
Nine Months Ended
November 30, $ %
($'s in thousands) 2021 2020 Change Change
Factory sales $ 16,578.5 $ 11,203.7 $ 5,374.8 48.0 %
Retail sales 2,208.1 1,214.4 993.7 81.8 %
Franchise fees 165.0 174.7 (9.7 ) (5.6 )%
Royalty and marketing fees 5,075.8 2,665.9 2,409.9 90.4 %
Total $ 24,027.4 $ 15,258.7 $ 8,768.7 57.5 %
Factory Sales
The increase in factory sales for the nine months ended November 30, 2021
compared to the nine months ended November 30, 2020 was primarily due to an
86.6% increase in sales of product to our network of franchised and licensed
retail stores partially offset by a 27.7% decrease in shipments of product to
customers outside our network of franchised retail stores. Purchases by the
Company's largest customer, Edible, during the nine months ended November 30,
2021 were approximately $1.2 million, or 5.0% of the Company's revenues,
compared to $2.1 million, or 13.9% of the Company's revenues during the nine
months ended November 30, 2020. The increase in sales of product to our network
of franchised and licensed retail stores was primarily the result of the
COVID-19 pandemic and the associated public health measures in place during the
nine months ended November 30, 2020, which significantly reduced traffic in our
stores. During the nine months ended November 30, 2021 most of the disruptions
experienced as a result of the COVID-19 pandemic were no longer impacting our
network of franchised and licensed retail stores and many of our locations had
returned to, or exceeded, pre-pandemic levels. During the nine months ended
November 30, 2021, certain disagreements arose between RMCF and Edible related
to the strategic alliance and ecommerce agreements resulting in continuing
discussions, the result of which are not currently determinable. There can be
no assurance historical revenue levels will be indicative of future revenues.
Same store pounds purchased by domestic franchise and licensed locations
increased 11.1% during the nine months ended November 30, 2021 when compared to
the nine months ended November 30, 2019 (the most recent comparable period prior
to the business disruptions of COVID-19).
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Retail Sales
The increase in retail sales for the nine months ended November 30, 2021
compared to the nine months ended November 30, 2020 was primarily due to all of
our Company-owned stores being open during the nine months ended November 30,
2021 compared to the closure or limited operations of all of our Company-owned
stores for much of the nine months ended November 30, 2020. The closure or
limited operations of our Company-owned stores in the prior year period was the
result of the COVID-19 pandemic and the associated public health measures in
place during the nine months ended November 30, 2020. As of November 30, 2021
most Company-owned stores had resumed full operations following COVID-19 related
closure.
Royalties, Marketing Fees and Franchise Fees
The increase in royalty and marketing fees for the nine months ended November
30, 2021 compared to the nine months ended November 30, 2020 was primarily due
to the majority of our franchise locations having resumed normal operations
during the nine months ended November 30, 2021, due to the relaxing of
restrictions related to the COVID-19 pandemic and the associated public health
measures in place during the nine months ended November 30, 2020 as well as the
rollout of vaccines earlier in the fiscal year. Nearly all of our franchised
locations experienced reduced operations and periods of full closure during the
nine months ended November 30, 2020. Same store sales at domestic franchise
locations increased 17.8% during the nine months ended November 30, 2021 when
compared to the nine months ended November 30, 2019 (the most recent comparable
period prior to the business disruptions of COVID-19).
The decrease in franchise fee revenue for the nine months ended November 30,
2021 compared to the nine months ended November 30, 2020 was the result of a
decrease in revenue resulting from the closure of franchise location and the
associated recognition of revenue in the nine months ended November 30, 2020,
with fewer comparable closures during the nine months ended November 30, 2021
and fewer franchise stores in operation and the associated recognition of
revenue over the term of the various franchise agreements.
