Cautionary Note Regarding Forward-Looking Statements
This information 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
2022
addition to historical information, the following discussion contains certain
forward-looking information. See “Cautionary Note Regarding 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
manufacture an extensive line of premium chocolate candies and other
confectionery products. Our subsidiary,
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
2022
Mountain Chocolate Factory
and
cafés and 57 franchised cafés located in 22 states.
frozen yogurt cafés under the names “
“Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen
Leaf Yogurt”.
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. For additional
information, see Item 1A. “Rick 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
28, 2022
Contested Solicitation of Proxies
During the three and six months ended
substantial costs associated with a stockholder’s contested solicitation of
proxies in connection with our 2022 annual meeting of stockholders. During the
three and six months ended
contested solicitation of proxies, compared with
associated with a contested solicitation of proxies incurred in the three and
six months ended
administrative expense in the Consolidated Statement of Operations. Future costs
associated with the stockholder’s contested solicitation of proxies and the
related legal proceedings described under the caption “PART II. OTHER
INFORMATION – Item 1. Legal Proceedings” 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
2022
Senior Vice President – Sales and Marketing of the Company effective in
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Table of Contents Results of Operations
Three Months Ended
31, 2021
Results Summary Basic earnings per share decreased from$0.03 per share in the three months endedAugust 31, 2021 to a loss of$0.59 per share in the three months endedAugust 31, 2022 . Revenues decreased 5.1% from$7.9 million in the three months endedAugust 31, 2021 to$7.5 million in the three months endedAugust 31, 2022 . Income from operations decreased from$258,000 in the three months endedAugust 31, 2021 to a loss from operations of$2.2 million in the three months endedAugust 31, 2022 . Net income decreased from$197,000 in the three months endedAugust 31, 2021 to a net loss of$3.6 million in the three months endedAugust 31, 2022 . Revenues Three Months Ended August 31, $ % ($'s in thousands) 2022 2021 Change Change Factory sales$ 4,808.2 $ 5,161.4 $ (353.2 ) (6.8 )% Retail sales 796.7 782.6 14.1 1.8 % Franchise fees 54.3 47.1 7.2 15.3 % Royalty and marketing fees 1,866.5 1,935.0 (68.5 ) (3.5 )% Total$ 7,525.7 $ 7,926.1 $ (400.4 ) (5.1 )% Factory Sales
The decrease in factory sales for the three months ended
compared to the three months ended
franchised retail stores and a 3.7%,
our network of franchised and licensed retail stores. The decrease in sales of
product to our network of franchised and licensed retail stores was primarily
the result of lower same store pounds purchased. Same store pounds purchased by
domestic franchise and licensed locations decreased 15.4% during the three
months ended
2021
Retail Sales
Retail sales at Company-owned stores increased 1.8% during the three months
ended
result of an increase in Company-owned same store sales. Same store sales at all
Company-owned locations increased 1.8% during the three months ended
2022
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees from the three months ended
31, 2021
decrease in same store sales at domestic
locations mostly offset by an increase in same store sales at U-Swirl Frozen
Yogurt cafés. Same store sales at domestic franchise
Factory
cafés increased 16.2% during the three months ended
compared to the three months ended
The increase in franchise fee revenue for the three months ended
2022
franchise agreements outstanding and subject to revenue recognition.
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Table of Contents
Costs and Expenses
Cost of Sales
Three Months Ended
August 31, $ %
($'s in thousands) 2022 2021 Change Change
Cost of sales - factory $ 3,781.8 $ 3,814.3 $ (32.5 ) (0.9 )%
Cost of sales - retail 297.2 257.8 39.4 15.3 %
Franchise costs 524.0 737.2 (213.2 ) (28.9 )%
Sales and marketing 481.9 405.9 76.0 18.7 %
General and administrative 4,067.6 1,864.3 2,203.3 118.2 %
Retail operating 470.7 440.2 30.5 6.9 %
Total $ 9,623.2 $ 7,519.7 $ 2,103.5 28.0 %
Gross Margin
Three Months Ended
August 31, $ %
($'s in thousands) 2022 2021 Change Change
Factory gross margin $ 1,026.4 $ 1,347.1 $ (320.7 ) (23.8 )%
Retail gross margin 499.5 524.8 (25.3 ) (4.8 )%
Total $ 1,525.9 $ 1,871.9 $ (346.0 ) (18.5 )%
Three Months Ended
August 31, % %
2022 2021 Change Change
(Percent)
Factory gross margin 21.3 % 26.1 % (4.8 )% (18.4 )%
Retail gross margin 62.7 % 67.1 % (4.4 )% (6.6 )%
Total 27.2 % 31.5 % (4.3 )% (13.7 )%
Adjusted Gross Margin
Three Months Ended
August 31, $ %
($'s in thousands) 2022 2021 Change Change
Factory gross margin $ 1,026.4 $ 1,347.1 $ (320.7 ) (23.8 )%
Plus: depreciation and amortization 160.8 157.7 3.1 2.0 %
Factory adjusted gross margin 1,187.2 1,504.8 (317.6 ) (21.1 )%
Retail gross margin 499.5 524.8 (25.3 ) (4.8 )%
Total Adjusted Gross Margin $ 1,686.7 $ 2,029.6 $ (342.9 ) (16.9 )%
Factory adjusted gross margin 24.7 % 29.2 % (4.5 )% (15.4 )%
Retail gross margin 62.7 % 67.1 % (4.4 )% (6.6 )%
Total Adjusted Gross Margin 30.1 % 34.1 % (4.0 )% (11.7 )%
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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Table of Contents
Cost of Sales and Gross Margin
Factory gross margins decreased to 21.3% in the three months ended
2022
due primarily to the impacts of Employee Retention Credits recognized in the
three months ended
months ended
increase in product prices. The Company recognized approximately
payroll tax benefit associated with Employee Retention Credits (“ERC”) in the
three months ended
2020
for the credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 67.1% during the three months ended
31, 2021
retail gross margins was primarily the result of an increase in costs of raw
materials.
