Rocky Mountain Chocolate Factory(US:RMCF)2025-06-20 20:43Part I Item 1. Business Rocky Mountain Chocolate Factory is an international franchisor and confectionery producer, operating 260 stores and generating revenue from product sales, royalties, and company-owned stores - As of February 28, 2025, the company's network consisted of 2 Company-owned stores, 141 franchised stores, and 117 licensee-owned stores, totaling 260 locations across 27 states and the Philippines10240 - The company operates co-branding partnerships, with 107 locations operated by Cold Stone Creamery franchisees and 10 by U-Swirl (SWRL) franchisees as of February 28, 2025273637 - A revised franchise agreement effective after July 1, 2023, offers a tiered royalty rate from 6% down to 4%, based on the sales mix of company-produced products, to incentivize franchisees to sell more Durango-made items46 - The company's Durango production facility produced approximately 2.05 million pounds of chocolate products in FY 2025, a 27% increase from the 1.61 million pounds produced in FY 2024156 FY 2025 Revenue Sources | Revenue Source | Percentage of Total Revenue | | :--- | :--- | | Sales of confectionery products to franchisees/third parties | 76% | | Sales at Company-owned stores | 5% | | Franchise royalties and marketing fees | 19% | Item 1A. Risk Factors The company faces substantial doubt about its going concern ability due to net losses, negative cash flow, and debt covenant violations, alongside various operational and market risks - The auditor's report for the fiscal year ended February 28, 2025, contains an explanatory paragraph expressing substantial doubt about the company's ability to continue as a going concern due to a net loss of $6.1 million and negative operating cash flow of $6.6 million122124 - As of February 28, 2025, the company was in violation of two covenants in its $6.0 million Credit Agreement: the ratio of total liabilities to tangible net worth was 2.21 to 1 (limit is 2.0 to 1), and capital expenditures were $3.7 million (limit is $3.5 million)126127204 - Sales to Specialty Market customers (outside the franchise system) are concentrated, representing approximately $3.7 million or 12% of total revenue in FY 202585 - The company's growth is highly dependent on its ability to attract and retain qualified franchisees and their ability to operate stores successfully8788 - The business is subject to risks from macroeconomic factors, including public health outbreaks, economic weakness that reduces discretionary spending, and changes in trade policies or tariffs that could increase costs131134138 Item 1.B Unresolved Staff Comments The company reports that there are no unresolved staff comments - None149 Item 1.C Cybersecurity The company manages cybersecurity risks through integrated processes, including firewalls and consultants, with Board oversight, and has not experienced material incidents - The company's cybersecurity risk management is integrated into its overall risk management system and includes the use of firewalls, antivirus software, and third-party consultants150 - The Board's Audit Committee is responsible for overseeing cybersecurity risks, and the interim CEO and CFO communicate daily with the IT department to monitor threats152154 - To date, the company has not experienced any material cybersecurity incidents that have significantly affected its business, operations, or financial condition151 Item 2. Properties The company owns a 53,000 square foot manufacturing and headquarters facility in Durango, Colorado, and leases its two company-owned stores - The company owns its 53,000 square foot manufacturing and headquarters facility in Durango, Colorado156 - In July 2024, the company sold an unused parcel of land in Durango for approximately $0.9 million156 - As of February 28, 2025, the company had lease obligations for its two Company-owned stores in Durango, CO and Corpus Christi, TX157 Item 3. Legal Proceedings The company is not aware of any pending legal actions expected to have a material adverse effect on its business - The company is not a party to any legal proceedings expected to have a material adverse effect on its business159338 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable161 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'RMCF', with no current intention to pay cash dividends - The company's common stock is listed on the Nasdaq Global Market under the symbol "RMCF"162 - The company has no present intention of paying a cash dividend on its common stock163 Item 6. Reserved This item is reserved Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 5.8% revenue increase to $29.6 million in FY 2025, alongside increased operating losses, declining gross margin, and liquidity concerns raising going concern doubts - Gross margin significantly decreased to 0.4% in FY 2025 from 6.2% in FY 2024, primarily due to a sharp increase in cocoa costs, other inflationary pressures, and a $1.5 million negative impact from an unsuccessful attempt to relocate consumer packaging operations183186 - Royalty and marketing fees decreased by 6.7% in FY 2025, mainly because of new, more favorable franchise agreements designed to encourage franchisees to sell more company-produced products179182 - The company's financial condition raises substantial doubt about its ability to continue as a going concern. Working capital increased to $2.4 million, but cash and cash equivalents decreased from $2.1 million to $0.7 million194195199 - In September 2024, the company secured a new $6.0 million, 3-year credit agreement at 12% interest, using the proceeds