The following discussion and analysis of financial condition and results of
operations is qualified by reference and should be read in conjunction with the
consolidated financial statements and the notes included in Item 1 of Part I of
this 10-Q and the audited consolidated financial statements and notes, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contained in the 10-K filed with the SEC on May 27, 2022, for the
fiscal year ended February 28, 2022, as amended by Amendment No. 1 on Form
10-K/A filed on June 28, 2022.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, the following discussion contains certain
forward-looking information. See "Forward-Looking Statements" above for certain
information concerning forward-looking statements.
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/licensed 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,
2022, there was one Company-owned, 101 licensee-owned and 162 franchised Rocky
Mountain Chocolate Factory stores operating in 37 states, Panama, and the
Philippines. As of November 30, 2022, U-Swirl operated three Company-owned cafés
and 58 franchised cafés located in 21 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".
Labor and Supply Chain
As a result of macroeconomic 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. For additional
information, see "Part I. Item 1A. - Risk Factors - The Availability and Price
of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our
Control" in our Annual Report on Form 10-K for the fiscal year ended February
28, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022.
Contested Solicitation of Proxies
During the three and nine months ended November 30, 2022, the Company incurred
substantial costs associated with a stockholder's contested solicitation of
proxies in connection with our 2022 annual meeting of stockholders. During the
three and nine months ended November 30, 2022, the Company incurred
approximately $764,000 and $2.9 million, respectively, of costs associated with
the contested solicitation of proxies, compared with $800,000 and $1.7 million
of costs associated with a contested solicitation of proxies incurred in the
three and nine months ended November 30, 2021. These costs are recognized as
general and administrative expense in the Consolidated Statement of Operations.
Future costs associated with the stockholder's contested solicitation of
proxies, the related legal proceedings, and the settlement thereof, as described
in Note 1 to the consolidated financial statements appearing in Item 1 of Part I
of this quarterly report under the caption "Subsequent Events" in this Form 10-Q
may have a material impact on the result of future periods. Additionally, as a
result of the contested solicitation of proxies in the prior year and the
resulting changes to the composition of the Company's Board of Directors, the
Company incurred $934,000 of severance costs during the nine months ended
November 30, 2022, resulting from the retirement of Edward L. Dudley in
September 2022.
Termination of Strategic Partnership with Edible Arrangements
On November 1, 2022, the Company sent a formal notice to Edible Arrangements,
LLC ("Edible Arrangements"), terminating the Exclusive Supplier Operating
Agreement, dated December 20, 2019 ("Exclusive Supplier Agreement"), by and
between the Company and Edible Arrangements, and the Ecommerce Licensing
Agreement, dated March 16, 2020 ("Licensing Agreement"), by and between the
Company and Edible Arrangements. Subsequent to the termination of the Supplier
Agreement and Licensing Agreement, the Company has no remaining material
obligations under the Strategic Alliance Agreement, dated as of December 20,
2019, by and among the Company, Farids & Co. LLC and Edible Arrangements; the
Common Stock Purchase Warrant, dated December 20, 2019, issued to Edible
Arrangements; and the Indemnification Letter Agreement, dated March 16, 2020, by
and between the Company and Edible Arrangements.
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Results of Operations
Three Months Ended November 30, 2022, Compared to the Three Months Ended
November 30, 2021
Results Summary
Basic loss per share decreased from a loss of $0.24 per share in the three
months ended November 30, 2021, to a loss of $0.03 per share in the three months
ended November 30, 2022. Revenues increased 11.4% from $8.5 million in the three
months ended November 30, 2021, to $9.5 million in the three months ended
November 30, 2022. The loss from operations decreased from a loss of $2.0
million in the three months ended November 30, 2021, to a loss from operations
of $215,000 in the three months ended November 30, 2022. Net loss decreased from
a net loss of $1.5 million in the three months ended November 30, 2021, to a net
loss of $212,000 in the three months ended November 30, 2022.
