Rocky Mountain Chocolate Factory(RMCF) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis of the company's financial performance, liquidity, and controls ITEM 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and changes in stockholders' equity, along with detailed notes. The company reported net losses for both the three and six months ended August 31, 2024, and faced a going concern doubt due to operating losses and non-compliance with a credit covenant, which was subsequently addressed by a new credit agreement Condensed Consolidated Statements of Operations This section presents the company's unaudited condensed consolidated statements of operations, detailing revenues, expenses, and net losses for the reported periods Three Months Ended August 31, 2024 vs 2023 | Metric | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | Change (%) | | :--------------------- | :-------------------- | :-------------------- | :---------------------- | :--------- | | Total Revenue | 6,380 | 6,558 | (178) | (2.7)% | | Loss from Operations | (914) | (1,011) | 97 | 9.6% | | Net Loss | (722) | (999) | 277 | 27.7% | | Basic Loss per Share | (0.11) | (0.16) | 0.05 | 31.3% | Six Months Ended August 31, 2024 vs 2023 | Metric | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | Change (%) | | :--------------------- | :-------------------- | :-------------------- | :---------------------- | :--------- | | Total Revenue | 12,787 | 12,994 | (207) | (1.6)% | | Loss from Operations | (2,544) | (2,552) | 8 | 0.3% | | Net Loss | (2,380) | (1,823) | (557) | (30.6)% | | Basic Loss per Share | (0.37) | (0.29) | (0.08) | (27.6)% | - The net loss for the six months ended August 31, 2023, included $704 thousand from discontinued operations[5] Condensed Consolidated Balance Sheets This section provides the company's unaudited condensed consolidated balance sheets, outlining assets, liabilities, and stockholders' equity at specific dates Balance Sheet Highlights (August 31, 2024 vs February 29, 2024) | Metric | Aug 31, 2024 ($ in thousands) | Feb 29, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :--------------------------- | :---------------------------- | :---------------------------- | :---------------------- | :--------- | | Cash and cash equivalents | 973 | 2,082 | (1,109) | (53.3)% | | Inventories | 6,115 | 4,358 | 1,757 | 40.3% | | Current assets held for sale | 666 | - | 666 | N/A | | Total current assets | 10,994 | 9,602 | 1,392 | 14.5% | | Total Assets | 21,130 | 20,577 | 553 | 2.7% | | Line of credit | 3,450 | 1,250 | 2,200 | 176.0% | | Total current liabilities | 8,853 | 8,072 | 781 | 9.7% | | Total Liabilities | 10,605 | 9,941 | 664 | 6.7% | | Total stockholders' equity | 10,525 | 10,636 | (111) | (1.0)% | Condensed Consolidated Statement of Cash Flows This section details the company's unaudited condensed consolidated statement of cash flows, categorizing cash movements from operating, investing, and financing activities Six Months Ended August 31, 2024 vs 2023 | Metric | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------------------- | :-------------------- | :-------------------- | :---------------------- | :--------- | | Net cash used in operating activities | (5,670) | (966) | (4,704) | (486.9)% | | Net cash provided by investing activities | 173 | 234 | (61) | (26.1)% | | Net cash provided by financing activities | 4,388 | - | 4,388 | N/A | | Net Decrease in Cash and Cash Equivalents | (1,109) | (732) | (377) | (51.5)% | | Cash and Cash Equivalents, End of Period | 973 | 3,985 | (3,012) | (75.6)% | Condensed Consolidated Statements of Changes in Stockholders' Equity This section presents the unaudited condensed consolidated statements of changes in stockholders' equity, reflecting movements in common stock, additional paid-in capital, and retained earnings Stockholders' Equity Changes (February 29, 2024 to August 31, 2024) | Metric | Feb 29, 2024 ($ in thousands) | Aug 31, 2024 ($ in thousands) | Change ($ in thousands) | | :--------------------------- | :---------------------------- | :---------------------------- | :---------------------- | | Common stock | 6 | 8 | 2 | | Additional paid-in capital | 9,896 | 12,163 | 2,267 | | Retained earnings (deficit) | 734 | (1,646) | (2,380) | | Total stockholders' equity | 10,636 | 10,525 | (111) | - The company issued 1,250,000 shares of common stock through a securities purchase agreement, generating $2.188 million in proceeds[10] - The net loss for the six months ended August 31, 2024, was $(2,380) thousand[5][10] Notes to Condensed Consolidated Financial Statements This section provides detailed explanatory notes to the unaudited condensed consolidated financial statements, offering