to repay a $3.5 million Wells Fargo facility and for working capital171200204 Fiscal Year 2025 vs 2024 Performance Summary | Metric | FY 2025 ($) | FY 2024 ($) | Change ($) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $29.6M | $28.0M | +$1.6M | +5.8% | | Operating Loss | ($5.9M) | ($4.9M) | ($1.0M) | +20.4% | | Loss from Continuing Operations | ($6.1M) | ($4.9M) | ($1.2M) | +24.5% | | Basic Loss per Share | ($0.86) | ($0.77) | ($0.09) | +11.7% | Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide the information for this item - Not required for smaller reporting companies212 Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements for FY2025 and FY2024, including an auditor's report expressing substantial doubt about going concern due to a $6.1 million net loss and declining equity - The Report of Independent Registered Public Accounting Firm includes a paragraph stating: "The Company has incurred recurring losses and negative cash flows from operations... all of which raise substantial doubt about the Company's ability to continue as a going concern"219 - Note 15 details the divestiture of the U-Swirl business in FY 2024, which resulted in a gain on disposal of $635,000 and total consideration of $2.758 million ($1.75 million cash and a $1.0 million note)354357 Consolidated Statements of Operations (in thousands) | | FY 2025 ($) | FY 2024 ($) | | :--- | :--- | :--- | | Total Revenue | $29,579 | $27,951 | | Total costs and expenses | $35,521 | $32,853 | | Loss from Operations | ($5,942) | ($4,902) | | Loss from Continuing Operations | ($6,122) | ($4,876) | | Net Loss | ($6,122) | ($4,172) | | Basic & Diluted Loss per Share | ($0.86) | ($0.66) | Consolidated Balance Sheets (in thousands) | | Feb 28, 2025 ($) | Feb 29, 2024 ($) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $720 | $2,082 | | Total current assets | $9,223 | $9,602 | | Total Assets | $21,175 | $20,577 | | Liabilities & Equity | | | | Total current liabilities | $6,869 | $8,072 | | Note payable | $5,957 | $0 | | Total Liabilities | $14,200 | $9,941 | | Total stockholders' equity | $6,975 | $10,636 | Consolidated Statements of Cash Flows (in thousands) | | FY 2025 ($) | FY 2024 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | ($6,595) | ($2,435) | | Net cash used in investing activities | ($1,655) | ($1,450) | | Net cash provided by financing activities | $6,888 | $1,250 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None358 Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of February 28, 2025 - Management concluded that the company's disclosure controls and procedures were effective as of February 28, 2025360 - Management concluded that the company's internal control over financial reporting was effective as of February 28, 2025, based on the COSO 2013 framework361 Item 9B. Other Information The company reports that none of its directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fourth quarter of fiscal year 2025 - No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement in the fourth quarter ended February 28, 2025364 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable365 Part III Item 10. Directors, Executive Officers and Corporate Governance The information required for this item, including details on directors, executive officers, and corporate governance, is incorporated by reference from the company's definitive proxy statement for its 2025 Annual Meeting of Stockholders - Information is incorporated by reference from the Proxy Statement for the 2025 Annual Meeting of Stockholders366 Item 11. Executive Compensation The information required for this item regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its 2025 Annual Meeting of Stockholders - Information is incorporated by reference from the Proxy Statement for the 2025 Annual Meeting of Stockholders368 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2025 proxy statement, detailing equity compensation plan data as of February 28, 2025 Equity Compensation Plan Information as of February 28, 2025 | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 235,664 | $ - | 656,465 | | Equity compensation plans not approved by stockholders | 0 | 0 | 0 | | Total | 235,664 | $ - | 656,465 | Item 13. Certain Relationships and Related Transactions, and Director Independence The information required for this item, covering related party transactions and director independence, is incorporated by reference from the company's definitive proxy statement for its 2025 Annual Meeting of Stockholders - Information is incorporated by reference from the Proxy Statement for the 2025 Annual Meeting of Stockholders371 Item 14. Principal Accountant Fees and Services The information required for this item regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2025 Annual Meeting of Stockholders - Information is incorporated by reference from the Proxy Statement for the 2025 Annual Meeting of Stockholders372 Part IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits, including the auditor's report and a valuation and qualifying accounts schedule Schedule II - Valuation and Qualifying Accounts (in thousands) | Description | Balance at Beginning of Period ($) | Additions Charged to Costs & Exp. ($) | Deductions ($) | Balance at End of Period ($) | | :--- | :--- | :--- | :--- | :--- | | Year Ended Feb 28, 2025 | | | | | | Valuation Allowance for Accounts and Notes Receivable | $362 | $53 | $80 | $335 | | Year Ended Feb 29, 2024 | | | | | | Valuation Allowance for Accounts and Notes Receivable | $764 | $113 | $515 | $362 | Item 16. Form 10-K Summary This item is not applicable - Not applicable383