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]

Financial Performance - Basic loss per share from continuing operations improved from $(0.51) in Q3 2022 to $(0.16) in Q3 2023[94] - Basic loss per share from continuing operations decreased from $(0.55) for the six months ended August 31, 2022, to $(0.40) for the six months ended August 31, 2023[115] - The company reported a net loss of $1.8 million for the six months ended August 31, 2023, an improvement from a net loss of $3.8 million in the comparable 2022 period[137] Revenue and Sales - Revenues from continuing operations remained stable at approximately $6.6 million for both Q3 2022 and Q3 2023[94] - Revenues from continuing operations decreased by 3.5% from $13.5 million for the six months ended August 31, 2022, to $13.0 million for the six months ended August 31, 2023[115] - Durango Product sales decreased by 2.1% to $4.7 million in Q3 2023, primarily due to a 34.0% decrease in shipments to customers outside the franchised network[95][96] - Retail sales at Company-owned stores increased by 17.4% to $308.9 thousand in Q3 2023, driven by the opening of a new store[97] - Retail sales at Company-owned stores declined by 2.5% during the six months ended August 31, 2023, compared to the same period in 2022[118] Costs and Expenses - Total costs decreased by 15.8% to $7.5 million in Q3 2023, with general and administrative expenses dropping by 58.2%[101] - Cost of sales for Durango products increased by 12.2% from $8.21 million for the six months ended August 31, 2022, to $9.21 million for the six months ended August 31, 2023[122] - General and administrative expenses decreased to 27.9% of total revenues for the six months ended August 31, 2023, compared to 41.9% for the six months ended August 31, 2022[128] Margins - Durango Product gross margin fell to 3.7% in Q3 2023 from 21.3% in Q3 2022, attributed to increased overhead costs and inflation[104] - Retail gross margin improved to 68.1% in Q3 2023 from 59.0% in Q3 2022, reflecting better cost management[105] - Total gross margin decreased from 19.7% for the six months ended August 31, 2022, to 6.4% for the six months ended August 31, 2023[122] Franchise and Royalty Fees - Royalty and marketing fees rose by 4.1% to $1.5 million in Q3 2023, supported by a 2.3% increase in same store sales at domestic franchise locations[95][98] - Franchise costs as a percentage of total royalty and marketing fees rose to 39.8% in Q3 2023 from 30.2% in Q3 2022, driven by increased professional fees and compensation expenses[106] - Franchise costs increased to 43.7% of total royalty and marketing fees and franchise fee revenue for the six months ended August 31, 2023, from 29.1% for the same period in 2022[126] Cash Flow and Working Capital - Working capital decreased from $6.2 million as of February 28, 2023, to $4.5 million as of August 31, 2023, a decrease of $1.8 million[135] - Cash and cash equivalent balances decreased by approximately $700,000 to $4.0 million as of August 31, 2023, compared to $4.7 million as of February 28, 2023[136] - Operating activities used cash of $966,538 during the six months ended August 31, 2023, compared to $1,584,693 in the same period of 2022[137] - Investing activities provided cash of $234,077, primarily due to cash from the sale of U-Swirl assets amounting to $1,417,768, partially offset by property and equipment purchases of $1,251,728[138] Interest Income - Net interest income increased to $11,400 in Q3 2023 from $3,900 in Q3 2022, due to higher interest income on cash balances[112] - Net interest income increased to $25,000 for the six months ended August 31, 2023, compared to $6,500 for the same period in 2022[132] Operational Challenges - Inflationary factors, including increased costs of ingredients and labor, directly affect operations, with no assurance that increased costs can be passed on to customers[141] - The company is subject to seasonal fluctuations in sales, with historically stronger sales during key holidays and the summer vacation season[143]

Financial Data and Key Metrics Changes - Total revenue for the quarter was $6.6 million, unchanged from the prior year, with product sales at $4.7 million compared to $4.8 million [39] - Net loss from continuing operations improved 68% to $1 million or $0.16 per share, compared to a net loss of $3.2 million or $0.51 per share in the prior year [40] - Adjusted EBITDA loss was $600,000 compared to an adjusted EBITDA of $700,000 in the previous year [40] - Total product and retail gross profit was $0.4 million with a gross profit margin of 7.6%, down from 23.3% due to lower production volume and higher costs [19] Business Line Data and Key Metrics Changes - Retail sales at company-operated stores increased 17% to $309,000 compared to $263,000, driven by the reopening of the Corpus Christi store [39] - Same-store sales for the Durango store were up 7% year-over-year, while same-store sales at all domestic locations increased 2.3% [39] - Royalty and marketing revenue increased to $1.5 million from $1.4 million [39] Market Data and Key Metrics Changes - The company experienced a tripling of transaction