Costs and Expenses
Cost of Sales
Nine Months Ended
November 30, $ %
($'s in thousands) 2021 2020 Change Change
Cost of sales - factory $ 13,065.3 $ 10,203.7 $ 2,861.6 28.0 %
Cost of sales - retail 754.1 421.1 333.0 79.1 %
Franchise costs 1,747.4 1,312.9 434.5 33.1 %
Sales and marketing 1,195.8 1,265.5 (69.7 ) (5.5 )%
General and administrative 6,575.0 4,756.7 1,818.3 38.2 %
Retail operating 1,304.6 1,010.0 294.6 29.2 %
Total $ 24,642.2 $ 18,969.9 $ 5,672.3 29.9 %
Gross Margin
Nine Months Ended
November 30, $ %
2021 2020 Change Change
Factory gross margin $ 3,513.2 $ 1,000.0 $ 2,513.2 251.3 %
Retail gross margin 1,454.0 793.3 660.7 83.3 %
Total $ 4,967.2 $ 1,793.3 $ 3,173.9 177.0 %
Nine Months Ended
November 30, % %
2021 2020 Change Change
Factory gross margin 21.2 % 8.9 % 12.3 % 137.4 %
Retail gross margin 65.8 % 65.3 % 0.5 % 0.8 %
Total 26.4 % 14.4 % 12.0 % 83.1 %
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Adjusted Gross Margin
Nine Months Ended
November 30, $ %
($'s in thousands) 2021 2020 Change Change
Factory gross margin $ 3,513.2 $ 1,000.0 $ 2,513.2 251.3 %
Plus: depreciation and amortization 464.8 473.3 (8.5 ) (1.8 )%
Factory adjusted gross margin 3,978.0 1,473.3 2,504.7 170.0 %
Retail gross margin 1,454.0 793.3 660.7 83.3 %
Total Adjusted Gross Margin $ 5,432.0 $ 2,266.6 $ 3,165.4 139.7 %
Factory adjusted gross margin 24.0 % 13.2 % 10.8 % 82.5 %
Retail gross margin 65.8 % 65.3 % 0.5 % 0.8 %
Total Adjusted Gross Margin 28.9 % 18.3 % 10.7 % 58.4 %
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures.
Adjusted gross margin is equal to the sum of our factory adjusted gross margin
plus our retail gross margin calculated in accordance with GAAP. Factory
adjusted gross margin is equal to factory gross margin plus depreciation and
amortization expense. We believe adjusted gross margin and factory adjusted
gross margin are helpful in understanding our past performance as a supplement
to gross margin, factory gross margin and other performance measures calculated
in conformity with GAAP. We believe that adjusted gross margin and factory
adjusted gross margin are useful to investors because they provide a measure of
operating performance and our ability to generate cash that is unaffected by
non-cash accounting measures. Additionally, we use adjusted gross margin and
factory adjusted gross margin rather than gross margin and factory gross margin
to make incremental pricing decisions. Adjusted gross margin and factory
adjusted gross margin have limitations as analytical tools because they exclude
the impact of depreciation and amortization expense and you should not consider
them in isolation or as a substitute for any measure reported under GAAP. Our
use of capital assets makes depreciation and amortization expense a necessary
element of our costs and our ability to generate income. Due to these
limitations, we use adjusted gross margin and factory adjusted gross margin as
measures of performance only in conjunction with GAAP measures of performance
such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margins increased to 21.2% in the nine months ended November 30,
2021 compared to a gross margin of 8.9% during the nine months ended November
30, 2020, due primarily to a 39.4% increase in production volume, higher average
sell prices, and the impacts of Employee Retention Credits in the nine months
ended November 30, 2021 compared to the nine months ended November 30, 2020,
partially offset by increased costs of materials and labor. The increase in
production volume was in response to a 48.0% increase in factory sales,
primarily due to a resumption of normal factory operations during the nine
months ended November 30, 2021 compared to significantly reduced operations
during the nine months ended November 30, 2020. Operations during the nine
months ended November 30, 2020 were lower than historical levels as a result of
the impacts of the COVID-19 pandemic. As a result of the decrease in production
volume, factory fixed costs, including idle labor, did not decrease
proportionate to factory revenue during the nine months ended November 30, 2020.
During the nine months ended November 30, 2020 the Company incurred
approximately $280,000 of production labor costs associated with paying
employees who abided by local stay at home orders related to COVID-19 public
health measures. This excess capacity cost, in the form of idle labor, was
included in cost of sales.
Retail gross margins increased from 65.3% during the nine months ended November
30, 2020 to 65.8% during the nine months ended November 30, 2021. The increase
in retail gross margins was primarily the result of the resumption of normal
operations during the nine months ended November 30, 2021 compared to the
temporary closure of all of our Company-owned stores for portions of the nine
months ended November 30, 2020 due to the COVID-19 pandemic, and the associated
impact on perishable inventory. This increase was mostly offset by higher costs.
