Zacks Investment Research has recently initiated coverage of Rocky Mountain Chocolate Factory, Inc. (RMCF) , assigning an "Underperform" recommendation to the company's shares. This bearish stance reflects significant concerns over the company's recent financial performance and operational challenges. Rocky Mountain's gross margins have plummeted dramatically from 5.1% in first-quarter fiscal 2024 to (5.8)% in first-quarter fiscal 2025. This decline is primarily due to rising raw material and labor costs, w ...

Core Viewpoint - Rocky Mountain Chocolate Factory, Inc. reported a wider loss per share of 26 cents in Q1 fiscal 2025 compared to a loss of 13 cents per share in the same quarter last year [1] Revenue Summary - Total revenues for the first quarter were $6.4 million, reflecting a decrease of 0.5% year over year [2] - Revenue sources include Durango product and retail sales, Franchise fees, and Royalty and marketing fees [5] - Durango product and retail sales generated $5.3 million, an increase of 5.2% year over year due to improved franchisee demand and inventory management [5] - Franchise fees totaled $0.1 million, up 55.6% year over year, attributed to store ownership transfer fees [6] - Royalty and marketing fees generated $1.1 million, down 23.1% year over year due to a decrease in the number of stores subject to royalty fees [6] Gross Margin Analysis - Gross margin decreased to (5.8)% from 5.1% in the year-ago quarter, primarily due to increased raw material and labor costs [7] Operating Expenses - Sales and marketing expenses decreased by 9.1% year over year to $0.4 million, driven by operational efficiencies and cost-cutting measures [8] - General and administrative expenses decreased by 35.9% year over year to $1.2 million, mainly due to a reduction in legal fees from the previous year [8] Profitability Metrics - The net loss for the first quarter was $1.7 million, wider than the net loss of $0.8 million in the same quarter last year [9] - Loss from operations totaled $1.6 million, compared to a loss of $1.5 million in the year-ago quarter [14] Liquidity and Debt Management - The company ended the first quarter with cash and cash equivalents of $0.6 million, down from $2.1 million at the end of fiscal 2024 [10] - Net cash used in operating activities of continuing operations was $2.2 million, compared to $0.4 million a year ago [10]

Financial Data and Key Metrics Changes - The company is targeting a return to a 20% gross margin by the end of fiscal '25 and aims for gross margins in the range of 25% to 30% by the end of fiscal '27, driven by consistent revenue growth and disciplined expense control [25][46] - The company expects to return to adjusted EBITDA profitability as it exits fiscal '25 [25][46] Business Line Data and Key Metrics Changes - The company has initiated agreements for several new stores and a newly designed kiosk concept, targeting net store growth for fiscal year '25, ending a multi-year pattern of store contraction [17][18] - E-commerce currently accounts for only 3% of total revenue, with expectations to significantly increase this mix over the next three years [39] Market Data and Key Metrics Changes - The company is focusing on expanding its presence in strategic markets such as Boston, New York City, Atlanta, and Seattle, which have favorable demographics and distribution routes [31][38] - The company is also enhancing its partnerships with specialty market retailers and co-branded partners like Cold Stone Creamery to drive brand awareness and throughput [40] Company Strategy and Development Direction - The company is undergoing a strategic realignment to improve operational turnaround, focusing on enhancing store-level profitability and sales growth through data-driven insights [15][34] - The company plans to improve its liquidity position through non-core asset sales and a new term loan agreement [23][46] Management's Comments on Operating Environment and Future Outlook - Management acknowledges recent challenges due to execution missteps and supply chain inefficiencies, but expresses confidence in the strategic plan to return to sustainable growth [22][27] - The company is committed to investing in production efficiency and upgrading its ERP system to improve operational insights and responsiveness [42][43] Other Important Information - The company is in the final stages of appointing a new CFO and expects to announce this shortly [12][29] - The company has deployed over $3 million in capital expenditures towards new equipment and production efficiency investments [22] Q&A Session Summary Question: What is the current status of the search for both a permanent CEO and CFO? - The company is moving forward with both searches and expects to have announcements shortly [29] Question: Can you expand upon the product mix that you believe will help to reinvigorate sales and expand gross margins? - The company is focused on developing markets with favorable demographics and easily expandable distribution lanes [31] Question: What are the highest priorities for capital allocation in the next 12 to 36 months? - The company plans to invest in production facilities to improve cost efficiency and expand its distribution system [50]