volume and more than doubling of sales in e-commerce compared to the same period last year [35] - E-commerce and specialty retail sales are expected to exceed total sales from these channels for all of fiscal 2023 in the second half of fiscal 2024 [32] Company Strategy and Development Direction - The company is executing a Strategic Transformation Plan focused on doing more with less, simplifying operations, and amplifying the brand [10] - A brand refresh was unveiled to enhance the customer experience and attract new consumers [13] - The company aims to reduce underperforming SKUs by 25% to align product offerings with consumer preferences [34] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strategic plan, indicating that foundational improvements are being made for long-term growth and profitability [42] - The company anticipates that the combination of e-commerce and specialty retail sales will lead to outsized results in the back half of the fiscal year [32] - Management acknowledged challenges such as high temperatures impacting consumer demand for chocolate but remains optimistic about future performance [16] Other Important Information - The company ended the quarter with a cash balance of $4 million, down from $4.7 million at the end of fiscal 2023, primarily due to equipment purchases [20] - The company remains debt-free and has renewed its line of credit with Wells Fargo for potential future financing needs [26] Q&A Session Summary Question: What was spent on the Corpus Christi store refresh and what are franchisees being encouraged to spend? - The refresh involved minimal spending, focusing on operational improvements rather than extensive renovations [44] Question: How much of total revenue does e-commerce represent? - E-commerce was about 12-13% of total sales in fiscal year 2023, with expectations for significant growth in fiscal 2024 [47] Question: Can you discuss cash on hand and future financing needs? - The company has a strong cash position and does not foresee a need for long-term financing, but has options available if necessary [48] Question: How far along is the company in its transformation process? - Management feels they have made significant progress, likening the process to being in the later innings of a game [49]

Financial Performance - Basic loss per share from continuing operations increased from $(0.05) for Q1 2022 to $(0.24) for Q1 2023, with revenues decreasing by 6.8% from $6.9 million to $6.4 million[81]. - Total costs and expenses increased by 10.5% from $7.2 million in Q1 2022 to $7.9 million in Q1 2023, with significant increases in franchise costs (62.1%) and general and administrative expenses (20.3%)[87][95]. - For the three months ended May 31, 2023, the company reported a loss before income taxes of $1.5 million, with an effective income tax rate of 9.3% for the same period in 2022[99]. Sales Performance - Durango Product sales decreased by 6.5% from $5.2 million in Q1 2022 to $4.8 million in Q1 2023, primarily due to a 47.9% decrease in shipments to customers outside the franchised network[82][83]. - Retail sales at Company-owned stores declined by 23.3% in Q1 2023 compared to Q1 2022, attributed to the sale of a Company-owned store in the prior year[84]. - Same-store sales through the domestic franchise network decreased by 2.7% in Q1 2023 compared to Q1 2022[85]. Margins and Costs - Durango Product gross margin fell to 3.0% in Q1 2023 from 14.2% in Q1 2022, driven by a 37.2% decrease in production volume and a 25.4% increase in overhead costs[88][91]. - Total adjusted gross margin decreased by 58.9% from $1.04 million in Q1 2022 to $428.5 thousand in Q1 2023[89]. - General and administrative expenses as a percentage of total revenues increased to 30.0% in Q1 2023 from 23.3% in Q1 2022[95]. - Franchise costs as a percentage of total royalty and marketing fees increased to 47.9% in Q1 2023 from 28.0% in Q1 2022[93]. Cash Flow and Working Capital - As of May 31, 2023, working capital decreased to $5.7 million from $6.2 million as of February 28, 2023, primarily due to operating activities[100]. - Cash and cash equivalents increased by $400,000 to $5.1 million as of May 31, 2023, mainly due to proceeds from the sale of U-Swirl assets[101]. - Operating activities used cash of $421,554 during the three months ended May 31, 2023, compared to cash provided of $11,298 in the same period of 2022[102]. - Investing activities provided cash of $853,315, primarily from the sale of U-Swirl assets, partially offset by property and equipment purchases of $549,534[103]. - There were no cash flows from financing activities during the three months ended May 31, 2023 and 2022[104]. Future Outlook - As of May 31, 2023, the company had purchase obligations of approximately $548,000 for future purchases of commodities[106]. - The company is subject to inflationary pressures affecting ingredient and labor costs, with potential impacts on lease costs and the ability to pass on these costs to customers[107]. - Seasonal fluctuations in sales are expected to continue, impacting quarterly results and influenced by new store openings and franchise sales[109].

