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, 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 August 31,
2021, there were two Company-owned, 96 licensee-owned and 162 franchised Rocky
Mountain Chocolate Factory stores operating in 37 states, South Korea, Panama,
and the Philippines. As of August 31, 2021, U-Swirl operated three Company-owned
cafés and 68 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 six months ended August 31, 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 six months ended August 31, 2021 (this "Quarterly Report"), during the year
ended February 28, 2021, we 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 and
closures of non-essential business 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 did not order 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, many 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. It is
unclear when or if store operations will return to pre-COVID-19 levels.
In addition, as previously announced on May 11, 2020, the Board of Directors has
suspended future quarterly dividends until the significant uncertainty of the
current public health crisis and economic climate has passed, and the Board of
Directors determines that resumption of dividend payments is in the best
interest of the Company and our stockholders.
Contested Solicitation of Proxies
During the three months ended August 31, 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 months
ended August 31, 2021, the Company incurred approximately $907,000 of costs
associated with the contested solicitation of proxies, compared with no
comparable costs incurred in the three months ended August 31, 2020. These costs
are recognized as general and administrative expense in the Consolidated
Statement of Operations. The Company is likely to continue to realize material
increased costs associated with the contested solicitation of proxies for the
near future. The total expected costs are not currently determinable.
Results of Operations
Three Months Ended August 31, 2021 Compared to the Three Months Ended August 31,
2020
Results Summary
Basic earnings per share increased from $0.01 per share in the three months
ended August 31, 2020 to $0.03 per share in the three months ended August 31,
2021. Revenues increased 48.8% from $5.3 million in the three months ended
August 31, 2020 to $7.9 million in the three months ended August 31, 2021.
Operating income increased from $119,000 in the three months ended August 31,
2020 to $258,000 in the three months ended August 31, 2021. Net income increased
from $76,000 in the three months ended August 31, 2020 to $197,000 in the three
months ended August 31, 2021. The increase in revenue, operating income and net
income was due primarily to the impacts from the COVID-19 pandemic during the
three months ended August 31, 2020, including its impact on our operation and
the operations of our franchised, licensed and Company-owned locations. During
the three months ended August 31, 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 mostly offset by the
costs associated with the contested solicitation of proxies incurred during the
three months ended August 31, 2021 with no comparable costs in the three months
ended August 31, 2020.
Revenues
Three Months Ended
August 31, $ %
($'s in thousands) 2021 2020 Change Change
Factory sales $ 5,161.4 $ 3,498.8 $ 1,662.6 47.5 %
Retail sales 782.6 495.4 287.2 58.0 %
Franchise fees 47.1 73.6 (26.5 ) (36.0 )%
Royalty and marketing fees 1,935.0 1,259.6 675.4 53.6 %
Total $ 7,926.1 $ 5,327.4 $ 2,598.7 48.8 %
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Factory Sales
The increase in factory sales for the three months ended August 31, 2021
compared to the three months ended August 31, 2020 was primarily due to a 75.3%
increase in sales of product to our network of franchised and licensed retail
stores, partially offset by a 40.5% 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 August 31, 2021 were approximately $313,000, or 4.0% of the
Company's revenues, compared to $615,000, or 11.5% of the Company's revenues
during the three months ended August 31, 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 August 31, 2020, which significantly reduced
traffic in our stores. During the three months ended August 31, 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. During the six
months ended August 31, 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 20.0% during the three months ended August 31, 2021, when
compared to the three months ended August 31, 2019 (the most recent comparable
period prior to the business disruptions of COVID-19).
Retail Sales
Retail sales at Company-owned stores increased 58.0% during the three months
ended August 31, 2021 compared to the three months ended August 31, 2020 as a
result of all of our Company-owned stores being open during the three months
ended August 31, 2021 compared to the limited operations of all of our
Company-owned stores for much of the three months ended August 31, 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 August 31, 2020. As of August 31, 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 August
31, 2020 to the three months ended August 31, 2021 was primarily due to the
majority of our franchise locations having resumed normal operations during the
three months ended August 31, 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 August 31, 2020 as well as the rollout of
vaccines. Nearly all of our franchised locations experienced reduced operations
during the three months ended August 31, 2020. Same store sales at domestic
franchise locations increased 14.2% during the three months ended August 31,
2021 when compared to the three months ended August 31, 2019 (the most recent
comparable period prior to the business disruptions of COVID-19).