Company Overview - Rocky Mountain Chocolate Factory Inc. is an international franchiser and producer of premium chocolates and confectionery products, including gourmet caramel apples [4] - The company operates over 260 stores across the United States and has several international locations [4] - Rocky Mountain Chocolate Factory was recognized as one of America's Best Retailers 2023 in the chocolate and candy stores category by Newsweek [4] Upcoming Conference Call - The company will host a conference call on July 15, 2024, at 5:00 p.m. Eastern time to discuss its fiscal first quarter 2025 results [1] - A press release with the results will be issued prior to the call [1] - Attendees can submit questions in advance via email to the investor relations team [2] Conference Call Details - The conference call will include a question-and-answer period following the management team's presentation [2] - Participants are encouraged to dial in 5-10 minutes before the start time for registration [2] - The call will be available for live broadcast and replay on the company's investor relations website [3]

Group 1 - Rocky Mountain Chocolate Factory Inc. has appointed Charles Arnold to its Board of Directors, where he will serve as Chair of the Audit Committee [1][3] - Charles Arnold has over 20 years of experience in corporate finance, including roles in public and private companies, and has served as CFO of Abernathy Holdings since June 2021 [2][3] - The appointment follows the resignation of Brett Seabert, and the Board expressed gratitude for his contributions over the past seven years [3] Group 2 - Rocky Mountain Chocolate Factory is an international franchiser and producer of premium chocolates and confectionery products, with over 260 stores in the U.S. and several international locations [5] - The company was recognized as one of America's Best Retailers 2023 by Newsweek in the chocolate and candy stores category [5]

DURANGO, Colo., June 28, 2024 (GLOBE NEWSWIRE) -- Rocky Mountain Chocolate Factory Inc. (Nasdaq: RMCF) (the "Company", "we", or "RMCF"), an international franchisor and producer of premium chocolates and other confectionery products, including gourmet caramel apples, today announced that Charles Arnold has been appointed to the Company's Board of Directors ("the Board"), where he will serve as Chair of the Audit Committee. Mr. Arnold is a seasoned corporate finance executive with over 20 years of experience ...

Financial Performance - Total revenue for the fiscal year ended February 29, 2024, was $27,950,687, a decrease of 8.1% from $30,432,352 in 2023[238] - Sales decreased to $22,022,310 in 2024 from $24,456,910 in 2023, representing a decline of 9.9%[238] - The company reported a net loss of $4,171,883 for 2024, compared to a net loss of $5,680,778 in 2023, indicating an improvement of 26.5%[238] - Loss from operations was $4,902,156 in 2024, slightly higher than the loss of $4,891,003 in 2023[238] - The company experienced recurring losses and negative cash flows from operations, raising substantial doubt about its ability to continue as a going concern[224] - The segment profit (loss) for FY 2024 was reported at $(4,875,717), compared to $(4,874,513) in FY 2023, indicating a slight deterioration in performance[367] Expenses and Costs - Cost of sales increased to $20,655,629 in 2024 from $20,455,373 in 2023, reflecting a rise of 1.0%[238] - General and administrative expenses decreased significantly to $6,673,929 in 2024 from $10,325,633 in 2023, a reduction of 35.0%[238] - The Company incurred total severance compensation costs of $692,295 in FY 2024, down from $928,938 in FY 2023, and $1,344,813 in FY 2022[381] - The total depreciation and amortization expense for FY 2024 was $887,299, compared to $765,263 in FY 2023, reflecting higher asset utilization[367] - The company incurred approximately $4.1 million in costs related to contested proxy solicitations during FY 2023, up from $1.7 million in FY 2022[370] Assets and Liabilities - Total assets decreased from $21,986,827 in 2023 to $20,577,218 in 2024, a decline of approximately 6.4%[241] - Current assets fell from $11,204,976 in 2023 to $9,602,650 in 2024, representing a decrease of about 14.3%[241] - Cash and cash equivalents decreased significantly from $4,717,068 in 2023 to $2,082,014 in 2024, a drop of approximately 55.9%[246] - Total liabilities increased from $7,616,663 in 2023 to $9,941,059 in 2024, an increase of about 30.5%[241] - The Company had lease liabilities totaling $1,694,471 as of February 29, 2024, with total estimated future minimum lease payments of $1.9 