The Yowie Group Ltd (ASX: YOW) share price has been volatile this week.

But first, if you haven’t had the chance to read my in-depth article on the merits of an investment in Yowie Group, please do so as the below article does not include an introduction to the business.

Cracking open a 4C

It’s been a pretty hairy week for Yowie Group shareholders, including myself. Following my Yowie article last Friday, shares closed some 9% higher on Monday (at 84.5 cents) then peaked at 95 cents Wednesday morning after the company released its 4C (quarterly cash flow report), before finally ending the day down at about 80 cents. Shares touched 77 cents again yesterday before rallying 8% higher today to finish at 84 cents.

I don’t care for short-term share price movements, but if you’ve never invested in high-risk small caps, welcome to the party.

Thoughts on the quarter

In the December quarter, Yowie revealed some good things, some promising things and some commentary which we’d already seen. The company’s use of the Nielsen data showing the dollar value of Yowie sales performance for the 13 weeks leading up to Christmas was great. The fact Yowie is the number-one novelty candy item, the sixth-best selling in the convenience channel and the eighth-best front end candy item (ahead of M&M Tubes, Snickers King Size, and many other great chocolates) is a real achievement for the company. It’s also a very promising development for the brand.

It was also pleasing to see receipts from customers rose sharply, even if a large portion could be attributed to its rollout to Walmart. Indeed, its ability to sign Walmart after numerous store trials should not be forgotten.

Regarding sales, of course, I would have preferred more in the months of November and December given it was the Christmas period. However, with the transition of manufacturing, I probably shouldn’t expect to have my cake and eat it too.

Manufacturing

Last week, I noted Yowie’s manufacturing change from Whetstone to Madelaine left me a little concerned and is one reason why I haven’t bought more Yowie shares in recent weeks.”

However, after some more digging and research, I can understand why Yowie elected to discontinue its business with Whetstone, specifically Hank Whetstone, Jr (I should say thanks to Peter for getting in touch with me and sharing some information). You can read more here.

Whetstone holds unique patents to the design of chocolate encapsulating toys, which Yowie paid to use in its production of chocolate until 31 December 2015.

Yowie’s recent 4C read: Yowie will be using its newly developed, US patent pending and FDA approved capsule design in its production facility with Madelaine which is intended to deliver reduced input costs, automated processing and improve ease of opening the product capsule.”

But that left me wondering: Can Yowie still make its chocolate and (legally) sell it in the US market?

The answer, according to Yowie’s management team, is yes. Once production at Madelaine is up and running, expected around March, the company can distribute its newly designed and higher margin chocolate to its growing channel of distribution partners. The company says its product is already FDA approved and provided it doesn’t infringe upon existing patents could be sold in the US. In my opinion, if Yowie could develop its own patent that’d be great. But a challenge to their “pending” design shouldn’t be ruled out.

While the manufacturing transitions to Madelaine, inventory should cover the distribution to retailers. However, as I alluded to last week, I think it may be a case of short-term pain for long-term gain. If manufacturing comes online in March, which is the plan, that means manufacturing could ramp up in time for first production of the Angry Birds chocolates in April (ahead of the Angry Birds movie launch in May).

A note on manufacturing

It’s worth noting that Madelaine is an established and reputable Chocolate business which was hurt during Superstorm Sandy. Fortuitously, this appears to have provided an ideal opportunity for Yowie to transition from the less lucrative and more uncertain manufacturing deal with Whetstone. There could be a significant cost benefit for Yowie from the economies of scale offered by Madelaine.

Key takeaway

Unfortunately, due to no fault of Yowie, there would appear to have been some nuts and bolts moving in the wrong direction behind the scenes of the world of ASX investors. However, if Yowie can transition to the new supplier smoothly, navigate the often tricky and messy world of patent law, crack into new distribution channels, sign more agreements with big names like Angry Birds and get its chocolate (safely) into more consumers’ mouths, the outlook remains bright for long-term shareholders.

Obviously, there are risks, so remember to conduct your own diligence — and share your thoughts in the comments sections below.

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Motley Fool writer/analyst Owen Raszkiewicz owns shares of Yowie Group. Email him at oraszkiewicz@fool.com.au.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.