Franchise Costs
The increase in franchise costs in the nine months ended November 30, 2021
compared to the nine months ended November 30, 2020 was due primarily to an
increase in professional fees, the result of litigation with our licensee in
Canada. As a percentage of total royalty and marketing fees and franchise fee
revenue, franchise costs decreased to 33.3% in the nine months ended November
30, 2021 from 46.2% in the nine months ended November 30, 2020. This decrease as
a percentage of royalty, marketing and franchise fees is primarily a result of
higher royalty fees partially offset by higher costs.
Sales and Marketing
The decrease in sales and marketing costs for the nine months ended November 30,
2021 compared to the nine months ended November 30, 2020 was primarily due to a
decrease in online advertising costs.
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General and Administrative
The increase in general and administrative costs for the nine months ended
November 30, 2021 compared to the nine months ended November 30, 2020 is
primarily due to costs associated with a stockholder's contested solicitation of
proxies in connection with our 2021 annual meeting of stockholders and the
compensation costs associated with the letter agreement between the Company and
Mr. Merryman. These increases were partially offset by a decrease in bad debt
expense and a decrease in the impairment of certain intangible assets. During
the nine months ended November 30, 2021, the Company incurred approximately $1.7
million of costs associated with the contested solicitation of proxies and $1.9
million in change in control severance expense, compared with no comparable
costs incurred in the nine months ended November 30, 2020. As a percentage of
total revenues, general and administrative expenses decreased to 27.4% in the
nine months ended November 30, 2021 compared to 31.2% in the nine months ended
November 30, 2020.
Retail Operating Expenses
The increase in retail operating expenses for the nine months ended November 30,
2021 compared to the nine months ended November 30, 2020 was a result of the
re-opening of all of our Company-owned stores so that all stores were open
during the nine months ended November 30, 2021 compared to the closure or
limited operation of all of our Company-owned stores for much of the nine months
ended November 30, 2020. The closure or limited operation of our Company-owned
stores was the result of COVID-19 and the associated public health measures in
place during the nine months ended November 30, 2020. Retail operating expenses,
as a percentage of retail sales, decreased from 83.2% in the nine months ended
November 30, 2020 to 59.1% in the nine months ended November 30, 2021. This
decrease is primarily the result of higher retail sales partially offset by
higher retail operating expenses.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization
included in cost of sales, was $440,000 in the nine months ended November 30,
2021, a decrease of 17.1% from $531,000 in the nine months ended November 30,
2020. This decrease was the result of lower amortization of franchise rights,
the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the
financial statements for a summary of annual amortization of intangible assets
based upon existing intangible assets and current useful lives. Depreciation and
amortization included in cost of sales decreased 1.8% from $473,000 in the nine
months ended November 30, 2020 to $465,000 in the nine months ended November 30,
2021.
Other Income (Expense)
Other income decreased to $176,500 during the nine months ended November 30,
2021 compared to other income of $261,000 during the nine months ended November
30, 2020. This change was primarily the result of debt forgiveness income during
the nine months ended November 30, 2020 with no comparable amounts realized
during the nine months ended November 30, 2021. Net interest income was $9,300
in the nine months ended November 30, 2021 compared to net interest expense of
$57,600 during the nine months ended November 30, 2020. This change was
primarily the result of the Company's increased debt as a result of measures
taken during the three months ended May 31, 2020 to ensure adequate liquidity
during the COVID-19 pandemic. During the nine months ended November 30, 2020,
the Company borrowed $3.4 million from its line of credit and borrowed $1.5
million of loans under the Paycheck Protection Program. The line of credit was
paid in full and Paycheck Protection Program loans were fully forgiven during
the year ended February 28, 2021.
The Company recognized a gain on insurance recovery of $167,100 during the nine
months ended November 30, 2021, compared with $210,500 recognized during the
nine months ended November 30, 2020. The Company recognized forgiveness of debt
of $108,300 during the nine months ended November 30, 2020, with no comparable
amount recognized during the nine months ended November 30, 2021.
Income Tax Expense
Our effective income tax rate for the nine months ended November 30, 2021 was
20.2%, compared to 24.3% for the nine months ended November 30, 2020. This
decrease was primarily the result of the impact of different values of vested
restricted stock units for financial reporting purposes compared to how the same
vested restricted stock units are valued for tax purposes.