million[340] Inventory and Sales - Inventories increased from $3,639,780 in 2023 to $4,358,401 in 2024, a rise of approximately 19.7%[241] - Retail sales increased to $1,318,901 in 2024 from $1,084,777 in 2023, an increase of 21.6%[313] - Durango product sales recognized at a point in time decreased to $20,703,409 in 2024 from $23,372,133 in 2023, a decrease of 11.4%[313] Equity and Capital - The company’s retained earnings decreased from $4,906,032 in 2023 to $734,149 in 2024, a decline of about 85%[241] - The company’s total stockholders' equity decreased from $14,370,164 in 2023 to $10,636,159 in 2024, a decline of about 26.1%[241] - The company’s additional paid-in capital increased from $9,457,875 in 2023 to $9,895,704 in 2024, an increase of approximately 4.6%[241] Cash Flow and Financing - The company reported a net cash used in operating activities of $2,434,947 for 2024, compared to $2,102,491 in 2023, indicating a decline in cash flow[246] - The Company had a $4.0 million revolving credit line, with $2.75 million available for borrowing as of February 29, 2024[321] - The Company's current ratio as of February 29, 2024, was 1.19 to 1, below the required 1.5 to 1 under its credit agreement[257] Taxation - The effective tax rate for FY 2024 was zero, primarily due to reported losses and a full valuation allowance against deferred tax assets[353] - The Company incurred an income tax expense of $613,843 for FY 2023 despite a pretax loss, mainly due to an increase in reserves for deferred tax assets[354] Strategic Initiatives - The Company plans to sell an unused parcel of land and cut overhead for manufacturing to strengthen its liquidity position[258] - The Company intends to increase profits and gross margins through raising chocolate prices to its franchising system and Specialty Market customers[258] Discontinued Operations - Total revenue from discontinued operations for FY 2024 was $212,242, a significant decrease from $3,128,368 in FY 2023[384] - The Company completed the sale of U-Swirl for total consideration of $2.75 million, including $1.75 million in cash and a $1 million promissory note[382] - The Company filed a certificate of dissolution for U-Swirl on October 31, 2023, effectively ending its legal existence[384]

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Rocky Mountain Chocolate Factory, Inc. as of November 30, 2023, detailing financial performance, position, and cash flows, including the impact of the U-Swirl divestiture [Consolidated Statements of Operations](index=5&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) For the three and nine months ended November 30, 2023, the company reported increased losses from continuing operations and decreased total revenue, with the consolidated net loss improving due to a gain from discontinued operations Consolidated Statements of Operations Highlights (unaudited) | Metric ($ in thousands) | Three Months Ended Nov 30, 2023 | Three Months Ended Nov 30, 2022 | Nine Months Ended Nov 30, 2023 | Nine Months Ended Nov 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $7,697 | $8,825 | $20,691 | $22,285 | | **Loss from Operations** | $(775) | $(199) | $(3,327) | $(2,942) | | **Net Loss from Continuing Operations** | $(757) | $(196) | $(3,283) | $(3,634) | | **Earnings (loss) from Discontinued Operations** | $0 | $(16) | $704 | $(334) | | **Consolidated Net Loss** | $(757) | $(212) | $(2,579) | $(3,968) | | **Net Loss per Share (Basic)** | $(0.12) | $(0.03) | $(0.40) | $(0.63) | [Consolidated Balance Sheets](index=7&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) As of November 30, 2023, total assets decreased to **$21.3 million** from **$22.0 million**, driven by reduced cash, while total liabilities increased due to a **$1.0 million** line of credit draw, and stockholders' equity declined Consolidated Balance Sheet Highlights (unaudited) | Metric ($ in thousands) | November 30, 2023 | February 28, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $2,082 | $4,717 | | Total current assets | $10,080 | $11,205 | | **Total Assets** | **$21,280** | **$21,987** | | Line of credit | $1,000 | $0 | | Total current liabilities | $7,079 | $5,010 | | **Total Liabilities** | **$8,999** | **$7,617** | | **Total Stockholders' Equity** | **$12,282** | **$14,370** | [Consolidated Statements of Cash Flows](index=9&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) For the nine months ended November 30, 2023, net cash used in operating activities was **$2.6 million**, with investing activities using **$1.1 million** and financing activities providing **$1.0 million**, resulting in a **$2.6 million** net decrease in cash Cash Flow Summary (unaudited, for nine months ended Nov 30) | Cash Flow Activity ($ in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,564) | $(3,583) | | Net cash provided by (used in) investing activities | $(1,071) | $(788) | | Net cash provided by financing