Rocky Mountain Chocolate Factory Inc
For the period ended Aug 31, 2024. Filed Oct 15, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Aug 31, 2024 · Filed Oct 15, 2024
RMCF$0.83+7.1%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-05-31; filed 2024-07-15.
0000950170-24-083642
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-08-31; filed 2024-10-15.
0000950170-24-114671
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 63 previous paragraphs and 96 current paragraphs.
36 unchanged; 23 reworded; 32 added; 4 removed; 0 previous and 5 current paragraphs rearranged.
Tables are not compared: 4 previous and 8 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (32)
Current report
On August 5, 2024, the Company entered into a securities purchase agreement with certain investors, including Steven L. Craig, an existing director of the Company (the “Investors”), pursuant to which, among other things, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Investors in a private placement, an aggregate of 1,250,000 of shares of the Company’s common stock at a price per share equal to $1.75, for total proceeds of approximately $2.2 million. On September 5, 2024, the Company filed a Form S-1 registering the shares sold in the private placement. The Form S-1 was declared effective by the SEC on October 9, 2024 .
Current report
On September 30, 2024, the Company repaid the amount owed under its credit agreement with Wells Fargo Bank N.A. and entered into a new credit agreement (the “New Credit Agreement”) with RMC Credit Facility, LLC (“RMC”). Pursuant to the New Credit Agreement, the Company received an advance in the principal amount of $6.0 million, which advance is evidenced by a promissory note (the “Note”). The Note will mature on September 30, 2027 (the “Maturity Date”), and interest will accrue at a rate of 12% per annum and is payable monthly in arrears. All outstanding principal and interest will be due on the Maturity Date. RMC is a special purpose investment entity affiliated with Steven L. Craig, one of the members of Parent’s board of directors.
Current report
The decrease in Durango product and retail sales of 2.0%, or $0.1 million for the three months ended August 31, 2024 compared to the three months ended August 31, 2023 was primarily due to decreased year-over-year franchisee demand for products purchased from the Durango production facility, in part impacted by a June 1, 2024 price increase to the franchise network, and in part as a result of lower total store count.
Current report
Gross Margin
Current report
Adjusted Gross Margin
Current report
Total gross margin percentage increased to 11.5% for the three months ended August 31, 2024 compared to a gross margin of 7.7% during the three months ended August 31, 2023, due primarily to an increase in selling prices and operational efficiencies.
Current report
The increase in franchise costs for the three months ended August 31, 2024 compared to the three months ended August 31, 2023 was due primarily to investments made in our franchise development team designed to increase franchised store locations as we continue to build our franchise network and identify new sites and franchisees. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 65.1% for the three months ended August 31, 2024 from 39.8% for the three months ended August 31, 2023.
Current report
Retail operating expenses increased 19.8% during the three months ended August 31, 2024 compared to the three months ended August 31, 2023. This increase is primarily the result of the addition of the Corpus Christi location and the acceleration of expenses on a year-over-year basis.
Current report
Total Other Income (Expense)
Current report
Six Months Ended August 31, 2024 Compared To the Six Months Ended August 31, 2023
Current report
Results Summary
Current report
Basic loss per share decreased from a loss from continuing operations of $(0.40) per share for the six months ended August 31, 2023 to a loss from continuing operations of $(0.37) per share for the six months ended August 31, 2024. Revenues decreased by 1.6% from $13.0 million for the six months ended August 31, 2023 to $12.8 million for the six months ended August 31, 2024. Operating loss was $2.6 million for the six months ended August 31, 2023 compared to an operating loss of $2.5 million for the six months ended August 31, 2024. Loss from continuing operations decreased from a loss of $2.5 million for the six months ended August 31, 2023 to a loss of $2.4 million for the six months ended August 31, 2024.
Current report
REVENUES
Current report
Durango Product and Retail Sales
Current report
Royalty and marketing fees decreased $0.4 million during the six months ended August 31, 2024 compared to the six months ended August 31, 2023, primarily due to a decrease in stores year over year that are subject to royalty fees. The increase in franchise fee revenue of $22 thousand during the six months ended August 31, 2024 compared to the six months ended August 31, 2023 was primarily the result of an increase in store ownership transfer fees received in the current year.