context on accounting policies, significant transactions, and financial positions NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note describes the company's business, its operational segments, and the key accounting policies applied in preparing the financial statements - Rocky Mountain Chocolate Factory, Inc. is an international franchisor, confectionery manufacturer, and retail operator, founded in 1981[13] - The company's revenues are derived from sales to franchisees and others of confectionery products, initial franchise fees and royalties, sales at company-owned stores, and marketing fees[15] - The U-Swirl subsidiary's activities have been reported as discontinued operations following its sale in fiscal year 2023[14] Rocky Mountain Chocolate Factory Brand Store Count (August 31, 2024) | Store Type | Open at 2/29/2024 | Opened | Closed | Sold | Open at 8/31/2024 | | :--------------------------------------- | :---------------- | :----- | :----- | :--- | :---------------- | | Company-owned stores | 2 | - | - | - | 2 | | Franchise stores - Domestic stores/kiosks | 149 | 1 | (5) | (1) | 144 | | International license stores | 3 | - | - | - | 3 | | Cold Stone Creamery - co-branded | 104 | 2 | (2) | - | 104 | | U-Swirl - co-branded | 11 | - | - | (1) | 10 | | Total | 269 | | | | 263 | - The company incurred a net loss of $2.4 million and used $5.7 million cash in operating activities during the six months ended August 31, 2024, and was not in compliance with a credit agreement covenant (current ratio 1.24:1 vs. required 1.5:1), raising substantial doubt about its ability to continue as a going concern[19] - The company sold a parcel of land for approximately $0.9 million, recording a gain of $0.5 million, and classified factory machinery as held for sale, incurring a $0.1 million impairment charge[25][26] - The company is evaluating the impact of new accounting pronouncements ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures)[27][28] NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION This note provides additional details on cash paid for interest and income taxes, as well as non-cash investing activities Cash Paid (Received) for Six Months Ended August 31 | Metric | Aug 31, 2024 ($ in thousands) | Aug 31, 2023 ($ in thousands) | | :------------ | :---------------------------- | :---------------------------- | | Interest | 98 | - | | Income taxes | 17 | (30) | Non-cash Investing Activities Six Months Ended August 31 | Metric | Aug 31, 2024 ($ in thousands) | Aug 31, 2023 ($ in thousands) | | :------------------------------------ | :---------------------------- | :---------------------------- | | Sale of assets in exchange for note receivable | - | 1,000 | NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS This note outlines the company's policies for recognizing revenue from customer contracts, including initial franchise fees and contract liabilities - Initial franchise fees are recognized proportionately over the term of the franchise agreement, generally 10 years, as the initial services are not distinct from continuing services[34] Contract Liabilities (Six Months Ended August 31) | Metric | Six Months Ended Aug 31, 2024 ($ in thousands) | Six Months Ended Aug 31, 2023 ($ in thousands) | | :-------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Contract liabilities at beginning of year | 828 | 943 | | Revenue recognized | (108) | (86) | | Contract fees received | 98 | 43 | | Contract liabilities at end of period | 818 | 900 | Estimated Future Revenue Recognition from Unsatisfied Performance Obligations (as of Aug 31, 2024) | Fiscal Year | Amount ($ in thousands) | | :---------- | :---------------------- | | 2025 | 74 | | 2026 | 142 | | 2027 | 129 | | 2028 | 102 | | 2029 | 80 | | Thereafter | 291 | | Total | 818 | - No gift card breakage was recognized during the three or six months ended August 31, 2024[36] NOTE 4 – DISAGGREGATION OF REVENUE This note provides a detailed breakdown of the company's revenue by method and operating segment for the reported periods Disaggregated Revenue by Method and Segment (Three Months Ended August 31, 2024) | Revenue Type / Segment | Franchising ($ in thousands) | Manufacturing ($ in thousands) | Retail ($ in thousands) | Total ($ in thousands) | | :--------------------- | :--------------------------- | :----------------------------- | :---------------------- | :--------------------- | | Franchise fees (over time) | 38 | - | - | 38 | | Durango Product sales (point in time) | - | 4,524 | - | 4,524 | | Retail sales (point in time) | - | - | 394 | 394 | | Royalty and marketing fees (point in time) | 1,424 | - | - | 1,424 | | Total Revenue | 1,462 | 4,524 | 394 | 6,380 | Disaggregated Revenue by Method and Segment (Six Months Ended August 31, 2024) | Revenue Type / Segment | Franchising ($ in thousands) | Manufacturing ($ in thousands) | Retail ($ in thousands) | Total ($ in thousands) | | :--------------------- | :--------------------------- | :----------------------------- | :---------------------- | :--------------------- | | Franchise fees (over time) | 108 | - | - | 108 | | Durango Product sales (point in time) | - | 9,481 | - | 9,481 | | Retail sales (point in time) | - | - | 716 | 716 | | Royalty and marketing fees (point in time) | 2,482 | - | - | 2,482 | | Total Revenue | 2,590 | 9,481 | 716 | 12,787 | NOTE 5 - INVENTORIES This note details the composition of the company's inventories, including ingredients, finished goods, and reserves for slow-moving items Inventories (August 31, 2024 vs February 29, 2024) | Category | Aug 31, 2024 ($ in thousands) | Feb 29, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------ | :---------------------------- | :---------------------------- | :---------------------- | :--------- | | Ingredients and supplies | 3,020 | 2,038 | 982 | 48.2% | | Finished candy | 3,275 | 2,509 | 766 | 30.5% | | Reserve for slow moving inventory | (180) | (189) | 9 | (4.8)% | | Total inventories | 6,115 | 4,358 | 1,757 | 40.3% | NOTE 6 – PROPERTY AND EQUIPMENT, NET This note presents the company's property and equipment, net of accumulated depreciation, categorized by asset type Property and Equipment, Net (August 31, 2024 vs February 29, 2024) | Category | Aug 31, 2024 ($ in thousands) | Feb 29, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------ | :---------------------------- | :---------------------------- | :---------------------- | :--------- | | Land | 124 | 514 | (390) | (75.9)% | | Building | 5,342 | 5,109 | 233 | 4.6% | | Machinery and equipment | 13,110 | 12,509 | 601 | 4.8% | | Total Gross Carrying | 19,560 | 19,187 | 373 | 1.9% | | Less accumulated depreciation | (11,836) | (11,429) | (407) | 3.6% | | Property and equipment, net | 7,724 | 7,758 | (34) | (0.4)% | - Depreciation expense for property and equipment totaled $0.5 million for the six months ended August 31, 2024, compared to $0.4 million in the prior year[43] NOTE 7 – GOODWILL AND INTANGIBLE ASSETS This note provides information on the company's goodwill and intangible assets, including those subject to and not subject to amortization Goodwill and Intangible Assets (August 31, 2024 vs February 29, 2024) | Category | Aug 31, 2024 Gross Carrying Value ($ in thousands) | Feb 29, 2024 Gross Carrying Value ($ in thousands) | | :-------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Intangible assets subject to amortization | 654 | 654 | | Goodwill and intangible assets not subject to amortization | 576 | 576 | | Total Goodwill and Intangible Assets | 1,230 | 1,230 | - Accumulated amortization for intangible assets subject to amortization increased from $(416) thousand at February 29, 2024, to $(430) thousand at August 31, 2024[44] Estimated Annual Amortization of Intangible Assets (as of August 31, 2024) | Fiscal Year | Amount ($ in thousands) | | :---------- | :---------------------- | | 2025 | 27 | | 2026 | 27 | | 2027 | 27 | | 2028 | 27 | | 2029 | 27 | | Thereafter | 89 | | Total | 224 | NOTE 8 – NOTES PAYABLE AND REVOLVING CREDIT LINE This note details the company's credit agreements, including outstanding balances, covenant compliance, and the terms of a new related-party credit facility - As of August 31, 2024, the company had $3.5 million outstanding on a $4.0 million credit line with Wells Fargo Bank N.A., which was repaid on September 30, 2024[46][47] - The company was not in compliance with the Wells Fargo credit agreement's current ratio covenant (1.24:1 vs. required 1.5:1) as of August 31, 2024[47] - On September 30, 2024, the company entered into a new $6.0 million credit agreement with RMC Credit Facility, LLC (a related party), maturing on September 30, 2027, with a 12% annual interest rate[48] - Proceeds from the new credit agreement were used to repay the old credit agreement ($3.5 million) and for continued capital investment and working capital needs[49] - The new credit agreement limits capital expenditures to $3.5 million per year and includes financial covenants for maximum total liabilities to net worth and minimum current ratio[49] NOTE 9 – COMMON STOCK This note describes transactions related to the company's common stock, including private placements, equity incentive plans, and stock-based compensation - On August 5, 2024, the company issued 1,250,000 shares of common stock in a private placement for approximately $2.2 million[50] - The 2024 Equity