The decrease in franchise fee revenue for the three months ended August 31, 2021
compared to the three months ended August 31, 2020 was the result of a decrease
in revenue resulting from the closure of franchise locations and the associated
recognition of revenue in the three months ended August 31, 2020, with no
comparable closures during the three months ended August 31, 2021 and fewer
franchise stores in operation and the associated recognition of revenue over the
terms of the various franchise agreements.
Costs and Expenses
Cost of Sales
Three Months Ended
August 31, $ %
($'s in thousands) 2021 2020 Change Change
Cost of sales - factory $ 3,814.3 $ 2,907.8 $ 906.5 31.2 %
Cost of sales - retail 257.8 145.8 112.0 76.8 %
Franchise costs 737.2 451.0 286.2 63.5 %
Sales and marketing 405.9 408.9 (3.0 ) (0.7 )%
General and administrative 1,864.3 788.5 1,075.8 136.4 %
Retail operating 440.2 329.4 110.8 33.6 %
Total $ 7,519.7 $ 5,031.4 $ 2,488.3 49.5 %
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Gross Margin
Three Months Ended
August 31, $ %
($'s in thousands) 2021 2020 Change Change
Factory gross margin $ 1,347.1 $ 591.0 $ 756.1 127.9 %
Retail gross margin 524.8 349.6 175.2 50.1 %
Total $ 1,871.9 $ 940.6 $ 931.3 99.0 %
Three Months Ended
August 31, % %
2021 2020 Change Change
(Percent)
Factory gross margin 26.1 % 16.9 % 9.2 % 54.5 %
Retail gross margin 67.1 % 70.6 % (3.5 )% (5.0 )%
Total 31.5 % 23.5 % 7.9 % 33.7 %
Adjusted Gross Margin
Three Months Ended
August 31, $ %
($'s in thousands) 2021 2020 Change Change
Factory gross margin $ 1,347.1 $ 591.0 $ 756.1 127.9 %
Plus: depreciation and amortization 157.7 158.2 (0.5 ) (0.3 )%
Factory adjusted gross margin 1,504.8 749.2 755.6 100.9 %
Retail gross margin 524.8 349.6 175.2 50.1 %
Total Adjusted Gross Margin $ 2,029.6 $ 1,098.8 $ 930.8 84.7 %
Factory adjusted gross margin 29.2 % 21.4 % 7.7 % 36.2 %
Retail gross margin 67.1 % 70.6 % (3.5 )% (5.0 )%
Total Adjusted Gross Margin 34.1 % 27.5 % 6.6 % 24.1 %
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.
Cost of Sales and Gross Margin
Factory gross margins increased to 26.1% in the three months ended August 31,
2021 compared to 16.9% the three months ended August 31, 2020, due primarily to
higher average sell prices, the impacts of Employee Retention Credits, and an
18.4% increase in production volume in the three months ended August 31, 2021
compared to the three months ended August 31, 2020, partially offset by
increased costs of materials and labor. The increase in production volume was
the result of an increase in factory sales. The Company recognized approximately
$155,000 of payroll tax benefit associated with Employee Retention Credits
("ERC"). 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 70.6% during the three months ended August
31, 2020 to 67.1% during the three months ended August 31, 2021. This decrease
was primarily due to increased costs.
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Franchise Costs
The increase in franchise costs in the three months ended August 31, 2021
compared to the three months ended August 31, 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 increased to 37.2% in the three months ended August 31,
2021 from 33.8% in the three months ended August 31, 2020. This increase as a
percentage of royalty, marketing and franchise fees is primarily a result of
higher professional fees partially offset by an increase in royalty revenues.
Sales and Marketing
Sales and marketing costs were approximately unchanged for the three months
ended August 31, 2021 compared to the three months ended August 31, 2020.