Current report
COSTS AND EXPENSES
Current report
Gross Margin
Current report
Adjusted Gross Margin
Current report
Non-GAAP Measures
Current report
Franchise Costs
Current report
Sales and Marketing
Current report
The decrease in sales and marketing costs during the six months ended August 31, 2024 compared to the six months ended August 31, 2023 was due primarily to operational efficiencies and in part to timing of anticipated expenses.
Current report
General and Administrative
Current report
Retail Operating Expenses
Current report
Depreciation and Amortization
Current report
Other income was $164 thousand during the six months ended August 31, 2024, compared to other income of $25 thousand during for the six months ended August 31, 2023. This was primarily due to a net gain on the disposal of assets for $0.2 million during the six months ended August 31, 2024 relating to gain on sale of equipment of $0.5 million offset by loss on the factoring of the U-Swirl promissory note of $0.3 million. In addition, there was interest income of $14 thousand for the six months ended August 31, 2024 compared to $38 thousand for the six months ended August 31, 2023, and interest expense of $98 thousand for the six months ended August 31, 2024 compared to $13 thousand during for the six months ended August 31, 2023.
Current report
As of August 31, 2024, working capital was $2.1 million compared with $1.5 million as of February 29, 2024. The increase in working capital was due primarily to the sale of our non-strategic operating assets, additional inventory on hand to support upcoming holidays sales, and assets held for sale. In addition, the Company drew down $2.2 million on its line of credit and received $2.2 million from the issuance of common stock. These proceeds were used in part to build up our inventory in advance of the upcoming holiday sales.
Current report
Revolving Line of Credit and New Credit Agreement
Current report
On September 30, 2024, the Company entered into a new credit agreement (the “New Credit Agreement”) with RMC Credit Facility, LLC ("RMC"). Pursuant to the New Credit Agreement, the Company received an advance in the principal amount of $6.0 million, which advance is evidenced by a promissory note (the “Note”). The Note will mature on September 30, 2027 (the “Maturity Date”), and interest will accrue at a rate of 12% per annum and is payable monthly in arrears. All outstanding principal and interest will be due on the Maturity Date. The New Credit Agreement is collateralized by the Company’s Durango real estate property and the related inventory and property, plant and equipment located on that property, as well as the Company’s accounts receivable and cash accounts.
Current report
In connection with the New Credit Agreement and the Note, the Company entered into a Deed of Trust with RMC and the Public Trustee of La Plata County, Colorado with respect to the Company’s property in Durango, Colorado. RMC is a special purpose investment entity affiliated with Steven L. Craig, one of the members of Parent’s board of directors.
Current report
The proceeds of the New Credit Agreement were and will be used as follows: (i) $3.5 million was used to repay the Credit Agreement and (ii) the remaining balance will be used for continued capital investment and working capital needs. The New Credit Agreement contains customary events of default, including nonpayment of principal and interest when due, failure to comply with covenants, and a change of control of the Company, as well as customary affirmative and negative covenants, including, without limitation, certain reporting obligations and certain limitations on liens, encumbrances, and indebtedness. The New Credit Agreement also limits our capital expenditures to $3.5 million per year and contains two financial covenants measured quarterly: a maximum ratio of total liabilities to total net worth and a minimum current ratio.
Current report
On August 5, 2024, the Company entered into a securities purchase agreement with certain investors, including Steven L. Craig, an existing director of the Company (the “Investors”), pursuant to which, among other things, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Investors in a private placement, an aggregate of 1,250,000 of shares of the Company’s common stock at a price per share equal to $1.75, for total proceeds of approximately $2.2 million. On September 5, 2024, the Company filed a Form S-1 registering the shares sold in the private placement. The Form S-1 was declared effective by the SEC on October 9, 2024.
Removed paragraphs (4)
Previous report
As of May 31, 2024, working capital was $0.8 million compared with $1.5 million as of February 29, 2024. The decrease in working capital was due primarily to a strategic reduction of inventory on hand, commensurate with the current product assortments actively marketed by us and our franchisees, and continued capital investment in the Durango production facility.