Incentive Plan was authorized with a total of 1,031,940 shares[51] - Stock-based compensation expense for the six months ended August 31, 2024, was $0.1 million, a decrease from $0.3 million in the prior year[53] Non-vested Restricted Stock Unit Transactions (Six Months Ended August 31, 2024) | Metric | Amount | | :------------------------------------------ | :-------- | | Outstanding at beginning of year | 160,958 | | Granted | 215,182 | | Vested | (21,043) | | Cancelled/forfeited | (252,023) | | Outstanding at August 31 | 103,074 | | Weighted average grant date fair value | $3.62 | | Weighted average remaining vesting period (years) | 2.75 | - All outstanding stock options (17,698) were cancelled/forfeited during the six months ended August 31, 2024[54] NOTE 10 - EARNINGS PER SHARE This note provides details on the calculation of basic and diluted earnings per share, including the weighted average common shares outstanding - Weighted Average Common Shares Outstanding - Basic for the three months ended August 31, 2024, was 6,686,537 shares, and for the six months ended August 31, 2024, was 6,507,323 shares[6] - 960,677 shares reserved for warrants and 103,074 shares underlying unvested restricted stock units and stock options were excluded from diluted EPS computation for the six months ended August 31, 2024, due to their anti-dilutive effect[56] NOTE 11 – LEASING ARRANGEMENTS This note outlines the company's leasing arrangements, including lease expense, discount rates, and maturities of lease liabilities - Lease expense recognized for the six months ended August 31, 2024, was $0.2 million, down from $0.3 million in the prior year[58] - The weighted average discount rate used for operating leases was 3.94% as of August 31, 2024, with a weighted average lease term of 6.2 years[59][61] Maturities of Lease Liabilities (as of August 31, 2024) | Fiscal Year | Amount ($ in thousands) | | :---------- | :---------------------- | | FYE 25 | 513 | | FYE 26 | 420 | | FYE 27 | 185 | | FYE 28 | 113 | | FYE 29 | 71 | | Thereafter | 311 | | Total | 1,613 | | Less: Imputed interest | (152) | | Present value of lease liabilities | 1,461 | NOTE 12 – COMMITMENTS AND CONTINGENCIES This note discloses the company's contractual commitments for raw materials and any material legal proceedings or contingencies - The company frequently enters into 3-18 month purchase contracts for raw materials at fixed prices[63] - As of August 31, 2024, the company was not a party to any legal proceedings expected to have a material adverse effect on its business[64] NOTE 13 - OPERATING SEGMENTS This note presents financial information disaggregated by the company's operating segments, including revenues, profit/loss, and assets Segment Performance (Six Months Ended August 31, 2024) | Metric ($ in thousands) | Franchising | Manufacturing | Retail | Unallocated | Total | | :---------------------- | :---------- | :------------ | :----- | :---------- | :---- | | Total revenues | 2,590 | 9,912 | 716 | - | 13,218 | | Intersegment revenues | - | (431) | - | - | (431) | | Revenue from external customers | 2,590 | 9,481 | 716 | - | 12,787 | | Segment profit (loss) | 747 | (524) | 88 | (2,691) | (2,380) | | Total assets | 1,250 | 14,711 | 533 | 4,636 | 21,130 | | Capital expenditures | - | 965 | - | 569 | 1,534 | | Total depreciation & amortization | 17 | 392 | 6 | 52 | 467 | NOTE 14 - INCOME TAXES This note describes the company's accounting policies for income taxes, including the use of the liability method and valuation allowances - The company uses the liability method for income taxes and establishes a valuation allowance against deferred tax assets when their realization is not more likely than not[71][72] NOTE 15 – DISCONTINUED OPERATIONS This note provides details on the company's discontinued U-Swirl operations, including the sale and financial results - The company completed the sale of its U-Swirl Company-owned locations (February 2023) and franchise rights/intangible assets (May 2023), with all related activities reported as discontinued operations[73] - U-Swirl was fully dissolved by October 31, 2023[74] Results of Discontinued Operations (Six Months Ended August 31) | Metric ($ in thousands) | 2024 | 2023 | | :---------------------- | :--- | :--- | | Total Revenue | - | 212 | | Earnings from discontinued operations, net of tax | - | 704 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, liquidity, and capital resources. It highlights the divestiture of the U-Swirl business, recent financing activities including a private placement and a new credit agreement, and the impact of macroeconomic trends and seasonality on operations. The company reported net