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Liquidity and Capital Resources
As discussed below, we took several defensive measures to maximize liquidity in
response to the COVID-19 pandemic, including the suspension of our cash
dividend, reducing expenses, extending payment terms with vendors, reducing
production volume and deferring discretionary capital expenditures. Based on
these actions, we believe that cash flows from operations and our cash and cash
equivalents on hand, will be sufficient to meet our ongoing liquidity needs and
capital expenditure requirements for at least the next twelve months. Additional
future financing may be necessary to fund our operations, and there can be no
assurance that, if needed, we will be able to secure additional debt or equity
financing on terms acceptable to us or at all, especially in light of the market
volatility and uncertainty as a result of the COVID-19 pandemic. Although we
believe we have adequate sources of liquidity over the long term, the success of
our operations, the global economic outlook, and the pace of sustainable growth
in our markets, in each case, in light of the market volatility and uncertainty
as a result of the COVID-19 pandemic, among other factors, could impact our
business and liquidity.
As of November 30, 2021, working capital was $9.0 million, compared to $9.0
million as of February 28, 2021.
Cash and cash equivalent balances increased approximately $400,000 to $6.0
million as of November 30, 2021 compared to $5.6 million as of February 28,
2021, primarily due to improved operating results. Our current ratio was 2.5 to
1 at November 30, 2021 compared to 3.4 to 1 at February 28, 2021. We monitor
current and anticipated future levels of cash and cash equivalents in relation
to anticipated operating, financing and investing requirements.
During the nine months ended November 30, 2021, we had a net loss of $(700,908).
Operating activities provided cash of $857,048, with the principal adjustment to
reconcile the net income to net cash used by operating activities being an
increase in accrued liabilities of $1,343,856, an increase in accounts payable
of $1,079,671, depreciation and amortization of $904,972, and expense related to
stock-based compensation of $709,210, partially offset by an increase in
accounts receivable of $985,887 and an increase in inventory of $936,483. During
the comparable 2020 period, we had a net loss of $(3,067,570), and operating
activities used cash of $2,012,609. The principal adjustment to reconcile the
net income to net cash used by operating activities being the provision for loss
on accounts and notes receivable of $1,468,815, asset impairment and store
closure losses of $544,060, depreciation and amortization of $1,004,539 and the
expense recorded for stock compensation of $399,636.
During the nine months ended November 30, 2021, investing activities used cash
of $407,457, primarily due to the purchases of property and equipment of
$704,462 partially offset by proceeds from insurance recovery of $206,336. In
comparison, investing activities provided cash of $198,438 during the nine
months ended November 30, 2020 primarily due to proceeds from the sales of
assets, the result of insurance proceeds, of $304,962.
During the nine months ended November 30, 2021, financing activities used cash
of $61,276 due to the redemption of the shareholder rights plan. In comparison,
financing activities provided cash of $4,263,021 during the prior year period
primarily due to the use of the line of credit and receipt of loans under the
Paycheck Protection Program, as described above. There was no amount outstanding
related to our line of credit and loans under the Paycheck Protection Program as
of November 30, 2021, the result of repayment and forgiveness, respectively.
Off-Balance Sheet Arrangements
As of November 30, 2021, except for the purchase obligations as described below,
we had no material off-balance sheet arrangements or obligations.
Purchase obligations: As of November 30, 2021, we had purchase obligations of
approximately $64,000. These purchase obligations primarily consist of
contractual obligations for future purchases of commodities for use in our
manufacturing.
Impact of Inflation
We have recently experienced historically high levels of inflation related to
labor and materials. Inflationary factors such as increases in the costs of
ingredients and labor directly affect our operations. Most of our leases provide
for cost-of-living adjustments and require us to pay taxes, insurance and
maintenance expenses, all of which are subject to inflation. Additionally, our
future lease costs for new facilities may include potentially escalating costs
of real estate and construction. There is no assurance that we will be able to
pass on increased costs to our customers.
Depreciation expense is based on the historical cost to us of our fixed assets,
and is therefore potentially less than it would be if it were based on current
replacement cost. While property and equipment acquired in prior years will
ultimately have to be replaced at higher prices, it is expected that replacement
will be a gradual process over many years.
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Seasonality
We are subject to seasonal fluctuations in sales, which cause fluctuations in
quarterly results of operations. Historically, the strongest sales of our
products have occurred during key holidays and the summer vacation season. In
addition, quarterly results have been, and in the future are likely to be,
affected by the timing of new store openings and sales of franchises. Because of
the seasonality of our business and the impact of new store openings and sales
of franchises, results for any quarter are not necessarily indicative of results
that may be achieved in other quarters or for a full fiscal year.
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