Previous report
Revolving Line of Credit
Previous report
As a result of our noncompliance, under the terms of the Credit Agreement, the Lender has the option, but not the obligation, to immediately demand repayment of all funds drawn down under the Credit Line. As of May 31, 2024 and as of the date of this Quarterly Report, we did not have enough cash on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. Additionally, if the Lender exercises its option and demands repayment at some time in the future, we may not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the Lender may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement.
Previous report
The Lender also retains the right to act on covenant violations that occur after the date of delivery of any waiver. If the Lender were to decline to grant us a waiver and instead demand repayment in the future, we may need to seek alternative financing to pay these obligations as the Company may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.
Reworded paragraphs (23)
Previous wording
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”) (referred to as the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery producer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolate products and other confectionery products (“Durango Products”). Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionery products including gourmet caramel apples. We also sell our confectionery products in select locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of May 31, 2024, there was 2 Company-owned, 115 licensee-owned and 147 franchised Rocky Mountain Chocolate Factory stores operating in 36 states and the Philippines.
Current wording
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”) (referred to as the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery producer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolate products and other confectionery products. Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionery products including gourmet caramel apples. We also sell our confectionery products in select locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of August 31, 2024, there was 2 Company-owned, 114 licensee-owned and 147 franchised Rocky Mountain Chocolate Factory stores operating in 36 states and the Philippines.
Previous wording
As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs. We have seen labor and logistics challenges, which have contributed to lower factory, retail and e-commerce sales of our products due to the availability of material, labor and freight. In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our production facility, or if we or our franchisees experience delays in stocking our products.
Current wording
As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced elevated raw material, labor, and freight costs. We continue to experience, although at a decelerating pace, labor and logistics challenges, which have contributed to lower factory, retail and e-commerce sales. In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, or if we or our franchisees experience delays in stocking our products.
Previous wording
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in high traffic areas such as resorts or tourist locations, and the nature of the products we sell, which are highly seasonal. Historically, the strongest sales of our products have occurred during key holidays and summer vacation seasons. Additionally, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Current wording
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in high traffic areas such as resorts or tourist locations, and the nature of the products we sell, which are seasonal. Historically, the strongest sales of our products have occurred during key holidays and summer vacation seasons. Additionally, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sales of new franchise locations. Because of the seasonality of our business and the impact of new store openings and sales of new franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Previous wording
The most important factors in continued growth in our earnings are our ability to increase the sales of premium chocolate products produced in our Durango production facility, the ability to produce more efficiently, supporting our franchisees in increasing the frequency and average value of customer transactions, ongoing online revenue growth, and franchise store growth.
Current wording
The most important factors for continued growth in our earnings are our ability to increase the sales of premium chocolate products produced in our Durango production facility, and the support of our franchisees in increasing the frequency of customer visits and the average value of each customer transaction, along with ongoing e-commerce revenue growth, and new franchised store growth.
Previous wording
Our ability to successfully achieve expansion of our franchise systems depends on many factors not within our control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion.
Current wording
Our ability to successfully achieve expansion of our franchise systems depends on many factors not within our control including the availability of suitable sites for new store locations and the availability of qualified franchisees to support our expansion plans.
Previous wording
Basic loss per share increased from a loss from continuing operations of $(0.24) per share for the three months ended May 31, 2023 to a loss from continuing operations of $(0.26) per share for the three months ended May 31, 2024. Revenues decreased by 0.5% from $6.4 million for the three months ended May 31, 2023 to $6.4 million for the three months ended May 31, 2024. Operating loss was $1.5 million for the three months ended May 31, 2023 compared to an operating loss of $1.6 million for the three months ended May 31, 2024. Loss from continuing operations increased from a loss of $1.5 million for the three months ended May 31, 2023 to a loss of $1.7 million for the three months ended May 31, 2024.
Current wording
Basic loss per share decreased from a loss from continuing operations of $(0.16) per share for the three months ended August 31, 2023 to a loss from continuing operations of $(0.11) per share for the three months ended August 31, 2024. Revenues decreased by 2.7% from $6.6 million for the three months ended August 31, 2023 to $6.4 million for the three months ended August 31, 2024. Operating loss was $1.0 million for the three months ended August 31, 2023 compared to an operating loss of $0.9 million for the three months ended August 31, 2024. Loss from continuing operations decreased from a loss of $1.0 million for the three months ended August 31, 2023 to a loss of $0.7 million for the three months ended August 31, 2024.