Revenues
Three Months Ended
November 30, $ %
($'s in thousands) 2022 2021 Change Change
Factory sales $ 7,284.9 $ 6,376.4 $ 908.5 14.2 %
Retail sales 678.6 636.0 42.6 6.7 %
Franchise fees 58.5 61.7 (3.2 ) (5.2 )%
Royalty and marketing fees 1,453.4 1,433.5 19.9 1.4 %
Total $ 9,475.4 $ 8,507.6 $ 967.8 11.4 %
Factory Sales
The increase in factory sales for the three months ended November 30, 2022,
compared to the three months ended November 30, 2021, was primarily due to a
13.0%, $661,000, increase in sales of product to our network of franchised and
licensed retail stores and a 19.1%, $248,000, increase in shipments of product
to customers outside our network of franchised retail stores. The increase in
sales of product to our network of franchised and licensed retail stores was
primarily the result of a higher sell price and higher same-store pounds
purchased. Same-store pounds purchased by domestic franchise and licensed
locations increased 5.7% during the three months ended November 30, 2022, when
compared to the three months ended November 30, 2021.
Retail Sales
Retail sales at Company-owned stores increased 6.7% during the three months
ended November 30, 2022, compared to the three months ended November 30, 2021,
as a result of an increase in Company-owned same store sales. Same store sales
at all Company-owned locations increased 12.9% during the three months ended
November 30, 2022, when compared to the three months ended November 30, 2021.
This increase was partially offset by a decrease in the average number of
Company-owned stores in operation resulting from the sale of a Company-owned
location to a franchisee.
Royalties, Marketing Fees, and Franchise Fees
The increase in royalty and marketing fees from the three months ended November
30, 2021, to the three months ended November 30, 2022, was primarily due to an
increase in same store sales at domestic Rocky Mountain Chocolate Factory
locations and at U-Swirl Frozen Yogurt cafés. Same-store sales at domestic
franchise Rocky Mountain Chocolate Factory locations increased by 3.0% and
same-store sales at U-Swirl Frozen Yogurt cafés increased by 14.0% during the
three months ended November 30, 2022, when compared to the three months ended
November 30, 2021.
Franchise fee revenue for the three months ended November 30, 2022, compared to
the three months ended November 30, 2021, was relatively unchanged.
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Costs and Expenses
Cost of Sales
Three Months Ended
November 30, $ %
($'s in thousands) 2022 2021 Change Change
Cost of sales - factory $ 5,613.7 $ 4,960.9 $ 652.8 13.2 %
Cost of sales - retail 255.9 239.8 16.1 6.7 %
Franchise costs 551.5 458.5 93.0 20.3 %
Sales and marketing 607.2 377.2 230.0 61.0 %
General and administrative 2,111.7 3,865.9 (1,754.2 ) (45.4 )%
Retail operating 422.4 420.3 2.1 0.5 %
Total $ 9,562.4 $ 10,322.6 $ (760.2 ) (7.4 )%
Gross Margin
Three Months Ended
November 30, $ %
($'s in thousands) 2022 2021 Change Change
Factory gross profit $ 1,671.2 $ 1,415.5 $ 255.7 18.1 %
Retail gross profit 422.7 396.2 26.5 6.7 %
Total $ 2,093.9 $ 1,811.7 $ 282.2 15.6 %
Three Months Ended
November 30, % %
2022 2021 Change Change
(Percent)
Factory gross margin 22.9 % 22.2 % 0.7 % 3.2 %
Retail gross margin 62.3 % 62.3 % 0.0 % 0.0 %
Total 26.3 % 25.8 % 0.5 % 1.9 %
Adjusted Gross Margin
Three Months Ended
November 30, $ %
($'s in thousands) 2022 2021 Change Change
Factory gross margin $ 1,671.2 $ 1,415.5 $ 255.7 18.1 %
Plus: depreciation and amortization 160.0 155.2 4.8 3.1 %
Factory adjusted gross margin 1,831.2 1,570.7 260.5 16.6 %
Retail gross margin 422.7 396.2 26.5 6.7 %
Total Adjusted Gross Margin $ 2,253.9 $ 1,966.9 $ 287.0 14.6 %
Factory adjusted gross margin 25.1 % 24.6 % 0.5 % 2.0 %
Retail gross margin 62.3 % 62.3 % 0.0 % 0.0 %
Total Adjusted Gross Margin 28.3 % 28.0 % 0.3 % 1.1 %
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 22.9% in the three months ended November 30,
2022, compared to 22.2% in the three months ended November 30, 2021. This
increase was due primarily to an increase in prices partially offset by
increased labor and material costs and expense associated with inventory
obsolescence.