General and Administrative
The increase in general and administrative costs for the three months ended
August 31, 2021 compared to the three months ended August 31, 2020 is primarily
due to costs associated with a stockholder's contested solicitation of proxies
in connection with our 2021 annual meeting of stockholders. During the three
months ended August 31, 2021, the Company incurred approximately $907,000 of
costs associated with the contested solicitation of proxies, compared with no
comparable costs incurred in the three months ended August 31, 2020. As a
percentage of total revenues, general and administrative expenses increased to
23.5% in the three months ended August 31, 2021 compared to 14.8% in the three
months ended August 31, 2020.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended August 31,
2021 compared to the three months ended August 31, 2020 was due primarily to the
resumption of normal operations at all of our Company-owned stores so that all
stores were fully operational during the three months ended August 31, 2021
compared to the limited operations of all of our Company-owned stores for much
of the three months ended August 31, 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 August 31, 2020. Retail
operating expenses, as a percentage of retail sales, decreased from 66.5% in the
three months ended August 31, 2020 to 56.2% in the three months ended August 31,
2021. 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 $149,000 in the three months ended August 31,
2021, a decrease of 15.9% from $177,000 in the three months ended August 31,
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 was approximately
unchanged at $158,000 in the three months ended August 31, 2020 and August 31,
2021.
Other Income (Expense)
Net interest income was $2,600 in the three months ended August 31, 2021
compared to net interest expense of $19,000 incurred in the three months ended
August 31, 2020. 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 Paychecks Protection Program. The line of credit was paid in full and
Paychecks Protection Program loans were fully forgiven during the year ended
February 28, 2021.
Income Tax Expense
Our effective income tax rate for the three months ended August 31, 2021 and
2020 was 24.4%.
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Six Months Ended August 31, 2021 Compared to the Six Months Ended August 31,
2020
Results Summary
Basic earnings per share increased from a net loss of $(0.59) per share for the
six months ended August 31, 2020 to a net income of $0.13 per share for the six
months ended August 31, 2021. Revenues increased 93.3% from $8.0 million for the
six months ended August 31, 2020 to $15.5 million for the six months ended
August 31, 2021. Operating income increased from an operating loss of $(4.7)
million for the six months ended August 31, 2020 to operating income of $904,000
for the six months ended August 31, 2021. Net income increased from a net loss
of $(3.6) million for the six months ended August 31, 2020 to net income of
$777,000 for the six months ended August 31, 2021. The increase in revenue,
operating income and net income was due primarily to the impacts from the
COVID-19 pandemic during the six months ended August 31, 2020, including its
impact on our operation and the operations of our franchised, licensed and
Company-owned locations. During the six months ended August 31, 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 six months ended August 31, 2021 with no comparable
costs in the six months ended August 31, 2020.
Revenues
Six Months Ended
August 31, $ %
($'s in thousands) 2021 2020 Change Change
Factory sales $ 10,202.2 $ 5,633.4 $ 4,568.8 81.1 %
Retail sales 1,572.1 683.0 889.1 130.2 %
Franchise fees 103.2 128.6 (25.4 ) (19.8 )%
Royalty and marketing fees 3,642.3 1,584.8 2,057.5 129.8 %
Total $ 15,519.8 $ 8,029.8 $ 7,490.0 93.3 %
Factory Sales
The increase in factory sales for the six months ended August 31, 2021 compared
to the six months ended August 31, 2020 was primarily due to a 135% increase in
sales of product to our network of franchised and licensed retail stores
partially offset by a 24.4% decrease in shipments of product to customers
outside our network of franchised retail stores. Purchases by the Company's
largest customer, Edible, during the six months ended August 31, 2021 were
approximately $797,000, or 5.1% of the Company's revenues, compared to $949,000,
or 11.8% of the Company's revenues during the six months ended August 31, 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 six months ended August
31, 2020, which significantly reduced traffic in our stores. During the six
months ended August 31, 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. During the six months ended August 31, 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 20.0% during
the six months ended August 31, 2021 when compared to the six months ended
August 31, 2019 (the most recent comparable period prior to the business
disruptions of COVID-19).
Retail Sales
The increase in retail sales for the six months ended August 31, 2021 compared
to the six months ended August 31, 2020 was primarily due to all of our
Company-owned stores being open during the six months ended August 31, 2021
compared to the closure or limited operations of all of our Company-owned stores
for much of the six months ended August 31, 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 six months ended August 31, 2020. As of August 31, 2021 all
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 six months ended August 31,
2021 compared to the six months ended August 31, 2020 was primarily due to the
majority of our franchise locations having resumed normal operations during the
six months ended August 31, 2021, due to the relaxing of restrictions related to
the COVID-19 pandemic and the associated public health measures in place during
the six months ended August 31, 2020 as well as the rollout of vaccines. Nearly
all of our franchised locations experienced reduced operations and periods of
full closure during the six months ended August 31, 2020. Same store sales at
domestic franchise locations increased 14.6% during the six months ended August
31, 2021 when compared to the six months ended August 31, 2019 (the most recent
comparable period prior to the business disruptions of COVID-19).
