Rocky Mountain Chocolate Factory(RMCF) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements 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 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 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 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 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] - The decrease was primarily due to a consolidated net loss of $2,579,448, partially offset by stock-based compensation of $490,802[19] Notes to Interim (Unaudited) Consolidated Financial Statements 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][88][92] - 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][54][144] - 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] 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 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][112][131] - 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][144] 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 - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[154] Controls and Procedures 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] - 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] - 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] PART II. OTHER INFORMATION Legal Proceedings 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][161] Risk Factors 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] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[164] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[164] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[164] Other Information The company reported no other information for this item - None[165] Exhibits 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] - Other exhibits include the Third Amended and Restated Bylaws and the Second Amendment to the Credit Agreement with Wells Fargo Bank[169]