Previous wording
Royalty and marketing fees decreased $0.3 million during the three months ended May 31, 2024 compared to the three months ended May 31, 2023, primarily due to a decrease in stores year over year that are subject to royalty fees. The increase in franchise fee revenue of $25 thousand during the three months ended May 31, 2024 compared to the three months ended May 31, 2023 was primarily the result of store ownership transfer fees received.
Current wording
Royalty and marketing fees decreased $0.1 million during the three months ended August 31, 2024 compared to the three months ended August 31, 2023, primarily due to a decrease in stores year over year that are subject to royalty fees. The decrease in franchise fee revenue of $3 thousand during the three months ended August 31, 2024 compared to the three months ended August 31, 2023 was not material.
Previous wording
The decrease in sales and marketing costs during the three months ended May 31, 2024 compared to the three months ended May 31, 2023 was due primarily to operational efficiencies and cost cutting measures.
Current wording
The decrease in sales and marketing costs during the three months ended August 31, 2024 compared to the three months ended August 31, 2023 was due in part due to operational efficiencies and cost cutting measures and in part due to timing of anticipated expenses.
Previous wording
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales was $42 thousand during the three months ended May 31, 2024, an increase of 35.5% from $31 thousand during the three months ended May 31, 2023. Depreciation and amortization included in cost of sales increased 14.6% from $0.2 million during the three months ended May 31, 2023 to $0.2 million during the three months ended May 31, 2024. This increase was the result of investment in production equipment.
Current wording
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales was $38 thousand during the three months ended August 31, 2024, an increase of 18.8% from $32 thousand during the three months ended August 31, 2023. Depreciation and amortization included in cost of sales increased 3.8% from $0.2 million during the three months ended August 31, 2023 to $0.2 million during the three months ended August 31, 2024. This increase was the result of investment in production equipment.
Previous wording
Other income (expense) was $(28) thousand during the three months ended May 31, 2024, compared to other income of $14 thousand during for the three months ended May 31, 2023. This represents interest income of $7 thousand for the three months ended May 31, 2024 compared to $20 thousand for the three months ended May 31, 2023, and interest expense of $35 thousand for the three months ended May 31, 2024 compared to $6 thousand during for the three months ended May 31, 2023.
Current wording
Total other income was $192 thousand during the three months ended August 31, 2024, compared to other income of $12 thousand during for the three months ended August 31, 2023. A net gain on the disposal of assets for $0.2 million during the three months ended August 31, 2024 is included in total other income relating to sale of equipment of $0.5 million offset by loss on the factoring of the U-Swirl promissory note of $0.3 million. In addition, there was interest income of $7 thousand for the three months ended August 31, 2024 compared to $18 thousand for the three months ended August 31, 2023, and interest expense of $63 thousand for the three months ended August 31, 2024 compared to $6 thousand during for the three months ended August 31, 2023.
Previous wording
The increase in Durango product and retail sales of 5.2%, or $0.3 million for the three months ended May 31, 2024 compared to the three months ended May 31, 2023 was primarily due to improved year over year franchisee demand and improved inventory management.
Current wording
The increase in Durango product and retail sales of 1.6%, or $0.2 million for the six months ended August 31, 2024 compared to the six months ended August 31, 2023 was primarily due to improved year-over-year franchisee demand, a June 1, 2024 price increase to the network of stores, and lower year-over-year store count.
Previous wording
Total gross margin percentage decreased to (5.8)% for the three months ended May 31, 2024 compared to a gross margin of 5.1% during the three months ended May 31, 2023, due primarily to increased raw material and labor costs.
Current wording
Total gross margin percentage decreased to 2.6% for the six months ended August 31, 2024 compared to a gross margin of 6.4% during the six months ended August 31, 2023, due primarily to increased raw material and labor costs.