losses and faced a going concern issue, which was partially mitigated by the new credit facility Overview This section provides a general introduction to the company's business, recent strategic actions, and key financial events - Rocky Mountain Chocolate Factory, Inc. is an international franchisor, confectionery producer, and retail operator, founded in 1981[81] - The company completed the sale of its U-Swirl frozen yogurt business in May 2023 to focus on its core confectionery franchise[82][83] - On August 5, 2024, the company issued 1,250,000 shares of common stock in a private placement for approximately $2.2 million[83] - On September 30, 2024, the company repaid its old credit agreement and entered into a new $6.0 million credit agreement with RMC Credit Facility, LLC, a related party[84] Current Trends Affecting Our Business and Outlook This section discusses macroeconomic factors, seasonality, and strategic initiatives influencing the company's current performance and future prospects - The company has experienced elevated raw material, labor, and freight costs due to macroeconomic inflationary trends and global supply chain disruptions[85] - Sales are subject to seasonal fluctuations, with the strongest sales historically occurring during key holidays and summer vacation seasons[86] - Continued growth depends on increasing sales of premium chocolate products from the Durango facility, enhancing franchisee performance, growing e-commerce revenue, and expanding new franchised stores[87] Results of Continuing Operations This section analyzes the financial performance of the company's continuing operations for the reported periods Three Months Ended August 31, 2024 Compared To the Three Months Ended August 31, 2023 This section compares the company's financial results for the three months ended August 31, 2024, against the same period in the prior year Results Summary (Three Months Ended August 31) | Metric | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | Change (%) | | :--------------------- | :-------------------- | :-------------------- | :---------------------- | :--------- | | Total Revenue | 6,380 | 6,558 | (178) | (2.7)% | | Loss from Operations | (914) | (1,011) | 97 | 9.6% | | Loss from Continuing Operations | (722) | (999) | 277 | 27.7% | | Basic Loss per Share | (0.11) | (0.16) | 0.05 | 31.3% | Revenue Breakdown (Three Months Ended August 31) | Revenue Type | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | % Change | | :--------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Durango product and retail sales | 4,918 | 5,016 | (98) | (2.0)% | | Franchise fees | 38 | 41 | (3) | (7.3)% | | Royalty and marketing fees | 1,424 | 1,501 | (77) | (5.1)% | | Total | 6,380 | 6,558 | (178) | (2.7)% | - Durango product and retail sales decreased primarily due to lower franchisee demand, a June 1, 2024 price increase, and a lower total store count[91] Gross Margin (Three Months Ended August 31) | Metric | 2024 | 2023 | Change (%) | | :------------------------ | :-------- | :-------- | :--------- | | Total gross margin ($ in thousands) | 568 | 384 | 47.9% | | Gross margin percentage | 11.5% | 7.7% | 50.9% | - Gross margin percentage increased due to higher selling prices and operational efficiencies[97] Costs and Expenses (Three Months Ended August 31) | Expense Category | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | % Change | | :--------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Total cost of sales | 4,350 | 4,632 | (282) | (6.1)% | | Franchise costs | 952 | 614 | 338 | 55.0% | | Sales and marketing | 138 | 442 | (304) | (68.8)% | | General and administrative | 1,622 | 1,687 | (65) | (3.9)% | | Retail operating | 194 | 162 | 32 | 19.8% | | Depreciation and amortization (excl. COGS) | 38 | 32 | 6 | 18.8% | | Total Costs and Expenses | 7,294 | 7,569 | (275) | (3.6)% | - Franchise costs increased due to investments in the franchise development team, while sales and marketing and general and administrative costs decreased due to operational efficiencies and lower legal fees[97][98][99] - Total other income was $192 thousand, including a $0.2 million net gain on asset disposal (sale of equipment offset by U-Swirl promissory note factoring loss)[101] Six Months Ended August 31, 2024 Compared To the Six Months Ended August 31, 2023 This section compares the company's financial results for the six months ended August 31, 2024, against the same period in the prior year Results Summary (Six Months Ended August 31) | Metric | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | Change (%) | | :--------------------- | :-------------------- | :-------------------- | :---------------------- | :--------- | | Total