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The decrease in franchise fee revenue for the six months ended August 31, 2021
compared to the six months ended August 31, 2020 was the result of a decrease in
revenue resulting from the closure of franchise location and the associated
recognition of revenue in the six months ended August 31, 2020, with no
comparable closures during the six months ended August 31, 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
Six Months Ended
August 31, $ %
($'s in thousands) 2021 2020 Change Change
Cost of sales - factory $ 8,104.3 $ 5,698.3 $ 2,406.0 42.2 %
Cost of sales - retail 514.3 238.4 275.9 115.7 %
Franchise costs 1,288.8 872.3 416.5 47.7 %
Sales and marketing 818.6 883.0 (64.4 ) (7.3 )%
General and administrative 2,709.1 3,968.0 (1,258.9 ) (31.7 )%
Retail operating 884.3 648.6 235.7 36.3 %
Total $ 14,319.4 $ 12,308.6 $ 2,010.8 16.3 %
Gross Margin
Six Months Ended
August 31, $ %
2021 2020 Change Change
Factory gross margin $ 2,097.9 $ (64.9 ) $ 2,162.8 (3332.5 )%
Retail gross margin 1,057.8 444.6 613.2 137.9 %
Total $ 3,155.7 $ 379.7 $ 2,776.0 731.1 %
Six Months Ended
August 31, % %
2021 2020 Change Change
Factory gross margin 20.6 % -1.2 % 21.7 % (1884.9 )%
Retail gross margin 67.3 % 65.1 % 2.2 % 3.4 %
Total 26.8 % 6.0 % 20.8 % 345.9 %
Adjusted Gross Margin
Six Months Ended
August 31, $ %
($'s in thousands) 2021 2020 Change Change
Factory gross margin $ 2,097.9 $ (64.9 ) $ 2,162.8 (3332.5 )%
Plus: depreciation and amortization 309.6 315.7 (6.1 ) (1.9 )%
Factory adjusted gross margin 2,407.5 250.8 2,156.7 859.9 %
Retail gross margin 1,057.8 444.6 613.2 137.9 %
Total Adjusted Gross Margin $ 3,465.3 $ 695.4 $ 2,769.9 398.3 %
Factory adjusted gross margin 23.6 % 4.5 % 19.1 % 430.0 %
Retail gross margin 67.3 % 65.1 % 2.2 % 3.4 %
Total Adjusted Gross Margin 29.4 % 11.0 % 18.4 % 167.3 %
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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 20.6% in the six months ended August 31, 2021
compared to a gross margin of (1.2)% during the six months ended August 31,
2020, due primarily to an 55.0% increase in production volume, higher average
sell prices, and the impacts of Employee Retention Credits in the six months
ended August 31, 2021 compared to the six months ended August 31, 2020,
partially offset by increased costs of materials and labor. The increase in
production volume was in response to an 81.1% increase in factory sales,
primarily due to a resumption of normal factory operations during the six months
ended August 31, 2021 compared to significantly reduced operations during the
six months ended August 31, 2020. Operations during the six months ended August
31, 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, exceeded revenue during the six months ended
August 31, 2020. During the six months ended August 31, 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 65.1% during the six months ended August 31,
2020 to 67.3% during the six months ended August 31, 2021. The increase in
retail gross margins was primarily the result of the resumption of normal
operations during the six months ended August 31, 2021 compared to the temporary
closure of all of our Company-owned stores for much of the six months ended
August 31, 2020 due to the COVID-19 pandemic, and the associated impact on
perishable inventory.
Franchise Costs
The increase in franchise costs in the six months ended August 31, 2021 compared
to the six months ended August 31, 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 34.4% in the six months ended August 31, 2021 from
50.9% in the six months ended August 31, 2020. This decrease as a percentage of
royalty, marketing and franchise fees is primarily a result of higher royalty
fees.
Sales and Marketing
The decrease in sales and marketing costs for the six months ended August 31,
2021 compared to the six months ended August 31, 2020 was primarily due to a
decrease in online advertising costs.