Financial Data and Key Metrics Changes - Total revenue in the first quarter was $6.4 million, down from $6.9 million, primarily due to a $0.3 million decrease in product shipments related to the planned exit of certain customers [24] - Net loss from continuing operations was $1.5 million or negative $0.24 per share, compared to a net loss of $0.3 million or negative $0.05 per share in the prior year [32] - Adjusted EBITDA loss was $800,000 compared to an adjusted EBITDA of $700,000, driven by lower revenue and increased operating expenses [32] Business Line Data and Key Metrics Changes - Total sales from the Durango production facility were $4.8 million, down from $5.2 million [24] - Retail store sales at company-operated stores were $192,000 compared to $250,000, with same-store sales at all domestic locations decreasing by 2.7% [25] - Total gross profit from Durango production and retail was $0.3 million, with a gross margin of 5.1%, down from 16.3% due to lower production volume and higher costs [26] Market Data and Key Metrics Changes - Revenue to the Durango store was up 16% year-over-year, with June revenues increasing over 27% and customer count rising by 9% [17] - Monthly pounds shipped increased in June on a year-over-year basis for the first time since November 2022, rising roughly 6% [18] Company Strategy and Development Direction - The company is focused on a strategic transformation plan with three pillars: doing more with less, simplifying operations, and amplifying the brand [2][3] - The exit from the frozen yogurt business is part of the strategy to focus on core chocolate operations [4] - A new royalty structure has been established to attract multi-unit operators and incentivize sales of Durango-sourced products [12][13] Management Comments on Operating Environment and Future Outlook - Management expressed optimism about the ongoing transformation and its potential to improve profitability and market share in the fragmented U.S. chocolate confectionery market [21][22] - The company anticipates tangible results from its strategic initiatives as it progresses through future periods [22] Other Important Information - The company ended the first quarter with a cash balance of $5.1 million, up from $4.7 million at the end of fiscal 2023, and remained debt-free [19] - The company opened two new stores in the first quarter and transferred three existing stores to new owners [21] Q&A Session Summary Question: Regarding the $700,000 of savings implemented - Management confirmed that the savings were realized and partially recognized in the last month of the first quarter, with full benefits expected in the second quarter [41] Question: How many stores in the system do over $1 million? - The top 37 stores average over $1 million, with the count of stores in the $1 million plus range being in the high teens to low 20s [42] Question: Details on the planned exit from certain customers - The exit was related to an e-commerce and wholesaling relationship that was not expected to recur, impacting the first quarter but not future results [47] Question: Will G&A build further from the rates shown in the first quarter? - Management indicated that while G&A may increase due to inventory build for the holiday season, it will be less on a year-over-year basis [51] Question: Can inventory levels be maintained at the lower levels? - Management expressed confidence in tighter inventory management going forward, aiming to keep inventory levels down [55]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 001-36865 Rocky Mountain Chocolate Factory, Inc. (Exact name of registrant as specified in its c ...

Financial Data and Key Metrics Changes - For Q4 2023, total revenue increased by 5% to $8.1 million, with total factory sales rising by 6% to $6.1 million, driven by higher shipments from franchise and licensed retail stores [18] - Net loss from continuing operations was $1.9 million or $0.29 per share, compared to a net income of $0.4 million or $0.06 per share in the previous year [19] - Adjusted EBITDA decreased to $2.6 million from $4.1 million, primarily due to inventory write-downs [20][56] Business Line Data and Key Metrics Changes - Royalty and marketing revenue increased by 5% to $1.7 million, while retail sales decreased to $270,000 from $331,000 [18] - Same-store sales at all domestic locations increased by 1.5% [18] - Franchise fee revenue rose to $57,000 from $43,000 [18] Market Data and Key Metrics Changes - The company reported a significant decline in gross profit margin, with total factory and retail gross profit at $79,000 compared to $899,000, resulting in a gross profit margin of 1.2% compared to 14.7% [43] - For the full year 2023, total revenue increased by 3% to $30.4 million, but gross margin declined to 16.4% from 20.9% due to lower production volumes and inventory management efforts [44] Company Strategy and Development Direction - The company is implementing a three-part Strategic Transformation Plan aimed at streamlining operations, revitalizing the in-store experience, and enhancing digital presence [7][28] - The plan includes exiting non-core businesses, such as the frozen yogurt segment, to refocus on chocolate manufacturing and franchising [10][34] - The company aims to double revenue and factory pound volume over the next 3 to 5 years, establish a network of 250-plus revitalized chocolate shops, and increase e-commerce sales to approximately 10% of total revenue [38] Management's Comments on Operating Environment and Future Outlook - Management acknowledged past struggles due to a lack of manufacturing discipline and underinvestment in franchise stores, leading to a loss of market share [29] - The