Retail gross margins were unchanged at 62.3% during the three months ended
November 30, 2022, and 2021.
Franchise Costs
The increase in franchise costs in the three months ended November 30, 2022,
compared to the three months ended November 30, 2021, was due primarily to an
increase in franchise convention and travel expenses in the three months ended
November 30, 2022. As a percentage of total royalty and marketing fees, and
franchise fee revenue, franchise costs increased to 36.5% in the three months
ended November 30, 2022, from 30.7% in the three months ended November 30, 2021.
This increase as a percentage of royalty, marketing and franchise fees is
primarily the result of higher costs.
Sales and Marketing
The increase in sales and marketing costs for the three months ended November
30, 2022, compared to the three months ended November 30, 2021, was primarily
due to an increase in equity compensation costs and contract labor associated
with the retirement of Edward Dudley, and an increase in advertising costs.
General and Administrative
The decrease in general and administrative costs for the three months ended
November 30, 2022, compared to the three months ended November 30, 2021, is
primarily due to lower costs associated with a stockholder's contested
solicitation of proxies in connection with our 2022 annual meeting of
stockholders. During the three months ended November 30, 2022, the Company
incurred approximately $764,000 of costs associated with the contested
solicitation of proxies, compared with $2.7 million of costs associated with a
contested solicitation of proxies and associated severance costs during the
three months ended November 30, 2021. This decrease was partially offset by an
increase in legal expenses and salaries and wages in the three months ended
November 30, 2022, compared with the three months ended November 30, 2021. As a
percentage of total revenues, general and administrative expenses decreased to
22.3% in the three months ended November 30, 2022, compared to 45.4% in the
three months ended November 30, 2021.
Retail Operating Expenses
Retail operating expenses were relatively unchanged during the three months
ended November 30, 2022, compared to the three months ended November 30, 2021.
Retail operating expenses, as a percentage of retail sales, decreased from 66.1%
in the three months ended November 30, 2021, to 62.2% in the three months ended
November 30, 2022. This decrease is primarily the result of higher retail sales.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization
included in cost of sales, was $128,000 in the three months ended November 30,
2022, a decrease of 10.9% from $144,000 in the three months ended November 30,
2021. 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 the annual amortization of
intangible assets based upon existing intangible assets and current useful
lives. Depreciation and amortization included in cost of sales increased 3.1% to
$160,000 in the three months ended November 30, 2022, compared to $155,000 in
the three months ended November 30, 2021.
Other Income
Net interest income was $3,000 in the three months ended November 30, 2022,
compared to net interest income of $2,200 incurred in the three months ended
November 30, 2021.
Income Tax Expense (Benefit)
During the three months ended November 30, 2022, we did not incur any income tax
benefit on a loss before income taxes of $212,000. This was the result of
recording a full reserve on our deferred income tax asset. Our effective income
tax rate for the three months ended November 30, 2021, was 24.5%. See Note 14 to
the financial statements for a description of income taxes, deferred tax assets,
and associated reserves.