Previous wording
The decrease in franchise costs for the three months ended May 31, 2024 compared to the three months ended May 31, 2023 was due primarily to operational efficiencies, but we continue to build our franchise network as we focus on identifying new franchisees. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 48.0% for the three months ended May 31, 2024 from 47.9% for the three months ended May 31, 2023. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of higher royalty fees partially offset by higher costs.
Current wording
The increase in franchise costs for the six months ended August 31, 2024 compared to the six months ended August 31, 2023 was due primarily to increased costs to build our franchise network as we focus on identifying new store sites and franchisees. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 57.6% for the six months ended August 31, 2024 from 43.7% for the six months ended August 31, 2023.
Previous wording
The decrease in general and administrative costs during the three months ended May 31, 2024 compared to the three months ended May 31, 2023, was due primarily to a decrease in legal fees that were incurred in the prior year related to contested solicitation of proxies. As a percentage of total revenues, general and administrative expenses decreased to 19.3% during the three months ended May 31, 2024, compared to 30.0% during the three months ended May 31, 2023.
Current wording
The decrease in general and administrative costs during the six months ended August 31, 2024 compared to the six months ended August 31, 2023, was due primarily to a decrease in legal and third-party fees that were incurred in the prior year related to contested solicitation of proxies. As a percentage of total revenues, general and administrative expenses decreased to 22.4% during the six months ended August 31, 2024, compared to 27.9% during the six months ended August 31, 2023.
Previous wording
Retail operating expenses increased 93.2% during the three months ended May 31, 2024 compared to the three months ended May 31, 2023. This increase is primarily the result of two retail stores in the current year with the addition of the Corpus Christi location.
Current wording
Retail operating expenses increased 48.3% during the six months ended August 31, 2024 compared to the six months ended August 31, 2023. This increase is primarily the result of the addition of the Corpus Christi location.
Previous wording
Cash and cash equivalent balances decreased from $2.1 million as of February 29, 2024 to $0.6 million as of May 31, 2024 primarily as a result of cash used by operating activities. Our current ratio was 1.10 to 1.0 on May 31, 2024 compared to 1.19 to 1.0 on February 29, 2024. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
Current wording
Cash and cash equivalent balances decreased from $2.1 million as of February 29, 2024 to $1.0 million as of August 31, 2024 primarily as a result of cash used by operating activities during our seasonally slow selling periods, and a time in our annual business cycle in which we build inventory to meet elevated demand during our subsequent seasonally high selling periods. Our current ratio was 1.24 to 1.0 on August 31, 2024 compared to 1.19 to 1.0 on February 29, 2024. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements necessary to implement our long-term business plan.
Previous wording
During the three months ended May 31, 2024, we had a consolidated net loss of $1.7 million. Operating activities used cash of $2.2 million, with the principal adjustment to reconcile net income to net cash used in operating activities being depreciation and amortization of $0.2 million. Changes in operating assets and liabilities resulted in a net cash outflow of $0.8 million from cash used in the normal course of business. During the three months ended May 31, 2023, we had a consolidated net loss of $0.8 million. Operating activities used cash of $0.4 million, with the principal adjustment to reconcile net income to net cash used in operating activities being depreciation and amortization of $0.2 million, and stock compensation expense of $0.2 million.
Current wording
During the six months ended August 31, 2024, we had a consolidated net loss of $2.4 million. Operating activities used cash of $5.7 million, with the principal adjustment to reconcile net income to net cash used in operating activities being depreciation and amortization of $0.5 million and a gain on sale of assets of $0.2 million. Changes in operating assets and liabilities resulted in a net cash outflow of $5.7 million from cash used in the normal course of business. During the six months ended August 31, 2023, we had a consolidated net loss of $1.8 million. Operating activities used cash of $1.0 million, with the principal adjustment to reconcile net income to net cash used in operating activities being depreciation and amortization of $0.4 million, and stock compensation expense of $0.3 million.
Previous wording
During the three months ended May 31, 2024, investing activities used cash of $(38) thousand, primarily due to the purchases of property and equipment of $0.4 million. In comparison, investing activities provided for cash of $0.9 million during the three months ended May 31, 2023, primarily due cash flows from discontinued operations of $1.4 million, partially offset by purchases of property and equipment of $0.6 million.