Revenue | 12,787 | 12,994 | (207) | (1.6)% | | Loss from Operations | (2,544) | (2,552) | 8 | 0.3% | | Loss from Continuing Operations | (2,380) | (2,527) | 147 | 5.8% | | Basic Loss per Share | (0.37) | (0.40) | 0.03 | 7.5% | Revenue Breakdown (Six Months Ended August 31) | Revenue Type | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | % Change | | :--------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Durango product and retail sales | 10,197 | 10,032 | 165 | 1.6% | | Franchise fees | 108 | 86 | 22 | 25.6% | | Royalty and marketing fees | 2,482 | 2,876 | (394) | (13.7)% | | Total | 12,787 | 12,994 | (207) | (1.6)% | - Durango product and retail sales increased due to improved franchisee demand, a price increase, and lower year-over-year store count[104] - Royalty and marketing fees decreased due to fewer stores subject to royalty fees, while franchise fees increased due to store ownership transfer fees[105] Gross Margin (Six Months Ended August 31) | Metric | 2024 | 2023 | Change (%) | | :------------------------ | :-------- | :-------- | :--------- | | Total gross margin ($ in thousands) | 261 | 641 | (59.3)% | | Gross margin percentage | 2.6% | 6.4% | (59.9)% | - Gross margin percentage decreased primarily due to increased raw material and labor costs[110] Costs and Expenses (Six Months Ended August 31) | Expense Category | 2024 ($ in thousands) | 2023 ($ in thousands) | Change ($ in thousands) | % Change | | :--------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Total cost of sales | 9,936 | 9,391 | 545 | 5.8% | | Franchise costs | 1,493 | 1,293 | 200 | 15.5% | | Sales and marketing | 568 | 915 | (347) | (37.9)% | | General and administrative | 2,861 | 3,619 | (758) | (20.9)% | | Retail operating | 393 | 265 | 128 | 48.3% | | Depreciation and amortization (excl. COGS) | 80 | 63 | 17 | 27.0% | | Total Costs and Expenses | 15,331 | 15,546 | (215) | (1.4)% | - Franchise costs increased due to investments in building the franchise network, while general and administrative costs decreased due to lower legal and third-party fees related to prior-year proxy solicitation[111][113] - Other income was $164 thousand, primarily from a $0.2 million net gain on asset disposal (sale of equipment offset by U-Swirl promissory note factoring loss)[116] Liquidity and Capital Resources This section discusses the company's ability to meet its short-term and long-term financial obligations, including cash flows, working capital, and financing activities - Working capital increased to $2.1 million as of August 31, 2024, from $1.5 million as of February 29, 2024, driven by asset sales, increased inventory, and assets held for sale[117] - Cash and cash equivalents decreased from $2.1 million to $1.0 million, primarily due to $5.7 million cash used in operating activities during seasonally slow periods and inventory build-up for upcoming holiday sales[118][119] - The current ratio was 1.24:1 as of August 31, 2024, below the required 1.5:1 covenant of the previous credit agreement[118][123] - Net cash provided by financing activities was $4.4 million, including $2.2 million from a revolving line of credit and $2.2 million from common stock issuance[121] - The company secured a new $6.0 million credit agreement with RMC Credit Facility, LLC on September 30, 2024, to repay the old line and support capital investment and working capital needs, addressing the going concern doubt[124][126] Significant Accounting Policies This section confirms that there have been no material changes to the company's significant accounting policies - There have been no material changes to the company's significant accounting policies disclosed in its Annual Report on Form 10-K for the fiscal year ended February 29, 2024[129] Off Balance Sheet Arrangements This section discloses any material off-balance sheet arrangements or obligations, such as purchase commitments - As of August 31, 2024, the company had no material off-balance sheet arrangements or obligations, other than purchase obligations of approximately $2.5 million for raw material inputs[130] Impact of Inflation This section discusses the effects of inflationary pressures on the company's costs and operations - Inflationary factors, such as increases in the costs of ingredients, labor, and lease-related expenses, directly affect the company's operations[85][131] - There is no assurance that the company will be able to pass on increased costs to its customers[131] Seasonality This section explains the seasonal fluctuations in the company's sales and their impact on quarterly results - The company is subject to seasonal fluctuations in sales, with the strongest sales historically