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Nine Months Ended November 30, 2022, Compared to the Nine Months Ended November
30, 2021
Results Summary
Basic earnings per share decreased from a net loss of $0.11 per share for the
nine months ended November 30, 2021, to a net loss of $0.64 per share for the
nine months ended November 30, 2022. Revenues increased 3.3% from $24.0 million
for the nine months ended November 30, 2021, to $24.8 million for the nine
months ended November 30, 2022. The loss from operations increased from a loss
of $1.1 million for the nine months ended November 30, 2021, to a loss from
operations of $2.6 million for the nine months ended November 30, 2022. Net loss
increased from a net loss of $701,000 for the nine months ended November 30,
2021, to a net loss of $4.0 million for the nine months ended November 30, 2022.
Revenues
Nine Months Ended
November 30, $ %
($'s in thousands) 2022 2021 Change Change
Factory sales $ 17,250.8 $ 16,578.5 $ 672.3 4.1 %
Retail sales 2,267.9 2,208.1 59.8 2.7 %
Franchise fees 180.0 165.0 15.0 9.1 %
Royalty and marketing fees 5,128.9 5,075.8 53.1 1.0 %
Total $ 24,827.6 $ 24,027.4 $ 800.2 3.3 %
Factory Sales
The increase in factory sales for the nine months ended November 30, 2022,
compared to the nine months ended November 30, 2021, was primarily due to an
8.0%, $1.1 million, increase in sales of product to our network of franchised
and licensed retail stores partially offset by a 15.7%, $429,000, decrease in
shipments of product to customers outside our network of franchised retail
stores.
Retail Sales
Retail sales at Company-owned stores increased 2.7% during the nine months ended
November 30, 2022, compared to the nine months ended November 30, 2021,
primarily as a result of an increase in same-store sales at Company-owned
locations. Same-store sales at all Company-owned locations increased 6.1% during
the nine months ended November 30, 2022, when compared to the nine months ended
November 30, 2021.
Royalties, Marketing Fees, and Franchise Fees
The slight increase in royalty and marketing fees for the nine months ended
November 30, 2022, compared to the nine months ended November 30, 2021, was
primarily due to an increase in same-store sales at domestic franchise frozen
yogurt cafés. Same-store sales at all domestic franchise locations increased
3.8% during the nine months ended November 30, 2022, when compared to the nine
months ended November 30, 2021, with same-store sales at the Company's domestic
franchise frozen yogurt cafés increasing 19.2% during the nine months ended
November 30, 2022, compared to the nine months ended November 30, 2021.
The increase in franchise fee revenue for the nine months ended November 30,
2022, compared to the nine months ended November 30, 2021, was the result of
store closures and the acceleration of unrecognized franchise fee revenue, and
more franchise agreements outstanding and subject to revenue recognition.
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Costs and Expenses
Cost of Sales
Nine Months Ended
November 30, $ %
($'s in thousands) 2022 2021 Change Change
Cost of sales - factory $ 13,823.2 $ 13,065.3 $ 757.9 5.8 %
Cost of sales - retail 848.8 754.1 94.7 12.6 %
Franchise costs 1,569.8 1,747.4 (177.6 ) (10.2 )%
Sales and marketing 1,617.1 1,195.8 421.3 35.2 %
General and administrative 7,810.6 6,575.0 1,235.6 18.8 %
Retail operating 1,364.7 1,304.6 60.1 4.6 %
Total $ 27,034.2 $ 24,642.2 $ 2,392.0 9.7 %
Gross Margin
Nine Months Ended
November 30, $ %
2022 2021 Change Change
Factory gross profit $ 3,427.6 $ 3,513.2 $ (85.6 ) (2.4 )%
Retail gross profit 1,419.1 1,454.0 (34.9 ) (2.4 )%
Total $ 4,846.7 $ 4,967.2 $ (120.5 ) (2.4 )%
Nine Months Ended
November 30, % %
2022 2021 Change Change
Factory gross margin 19.9 % 21.2 % (1.3 )% (6.2 )%
Retail gross margin 62.6 % 65.8 % (3.3 )% (5.0 )%
Total 24.8 % 26.4 % (1.6 )% (6.1 )%
Adjusted Gross Margin
Nine Months Ended
November 30, $ %
($'s in thousands) 2022 2021 Change Change
Factory gross margin $ 3,427.6 $ 3,513.2 $ (85.6 ) (2.4 )%
Plus: depreciation and amortization 480.5 464.8 15.7 3.4 %