leadership team is optimistic about the transformation plan and expects to report on progress in future calls [46] - The company is focused on improving operational efficiencies and reducing costs, targeting a return to factory gross margins of 25% to 30% [17][38] Other Important Information - The company ended Q4 with a cash balance of $4.7 million, down from $7.6 million at the end of the previous fiscal year, and remained debt-free [45] - The company plans to implement a new ERP and point-of-sale system to enhance data-driven decision-making [12] Q&A Session Summary Question: Is the $1.2 million of savings already in place or will it be implemented over the next 12 months? - Management indicated that a portion of the $1.2 million savings has already been implemented, including closing unnecessary third-party warehousing and SKU rationalization [47][59] Question: What is the current price trend for chocolate and related commodities? - Management noted that sugar prices are at an 11-year high, while cocoa prices are relatively stable but still high [61] Question: Will there be a price increase for franchisees in fiscal 2024? - Management confirmed that there will be no price increase for franchisees in fiscal 2024, despite a high-single digit increase in the previous fiscal year [62] Question: What are the expected investments necessary to execute the Strategic Transformation Plan? - Management highlighted that significant capital investment will be made in manufacturing equipment and ERP systems to enhance operational efficiency [65][66] Question: How will the closure of 25 to 35 stores impact the financials? - Management stated that the financial impact of closing underperforming stores will be minimal, as these stores generally performed below average unit volume [68]

Financial Performance - Revenues increased by 11.4% from $8.5 million in Q3 2021 to $9.5 million in Q3 2022[87] - Revenues increased by 3.3% from $24.0 million for the nine months ended November 30, 2021, to $24.8 million for the nine months ended November 30, 2022[105] - Factory sales rose by 14.2% to $7.3 million, driven by a 13.0% increase in sales to franchised and licensed retail stores[88][89] - Factory sales increased by 4.1% from $16.6 million for the nine months ended November 30, 2021, to $17.3 million for the nine months ended November 30, 2022[106] - Retail sales at Company-owned stores increased by 2.7% during the nine months ended November 30, 2022, compared to the same period in 2021[108] Profitability - Basic loss per share improved from a loss of $0.24 in Q3 2021 to a loss of $0.03 in Q3 2022[87] - The net loss decreased from $1.5 million in Q3 2021 to $212,000 in Q3 2022[87] - Basic earnings per share decreased from a net loss of $0.11 per share for the nine months ended November 30, 2021, to a net loss of $0.64 per share for the nine months ended November 30, 2022[105] - The loss from operations increased from $1.1 million for the nine months ended November 30, 2021, to a loss from operations of $2.6 million for the nine months ended November 30, 2022[105] - The net loss increased from $701,000 for the nine months ended November 30, 2021, to a net loss of $4.0 million for the nine months ended November 30, 2022[105] Costs and Expenses - Total costs decreased by 7.4% from $10.3 million in Q3 2021 to $9.6 million in Q3 2022[94] - Total costs and expenses increased by 9.7% from $24.6 million for the nine months ended November 30, 2021, to $27.0 million for the nine months ended November 30, 2022[112] - General and administrative expenses increased to 31.5% of total revenues in the nine months ended November 30, 2022, compared to 27.4% in the same period of 2021[118] - Sales and marketing costs increased by 35.2% from $1.2 million for the nine months ended November 30, 2021, to $1.6 million for the nine months ended November 30, 2022[112] - Retail operating expenses increased from 59.1% to 60.2% of retail sales for the nine months ended November 30, 2022, primarily due to higher salaries and wages, and utilities[119] Margins - Factory gross margin improved to 22.9% in Q3 2022 from 22.2% in Q3 2021, attributed to higher prices despite increased labor and material costs[96] - Retail gross margin remained stable at 62.3% for both Q3 2022 and Q3 2021[97] - Retail gross margins decreased from 65.8% during the nine months ended November 30, 2021, to 62.6% during the nine months ended November 30, 2022[115] Cash Flow and Working Capital - Working capital decreased by $2.3 million to $7.4 million as of November 30, 2022, compared to $9.7 million as of February 28, 2022[125] - Cash and cash equivalents decreased by approximately $4.4 million to $3.2 million as of November 30, 2022, primarily due to severance payments and an increase in inventory[126] - Investing activities used cash of $787,824 during the nine months ended November 30, 2022, primarily for property and equipment purchases[128] - There were no cash flows from financing activities for the nine months ended November 30, 2022, compared to cash used of $61,276 in the prior year[129] Other Financial Information - The company incurred approximately $764,000 and $2.9 million in costs associated with a contested solicitation of proxies during the three and nine months ended November 30, 2022, respectively[84] - Other income dropped significantly to $9,600 for the nine months ended November 30, 2022, from $176,500 in the same period of 2021[121] - Income tax expense was $1.4 million on a loss before income taxes of $2.6 million for the nine months ended November 30, 2022[123] - As of November 30, 2022, the company had purchase obligations of approximately $36,000 for future commodity purchases[130]