Franchise Costs
The decrease in franchise costs in the three months ended
compared to the three months ended
decrease in professional fees, the result of litigation with our licensee in
legal expenses in the three months ended
total royalty and marketing fees and franchise fee revenue, franchise costs
decreased to 27.3% in the three months ended
three months ended
marketing and franchise fees is primarily a result of lower professional fees
partially offset by a decrease in royalty revenues.
Sales and Marketing
The increase in sales and marketing costs for the three months ended
2022
increase in advertising costs.
General and Administrative
The increase in general and administrative costs for the three months ended
due to costs associated with a stockholder’s contested solicitation of proxies
in connection with our 2022 annual meeting of stockholders. During the three
months ended
costs associated with the contested solicitation of proxies, compared with
three months ended
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
occur. As a result of
management concluded that it is probable that the severance liability is paid.
As of
liability. As a percentage of total revenues, general and administrative
expenses increased to 54.0% in the three months ended
to 23.5% in the three months ended
Retail Operating Expenses
The increase in retail operating expenses for the three months ended
2022
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 56.2% in the three months ended
months ended
retail costs.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization
included in cost of sales, was
2022
2021
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 increased 1.9% to
three months ended
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Table of Contents Other Income
Net interest income was
compared to net interest income of
Income Tax Expense (Benefit)
During the three months ended
result of recording a full reserve on our deferred income tax asset. Our
effective income tax rate for the three months ended
See Note 14 to the financial statements for a description of income taxes,
deferred tax assets and associated reserves.
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Table of Contents
Six Months Ended
2021
Results Summary
Basic earnings per share decreased from a net income of
six months ended
months ended
six months ended
months ended
six months ended
for the six months ended
Revenues
Six Months Ended
August 31, $ %
($'s in thousands) 2022 2021 Change Change
Factory sales $ 9,965.8 $ 10,202.2 $ (236.4 ) (2.3 )%
Retail sales 1,589.3 1,572.1 17.2 1.1 %
Franchise fees 121.6 103.2 18.4 17.8 %
Royalty and marketing fees 3,675.6 3,642.3 33.3 0.9 %
Total $ 15,352.3 $ 15,519.8 $ (167.5 ) (1.1 )%
Factory Sales
The decrease in factory sales for the six months ended
to the six months ended
decrease in shipments of product to customers outside our network of franchised
retail stores partially offset by a 5.0%,
to our network of franchised and licensed retail stores.
Retail Sales
Retail sales at Company-owned stores were relatively flat during the six months
ended
store sales at all Company-owned locations increased 1.1% during the six months
ended
Royalties, Marketing Fees and Franchise Fees
The slight increase in royalty and marketing fees for the six months ended
due to an increase in same-store sales at domestic franchise frozen yogurt
cafés. Same store sales at all domestic franchise locations increased 3.1%
during the six months ended
ended
frozen yogurt cafés increasing 18.2% during the six months ended
2022
The increase in franchise fee revenue for the six months ended
compared to the six months ended
closures and the acceleration of unrecognized franchise fee revenue and more
franchise agreements outstanding and subject to revenue recognition.