activities | $1,000 | $0 | | **Net Decrease in Cash and Cash Equivalents** | **$(2,635)** | **$(4,371)** | [Consolidated Statement of Changes in Stockholders' Equity](index=10&type=section&id=CONSOLIDATED%20STATEMENT%20OF%20CHANGES%20IN%20STOCKHOLDERS'%20EQUITY) Stockholders' equity decreased by **$2.1 million** from February 28, 2023, to November 30, 2023, primarily due to a consolidated net loss, partially offset by equity compensation - Total stockholders' equity declined by **$2.1 million** over the nine-month period, from **$14,370,164** on February 28, 2023, to **$12,281,518** on November 30, 2023[19](index=19&type=chunk) - The decrease was primarily due to a consolidated net loss of **$2,579,448**, partially offset by stock-based compensation of **$490,802**[19](index=19&type=chunk) [Notes to Interim (Unaudited) Consolidated Financial Statements](index=11&type=section&id=NOTES%20TO%20INTERIM%20(UNAUDITED)%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) The notes detail the U-Swirl subsidiary sale, a breach of a loan covenant, revenue recognition, stock-based compensation, and a full valuation allowance against deferred tax assets - The company sold its U-Swirl subsidiary, and its historical results are now reported as discontinued operations, with the sale completed on May 1, 2023, for **$2.76 million** in total consideration, resulting in a gain on disposal of **$634,790**[22](index=22&type=chunk)[88](index=88&type=chunk)[92](index=92&type=chunk) - As of November 30, 2023, the company was not in compliance with a financial covenant in its credit agreement with Wells Fargo, requiring a current ratio of at least 1.5 to 1, as its ratio was 1.42 to 1, and a waiver has been requested but not yet received[36](index=36&type=chunk)[54](index=54&type=chunk)[144](index=144&type=chunk) - Due to recent losses, management determined it is no longer more likely than not that deferred tax assets are fully realizable, resulting in a full valuation allowance against its deferred tax assets as of November 30, 2023[87](index=87&type=chunk) Store Count as of November 30, 2023 | Store Type | Count | | :--- | :--- | | Company-owned stores | 2 | | Franchise stores - Domestic | 150 | | International license stores | 4 | | Co-branded stores | 113 | | **Total Operating** | **269** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses declining revenue and profitability for Q3 and the first nine months of fiscal 2024, driven by lower product sales and compressed gross margins, alongside decreased liquidity and a credit line covenant breach Q3 FY2024 vs Q3 FY2023 Performance | Metric | Q3 FY2024 | Q3 FY2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $7.7M | $8.8M | (12.8)% | | Durango Product Sales | $6.1M | $7.3M | (16.8)% | | Durango Product Gross Margin | 7.1% | 22.9% | (15.8) p.p. | | Loss from Continuing Operations | $(0.7)M | $(0.2)M | Increased Loss | Nine Months FY2024 vs Nine Months FY2023 Performance | Metric | Nine Months FY2024 | Nine Months FY2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $20.7M | $22.3M | (7.2)% | | Durango Product Sales | $15.6M | $17.3M | (9.6)% | | Durango Product Gross Margin | 4.8% | 19.9% | (15.1) p.p. | | Loss from Continuing Operations | $(3.3)M | $(2.9)M | Increased Loss | - General and administrative costs decreased significantly, primarily because the company incurred no costs related to a contested solicitation of proxies in the current period, compared to approximately **$764,000** in Q3 2022 and **$2.9 million** in the first nine months of 2022[98](index=98&type=chunk)[112](index=112&type=chunk)[131](index=131&type=chunk) - The company's liquidity has decreased, with working capital falling from **$6.2 million** to **$3.0 million** since February 28, 2023, and it breached its credit agreement's current ratio covenant (1.42 to 1 vs. 1.5 to 1 required), for which it is seeking a waiver from the lender[138](index=138&type=chunk)[144](index=144&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[154](index=154&type=chunk) [Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were not effective as of November 30, 2023, due to a material weakness in accounting for complex transactions, with a remediation plan underway - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of November 30, 2023[158](index=158&type=chunk) - The ineffectiveness is due to a material weakness in internal controls, specifically the finance department's inability to properly account for complex, non-routine transactions in accordance with GAAP[156](index=156&type=chunk) - A remediation plan has been implemented, which includes retaining accounting experts, and the company expects the remediation to be complete before the end of the current fiscal year[157](index=157&type=chunk) [PART II. OTHER INFORMATION](index=44&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=44&type=section&id=Item%201.