occurring during key holidays and the summer vacation season[86][132] - Quarterly results are also affected by the timing of new store openings and sales of franchises[86][132] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Rocky Mountain Chocolate Factory, Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company is not required to provide market risk disclosures as it is a smaller reporting company[133] ITEM 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of August 31, 2024, and reports no material changes in internal control over financial reporting during the quarter Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of the reporting date - The company's disclosure controls and procedures were evaluated and concluded to be effective as of August 31, 2024[135] Changes in Internal Control over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting during the quarter - There were no material changes in the company's internal control over financial reporting during the quarter ended August 31, 2024[136] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity sales ITEM 1. Legal Proceedings The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its business or operations, while acknowledging the potential for routine disputes and litigation - The company is not aware of any pending legal actions that would have a material adverse effect on its business and operations[138] ITEM 1A. Risk Factors Key risk factors include potential limitations on the use of net operating loss carryforwards, the risk of stock price decline due to future sales of privately placed shares, and dilution from future financing. The new credit agreement imposes significant operating and financial restrictions, and the company's ability to service this debt depends on sufficient future cash flow, which is not assured - The company's ability to utilize its net operating loss (NOL) carryforwards may be limited by Section 382 of the Internal Revenue Code or other regulatory changes[140][141] - Future sales of 1,250,000 common shares by private placement investors could cause the market price of the company's common stock to decline[142] - The need for future financing may result in the issuance of additional securities, leading to dilution for existing investors[143] - The new credit agreement imposes operating and financial restrictions, including limits on incurring debt, liens, investments, asset disposal, and capital expenditures (capped at $3.5 million per year)[146] - The credit agreement contains financial covenants requiring compliance with a maximum ratio of total liabilities to total net worth and a minimum current ratio, tested quarterly[147] - Servicing the $6.0 million debt under the new credit agreement may require significant cash flow, and insufficient cash generation could lead to default or onerous refinancing terms[148][149] ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds On August 5, 2024, the company completed an unregistered private placement, selling 1,250,000 shares of common stock for approximately $2.2 million, with proceeds allocated to working capital and general corporate purposes - On August 5, 2024, the company sold 1,250,000 shares of common stock in an unregistered private placement for approximately $2.2 million[151] - The net proceeds were used for working capital and general corporate purposes[151] - The securities were issued in reliance on the exemption from registration requirements provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D[151] ITEM 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[152] ITEM 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[152] ITEM 5. Other Information During the quarter, no Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers. As of October 1, 2024, the company had approximately 435 record holders of its common stock - No Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during the three months ended August 31, 2024[153] - As of October 1, 2024, there were approximately 435 record holders of the company's common stock[154] ITEM 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various agreements and certifications, providing supporting documentation for the report - Exhibits include an Offer Letter, Promissory Note and Security Assignment and Assumption Agreement, Securities Purchase Agreement, Registration Rights Agreement, and certifications (31.1, 31.2, 32.1, 32.2)[155] Signatures The report was duly signed on October 15, 2024, by the Interim Chief Executive Officer and Chief Financial Officer - The report was signed by Jeffrey R. Geygan (Interim Chief Executive Officer) and Carrie E. Cass (Chief Financial Officer) on October 15, 2024[157]