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Table of Contents
Costs and Expenses
Cost of Sales
Six Months Ended
August 31, $ %
($'s in thousands) 2022 2021 Change Change
Cost of sales - factory $ 8,209.5 $ 8,104.3 $ 105.2 1.3 %
Cost of sales - retail 593.0 514.3 78.7 15.3 %
Franchise costs 1,018.2 1,288.8 (270.6 ) (21.0 )%
Sales and marketing 1,009.9 818.6 191.3 23.4 %
General and administrative 5,698.8 2,709.1 2,989.7 110.4 %
Retail operating 942.2 884.3 57.9 6.5 %
Total $ 17,471.6 $ 14,319.4 $ 3,152.2 22.0 %
Gross Margin
Six Months Ended
August 31, $ %
2022 2021 Change Change
Factory gross margin $ 1,756.3 $ 2,097.9 $ (341.6 ) (16.3 )%
Retail gross margin 996.3 1,057.8 (61.5 ) (5.8 )%
Total $ 2,752.6 $ 3,155.7 $ (403.1 ) (12.8 )%
Six Months Ended
August 31, % %
2022 2021 Change Change
Factory gross margin 17.6 % 20.6 % (2.9 )% (14.3 )%
Retail gross margin 62.7 % 67.3 % (4.6 )% (6.8 )%
Total 23.8 % 26.8 % (3.0 )% (11.1 )%
Adjusted Gross Margin
Six Months Ended
August 31, $ %
($'s in thousands) 2022 2021 Change Change
Factory gross margin $ 1,756.3 $ 2,097.9 $ (341.6 ) (16.3 )%
Plus: depreciation and amortization 320.5 309.6 10.9 3.5 %
Factory adjusted gross margin 2,076.8 2,407.5 (330.7 ) (13.7 )%
Retail gross margin 996.3 1,057.8 (61.5 ) (5.8 )%
Total Adjusted Gross Margin $ 3,073.1 $ 3,465.3 $ (392.2 ) (11.3 )%
Factory adjusted gross margin 20.8 % 23.6 % (2.8 )% (11.7 )%
Retail gross margin 62.7 % 67.3 % (4.6 )% (6.8 )%
Total Adjusted Gross Margin 26.6 % 29.4 % (2.8 )% (9.6 )%
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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Table of Contents
Cost of Sales and Gross Margin
Factory gross margins decreased to 17.6% in the six months ended
2022
2021
the impacts of Employee Retention Credits recognized in the six months ended
2022
prices. The Company recognized approximately
associated with Employee Retention Credits (“ERC”) in the six months ended
2020
allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 67.3% during the six months ended
2021
retail gross margins was primarily the result of an increase in costs of raw
material.
Franchise Costs
The decrease in franchise costs in the six months ended
compared to the six months ended
decrease in professional fees, the result of litigation with our licensee in
legal expense in the six months ended
royalty and marketing fees and franchise fee revenue, franchise costs decreased
to 26.8% in the six months ended
ended
franchise fees is primarily the result of lower franchise costs.
Sales and Marketing
The increase in sales and marketing costs for the six months ended
2022
increase in advertising costs.
General and Administrative
The increase in general and administrative costs for the six months ended
31, 2022
costs associated with a stockholder’s contested solicitation of proxies in
connection with our 2022 annual meeting of stockholders. During the six months
ended
associated with the contested solicitation of proxies, compared with
costs associated with a contested solicitation of proxies during the six months
ended
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
probable that the severance liability is paid. As of
Company had recorded
of total revenues, general and administrative expenses increased to 37.1% in the
six months ended
Retail Operating Expenses
The increase in retail operating expenses for the six months ended
2022
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 56.2% in the six months ended
ended
sales.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization
included in cost of sales, was
a decrease of 14.0% from
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 increased 3.5% from
months ended
2022
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Table of Contents Other Income
Other income was
other income of
income was
income of
The Company recognized a gain on insurance recovery of
months ended
the six months ended
Income Tax Expense (Benefit)
During the six months ended
result of recording a full reserve on our deferred income tax asset. Our
effective income tax rate for the six months ended
See Note 14 to the financial statements for a description of income taxes,
deferred tax assets and associated reserves.
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Table of Contents
Liquidity and Capital Resources
As of
million
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
million
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
in inventory of
compared to 2.8 to 1 at
future levels of cash and cash equivalents in relation to anticipated operating,
financing and investing requirements.
During the six months ended
Operating activities used cash of
reconcile the net income to net cash used by operating activities being deferred
income taxes of
increase in accounts payable of
comparable 2021 period, we had net income of
provided cash of
income to net cash used by operating activities being depreciation and
amortization of
expense related to stock-based compensation of
increase in inventory of
During the six months ended
In comparison, investing activities used cash of
ended
of
There were no cash flows from financing activities during the six months ended
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
we had no material off-balance sheet arrangements or obligations.
Purchase obligations: As of
approximately
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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