General and Administrative
The decrease in general and administrative costs for the six months ended August
31, 2021 compared to the six months ended August 31, 2020 was due primarily to a
decrease in bad debt expense and a decrease in the impairment of certain
intangible assets, partially offset by costs associated with a stockholder's
contested solicitation of proxies. As a percentage of total revenues, general
and administrative expenses decreased to 17.5% in the six months ended August
31, 2021 compared to 49.4% in the six months ended August 31, 2020. These costs
during the six months ended August 31, 2020 were a direct result of public
health measures in place due to responses to COVID-19 and the financial burden
experienced by the majority of our network of franchised and licensed locations.
See Note 8 to the financial statements for a summary of costs associated with
the impairment of certain intangible assets during the six months ended August
31, 2020. During the six months ended August 31, 2021, the Company incurred
approximately $917,000 of costs associated with the contested solicitation of
proxies, compared with no comparable costs incurred in the six months ended
August 31, 2020.
Retail Operating Expenses
The increase in retail operating expenses for the six months ended August 31,
2021 compared to the six months ended August 31, 2020 was a result of the
re-opening of all of our Company-owned stores so that all stores were open
during the six months ended August 31, 2021 compared to the closure or limited
operation of all of our Company-owned stores for much of the six months ended
August 31, 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 six months ended August 31, 2020. Retail operating expenses, as a
percentage of retail sales, decreased from 95.0% in the six months ended August
31, 2020 to 56.2% in the six months ended August 31, 2021. This decrease is
primarily the result of higher retail sales.
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Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization
included in cost of sales, was $297,000 in the six months ended August 31, 2021,
a decrease of 18.1% from $362,000 in the six months ended August 31, 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 1.9% from $316,000 in the six
months ended August 31, 2020 to $310,000 in the six months ended August 31,
2021.
Other Income (Expense)
Other income was $174,300 in the six months ended August 31, 2021 compared to
other expense of $36,400 during the six months ended August 31, 2020. Net
interest income was $7,100 in the six months ended August 31, 2021 compared to
net interest expense of $36,400 during the six months ended August 31, 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 six months ended August 31,
2020, the Company borrowed $3.4 million from its line of credit and borrowed
$1.5 million of loans under the Paychecks Protection Program. The line of credit
was paid in full and Paychecks 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 six
months ended August 31, 2021, compared with no similar amounts recognized during
the six months ended August 31, 2020.
Income Tax Expense
Our effective income tax rate for the six months ended August 31, 2021 was
27.9%, compared to 24.3% for the six months ended August 31, 2020. This increase
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.
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 August 31, 2021, working capital was $10.2 million, compared to $9.0
million as of February 28, 2021, an increase of $1.2 million. The increase in
working capital was primarily due to improved operating results.
Cash and cash equivalent balances increased approximately $1.1 million to $6.7
million as of August 31, 2021 compared to $5.6 million as of February 28, 2021,
primarily due to improved operating results. Our current ratio was 3.2 to 1 at
August 31, 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 six months ended August 31, 2021, we had net income of $776,738.
Operating activities provided cash of $1,427,456, with the principal adjustment
to reconcile the net income to net cash used by operating activities being
depreciation and amortization of $606,190, an increase in accounts payable of
$1,201,485 and expense related to stock-based compensation of $269,624,
partially offset by an increase in inventory of $1,199,304. During the
comparable 2020 period, we had a net loss of $(3,591,265), and operating
activities used cash of $3,056,480. 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 $677,967 an
increase in accounts payable of $580,966 and the expense recorded for stock
compensation of $287,437.
During the six months ended August 31, 2021, investing activities used cash of
$329,405, primarily due to the purchases of property and equipment of $570,862
partially offset by proceeds from insurance recovery of $206,336. In comparison,
investing activities used cash of $104,905 during the six months ended August
31, 2020 primarily due to the purchases of intangible assets of $99,047.
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There were no cash flows from financing activities during the six months ended
August 31, 2021. 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 August 31, 2021, the result of repayment
and forgiveness, respectively.
Off-Balance Sheet Arrangements
As of August 31, 2021, except for the purchase obligations as described below,
we had no material off-balance sheet arrangements or obligations.
Purchase obligations: As of August 31, 2021, we had purchase obligations of
approximately $90,000. 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 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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