[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].

Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) Q1 2024 Earnings Call Transcript July 13, 2023 5:00 PM ET Company Participants Rob Sarlls - Chief Executive Officer Allen Arroyo - Chief Financial Officer Conference Call Participants Roger Lipton - Lipton Financial Services Operator Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss Rocky Mountain Chocolate Factory's financial results for the Fiscal First Quarter 2024. At this time, all particip ...

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]

Financial Data and Key Metrics Changes - Total revenue increased by 11% to $9.5 million for the three months ended November 30, 2022, compared to $8.5 million [29] - Total gross profit for the fiscal third quarter increased by 17% to $2.1 million compared to $1.8 million [30] - Net loss improved significantly to $212,000 or $0.03 per share compared to a net loss of $1.5 million or $0.24 per share in the prior year [31] - Adjusted EBITDA increased nearly 30% to $1.3 million for the three months ended November 30, 2022, compared to $1 million in the year-ago quarter [31] - Operating loss was reduced to $216,000 for the three months ended November 30, 2022, compared to a loss of $2 million in the year-ago period [18] Business Line Data and Key Metrics Changes - Total factory sales for the third quarter increased by 14% to $7.3 million compared to $6.4 million, primarily due to higher shipments to franchised and licensed retail stores [29] - Same-store sales at all domestic locations increased by 3% during the three months ended November 30, 2022, while same-store sales at domestic frozen yogurt cafes increased by 14% [16] Market Data and Key Metrics Changes - Retail sales increased by 7% to approximately $679,000 compared to $636,000 in the fiscal third quarter of the previous year [16] - Royalty and marketing revenue for the quarter was relatively flat at approximately $1.5 million, and franchise fee revenue was also flat at approximately $60,000 compared to the year-ago period [17] Company Strategy and Development Direction - The company is focused on a strategic transformation plan that includes improving operations in the factory and enhancing the end-to-end supply chain [22][23] - A Franchisee Advisory Council was established to foster dialogue among franchisees and align the company with the franchisee network [10] - The company is actively identifying opportunities for margin and profitability improvements, including SKU rationalization to reduce the product portfolio by at least 20% [27] Management's Comments on Operating Environment and Future Outlook - The company is facing macroeconomic pressures, including labor and supply chain challenges, but these pressures are not as severe as earlier in 2022 [11] - The company has implemented new hiring and retention policies, resulting in a 150% increase in applications compared to the third quarter of the previous year [12] - Management expressed optimism about the future, noting that the groundwork laid has begun to generate strong momentum and initial wins are encouraging [22][28] Other Important Information - The company ended the quarter with a cash balance of $3.2 million compared to $7.6 million at the end of the last fiscal year, driven by an increase in inventory [32] - The company remains debt-free as of November 30, 2022 [32] Q&A Session Summary - The Q&A session was not detailed in the provided content, and thus no specific questions and answers can be summarized.