Factory adjusted gross margin 3,908.1 3,978.0 (69.9 ) (1.8 )%
Retail gross margin 1,419.1 1,454.0 (34.9 ) (2.4 )%
Total Adjusted Gross Margin $ 5,327.2 $ 5,432.0 $ (104.8 ) (1.9 )%
Factory adjusted gross margin 22.7 % 24.0 % (1.3 )% (5.6 )%
Retail gross margin 62.6 % 65.8 % (3.3 )% (5.0 )%
Total Adjusted Gross Margin 27.3 % 28.9 % (1.6 )% (5.6 )%
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 decreased to 19.9% in the nine months ended November 30,
2022, compared to a gross margin of 21.2% during the nine months ended November
30, 2021, due primarily to an increase in costs from wage and material inflation
and the impacts of Employee Retention Credits recognized in the nine months
ended November 30, 2021, with no comparable credits in the nine months ended
November 30, 2022. These cost increases were partially offset by an increase in
product prices. The Company recognized approximately $155,000 of payroll tax
benefit associated with Employee Retention Credits ("ERC") in the nine months
ended November 30, 2021. ERCs were enacted by the CARES Act in March 2020. In
December 2020 the Consolidated Appropriations Act extended eligibility for the
credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 65.8% during the nine months ended November
30, 2021, to 62.6% during the nine months ended November 30, 2022. The decrease
in retail gross margins was primarily the result of an increase in the costs of
raw materials.
Franchise Costs
The decrease in franchise costs in the nine months ended November 30, 2022,
compared to the nine months ended November 30, 2021, was due primarily to a
decrease in professional fees, the result of litigation with our licensee in
Canada incurred during the nine months ended November 30, 2021, with no
comparable legal expense in the nine months ended November 30, 2022. As a
percentage of total royalty and marketing fees and franchise fee revenue,
franchise costs decreased to 29.6% in the nine months ended November 30, 2022,
from 33.3% in the nine months ended November 30, 2021. This decrease as a
percentage of royalty, marketing, and franchise fees is primarily the result of
lower franchise costs.
Sales and Marketing
The increase in sales and marketing costs for the nine months ended November 30,
2022, compared to the nine months ended November 30, 2021, was due to an
increase in equity compensation costs and contract labor associated with the
retirement of Edward Dudley, and an increase in advertising costs.
General and Administrative
The increase in general and administrative costs for the nine months ended
November 30, 2022, compared to the nine months ended November 30, 2021, was due
primarily to costs associated with a stockholder's contested solicitation of
proxies in connection with our 2022 annual meeting of stockholders. During the
nine months ended November 30, 2022, the Company incurred approximately $2.9
million of costs associated with the contested solicitation of proxies, compared
with $1.7 million of costs associated with a contested solicitation of proxies
during the nine months ended November 30, 2021. The Company also incurred
increased professional fees related to legal support for our Board of Directors
and legal costs associated with compensation arrangements for our former Chief
Executive Officer and Chief Financial Officer and legal and professional costs
associated with the search for, and appointment of, a new Chief Executive
Officer and a new Chief Financial Officer. Additionally, due to a stockholder's
contested solicitation of proxies in connection with our 2021 annual meeting of
stockholders the Company had become contingently liable for certain change in
control severance payments to Mr. Dudley if a triggering termination was to
occur. As a result of Mr. Dudley's retirement in September 2022, the Company
incurred $934,000 of associated severance costs. As a percentage of total
revenues, general and administrative expenses increased to 31.5% in the nine
months ended November 30, 2022, compared to 27.4% in the nine months ended
November 30, 2021.