Current wording
During the six months ended August 31, 2024, cash flows from investing activities was $0.2 million, primarily due to the purchases of property and equipment of $1.5 million, offset by proceeds from sale of assets of $1.6 million. In comparison, investing activities provided for cash of $0.2 million during the six months ended August 31, 2023, primarily due cash flows from discontinued operations of $1.4 million, partially offset by purchases of property and equipment of $1.3 million.
Previous wording
There were $0.8 million cash flows from financing activities during the three months ended May 31, 2024 compared to no cash flows from financing activities during the prior year. The Company drew down $0.8 million on its revolving line of credit during the three months ended May 31, 2024 as discussed further below.
Current wording
There were $4.4 million cash flows from financing activities during the six months ended August 31, 2024 compared to no cash flows from financing activities during the six months ended August 31, 2023. The Company received $2.2 million on its revolving line of credit during the six months ended August 31, 2024 as discussed further below, in addition to proceeds of $2.2 million from the issuance and sale of common stock.
Previous wording
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $2.0 million was available for borrowing (subject to certain borrowing-based limitations) as of May 31, 2024 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.71% at May 31, 2024 and 7.69% at February 29, 2024). Additionally, the Credit Line is subject to various financial ratio and leverage covenants. Per the Credit Agreement, the maturity date is September 30, 2024.
Current wording
Pursuant to a credit agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank N.A. (the “Lender”), we have a $4.0 million credit line for general corporate and working capital purposes, of which $0.6 million was available for borrowing (subject to certain borrowing-based limitations) as of August 31, 2024 (the “Credit Line”). The Credit Line is secured by substantially all of our assets, except retail store assets. Interest on borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.69% at August 31, 2024 and 7.69% at February 29, 2024). Additionally, the Credit Line is subject to various financial ratio and leverage covenants. Per the Credit Agreement, the maturity date is September 30, 2024.
Previous wording
As of May 31, 2024 we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of May 31, 2024 was 1.10 to 1. The Company has requested a waiver from the Lender regarding its compliance with this covenant, however no assurance can be given that the Lender will issue a waiver. Except as described above, we were in compliance with all other aspects of the Credit Agreement.
Current wording
As of August 31, 2024 we were not in compliance with the requirement under the Credit Agreement to maintain a ratio of total current assets to total current liabilities of at least 1.5 to 1. Our current ratio as of August 31, 2024 was 1.24 to 1. The Company repaid this agreement on September 30, 2024 as discussed below and terminated the Credit Agreement.
Previous wording
The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from the Lender and/or amending our Credit Line facility. We are also exploring supplemental debt facilities for other operational activities which could give us the ability to repay the Credit Line as needed.
Current wording
The Company will continue to explore additional means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from our lenders.
Previous wording
As of May 31, 2024, we had purchase obligations of approximately $0.3 million. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Current wording
As of August 31, 2024, we had purchase obligations of approximately $2.5 million. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Rearranged current paragraphs (5)
Current report — wording carried from elsewhere
The decrease in general and administrative costs during the three months ended August 31, 2024 compared to the three months ended August 31, 2023, was due primarily to a decrease in legal and third-party fees. As a percentage of total revenues, general and administrative expenses decreased to 25.4% during the three months ended August 31, 2024, compared to 25.7% during the three months ended August 31, 2023.
Current report — wording carried from elsewhere
Royalties, Marketing Fees and Franchise Fees
Current report — wording carried from elsewhere
In addition to the results provided in accordance with GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP. Adjusted gross margin is a non-GAAP measure. Adjusted gross margin is equal to the sum of our total gross margin plus depreciation and amortization calculated in accordance with GAAP. We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin, and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin is useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin rather than gross margin to make incremental pricing decisions. Adjusted gross margin has limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin.
Current report — wording carried from elsewhere
Cost of Sales and Gross Margin
Current report — wording carried from elsewhere
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales was $80 thousand during the six months ended August 31, 2024, an increase of 27.0% from $63 thousand during the six months ended August 31, 2023. Depreciation and amortization included in cost of sales increased 9.0% from $0.4 million during the six months ended August 31, 2023 to $0.4 million during the six months ended August 31, 2024. This increase was the result of investment in production equipment.