%20Legal%20Proceedings) The company is not aware of any pending legal actions expected to have a material adverse effect on its business or operations - The company is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business, financial condition, or operating results[80](index=80&type=chunk)[161](index=161&type=chunk) [Risk Factors](index=44&type=section&id=Item%201A.%20Risk%20Factors) No material changes have occurred in the company's risk factors since the filing of its Annual Report for the fiscal year ended February 28, 2023 - No material changes have occurred in the company's risk factors since the filing of its Annual Report for the fiscal year ended February 28, 2023[163](index=163&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=44&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the period - None[164](index=164&type=chunk) [Defaults Upon Senior Securities](index=44&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[164](index=164&type=chunk) [Mine Safety Disclosures](index=44&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[164](index=164&type=chunk) [Other Information](index=44&type=section&id=Item%205.%20Other%20Information) The company reported no other information for this item - None[165](index=165&type=chunk) [Exhibits](index=45&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including amendments to bylaws and credit agreements, and certifications by the Principal Executive Officer and Principal Financial Officer - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[169](index=169&type=chunk) - Other exhibits include the Third Amended and Restated Bylaws and the Second Amendment to the Credit Agreement with Wells Fargo Bank[169](index=169&type=chunk)

Financial Data and Key Metrics Changes - Total revenue decreased to $7.7 million from $8.8 million year-over-year, primarily due to higher factory overhead and production constraints at the Durango facility [13] - Net loss from continuing operations was $0.8 million or $0.12 per share, compared to a net loss of $0.2 million or $0.03 per share in the prior year [23] - Adjusted EBITDA loss was $3 million compared to adjusted EBITDA of $1.2 million, mainly due to lower sales and gross margin [28] Business Line Data and Key Metrics Changes - Total product sales were $6.1 million, down from $7.3 million, while retail sales at company-operated stores increased by 21% to $364,000 due to the opening of a second store [14] - Franchise fee revenue decreased to $41,000 from $49,000 [1] Market Data and Key Metrics Changes - Same-store sales for company-owned stores in Durango decreased by 1.1% year-over-year, while same-store sales across all domestic locations decreased by 2.1% [1] Company Strategy and Development Direction - The company has relocated consumer packaging functions to a third-party co-packer in Utah to alleviate labor constraints and improve production capacity [16][5] - The strategic transformation plan aims to enhance operational efficiency and expand the franchise network, with a focus on e-commerce and specialty retail partnerships [11][6] - The company plans to invest $6 million to $6.5 million in capital expenditures over fiscal years 2024 and 2025 [46] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, stating that the actions taken over the past year have positioned the company for growth and profitability in fiscal 2025 [30] - The management acknowledged challenges in labor availability but emphasized that the transition to co-packing has set the stage for meeting increased demand [38][40] Other Important Information - The company ended the third quarter with a cash balance of $2.1 million, down from $4.7 million at the end of fiscal year 2023, primarily due to cash used in operations and capital expenditures [29] - The company has no long-term debt, which provides financial flexibility [29] Q&A Session Summary Question: Inventory levels and co-packaging issues - Management explained that inventory levels were managed lean due to labor challenges, which impacted the ability to ramp up production [35][36] Question: Transition to co-packing - The transition to co-packing was accelerated due to labor shortages, and the move was completed successfully despite challenges [38][40] Question: Capital spending needs - The company has spent most of its capital expenditures for the fiscal year and is planning for fiscal 2025, with a focus on becoming cash flow positive [46][47] Question: Gross margin improvements - Management indicated that while outsourcing packaging may not directly improve margins, increasing throughput will enhance overall margins [50][52]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 001-36865 Rocky Mountain Chocolate Factory, Inc. (Exact name of registrant as specified in its charter) (State or other jurisdiction of Incorporation or organization) Delaware 47-1535633 (I.R.S. Employer Identification No.) 265 Turner Drive, Durango, CO 81303 (Address of principal execu ...