Retail Operating Expenses
The increase in retail operating expenses for the nine months ended November 30,
2022, compared to the nine months ended November 30, 2021, was due primarily to
an increase in salaries and wages, and utilities in our Company-owned stores and
cafés. Retail operating expenses, as a percentage of retail sales, increased
from 59.1% in the nine months ended November 30, 2021, to 60.2% in the nine
months ended November 30, 2022. This increase is primarily the result of higher
retail costs.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization
included in cost of sales, was $383,000 in the nine months ended November 30,
2022, a decrease of 13.0% from $440,000 in the nine months ended November 30,
2021. 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 the annual amortization of intangible
assets based upon existing intangible assets and current useful lives.
Depreciation and amortization included in cost of sales increased 3.4% from
$465,000 in the nine months ended November 30, 2021, to $480,000 in the nine
months ended November 30, 2022. This increase was the result of investment in
equipment.
Other Income
Other income was $9,600 in the nine months ended November 30, 2022, compared to
other income of $176,500 during the nine months ended November 30, 2021. Net
interest income was $9,600 in the nine months ended November 30, 2022, compared
to interest income of $9,300 during the nine months ended November 30, 2021.
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The Company recognized a gain on insurance recovery of $167,100 during the nine
months ended November 30, 2021, compared with no similar amounts recognized
during the nine months ended November 30, 2022.
Income Tax Expense (Benefit)
During the nine months ended November 30, 2022, we incurred income tax expense
of $1.4 million on a loss before income taxes of $2.6 million. This expense was
the result of recording a full reserve on our deferred income tax asset. Our
effective income tax rate for the nine months ended November 30, 2021, was
20.2%. See Note 14 to the financial statements for a description of income
taxes, deferred tax assets, and associated reserves.
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Liquidity and Capital Resources
As of November 30, 2022, working capital was $7.4 million, compared to $9.7
million as of February 28, 2022, a decrease of $2.3 million. The decrease in
working capital was primarily due to costs associated with a stockholder's
contested solicitation of proxies in connection with our 2022 annual meeting of
stockholders.
Cash and cash equivalent balances decreased approximately $4.4 million to $3.2
million as of November 30, 2022, compared to $7.6 million as of February 28,
2022. This decrease in cash and cash equivalents was primarily due to funding of
a rabbi trust established for severance payments to our former Chief Executive
Officer and the resulting $1.3 million decrease in cash balances and an increase
in inventory of $2.1 million. Our current ratio was 2.2 to 1 at November 30,
2022, compared to 2.8 to 1 at February 28, 2022. 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, 2022, we had a net loss of $4.0
million. Operating activities used cash of $3,583,418, with the principal
adjustment to reconcile the net income to net cash used by operating activities
being deferred income taxes of $1,388,271, depreciation and amortization of
$863,322, an increase in accounts payable of $1,976,869 and expense recorded for
stock compensation of $471,530, mostly offset by an increase in inventory of
$2,091,099, a decrease in accrued liabilities of $1,284,330 and an increase in
accounts receivable of $1,171,146. During the comparable 2021 period, we had a
net loss of $700,908, and operating activities provided cash of $857,048. 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 nine months ended November 30, 2022, investing activities used cash
of $787,824, primarily due to the purchases of property and equipment of
$810,732. In comparison, investing activities used cash of $407,457 during the
nine months ended November 30, 2021, primarily due to the purchases of property
and equipment of $704,462 partially offset by proceeds from insurance recovery
of $206,336.
During the nine months ended November 30, 2022, there were no cash flows from
financing activities. In comparison, financing activities used cash of $61,276
in the nine months ended November 30, 2021, due to the redemption of the
shareholder rights plan.
The Company believes that cash flow from operations will be sufficient to fund
capital expenditures and working capital requirements for FY 2023. If necessary,
the Company has an available bank line of credit to help meet these
requirements.
Off-Balance Sheet Arrangements
As of November 30, 2022, except for the purchase obligations as described below,
we had no material off-balance sheet arrangements or obligations.
As of November 30, 2022, we had purchase obligations of approximately $36,000.
These purchase obligations primarily consist of contractual obligations for
future purchases of commodities for use in our manufacturing.
Impact of Inflation
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 the
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.
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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