Rocky Mountain Chocolate Factory Inc

Current report

As of February 29, 2024, we had U.S. federal net operating loss (“NOL”) carryforwards of $14.5 million and various state NOLs, which we may use to reduce future taxable income. We have established a valuation allowance against the carrying value of these deferred tax assets. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future taxable income.

Current report

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) a corporation that undergoes an “ownership change” (i.e., a more-than 50% ownership change by one or more stockholders or groups of stockholders who own at least 5% of a company’s stock over a three-year testing period) is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. Changes in our stock ownership, some of which are outside of our control, could also result in limitations under Section 382 of the Code. Our NOLs may also be limited under similar provisions of state law. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs.

Current report

The sale of shares of our common stock acquired by purchasers in private placement transactions could cause the price of our common stock to decline.

Current report

We have registered for sale by investors in a private placement transaction (the “Selling Stockholders”) up to 1,250,000 shares of our common stock. Depending on a variety of factors, including market liquidity of our common stock, the sale of shares by the Selling Stockholders may cause the trading price of our common stock to decline.

Current report

Our cash requirements may vary from those now planned, depending upon numerous factors. Accordingly, we may need to obtain additional funding in connection with our continuing operations. There are no other commitments by any person for future financing. Our securities may be offered to other investors at a price lower than the price per share offered to current stockholders, or upon terms which may be deemed more favorable than those offered to current stockholders. In addition, the issuance of securities in any future financing may dilute an investor’s equity ownership and have the effect of depressing the market price for our securities. Moreover, we may issue securities from time to time to procure qualified personnel or for other business reasons. The issuance of any such securities, which is at the discretion of our board of directors, may further dilute the equity ownership of our stockholders.

Current report

Our Amended and Restated Certificate of Incorporation authorizes the issuance of 46,000,000 shares of common stock and 250,000 shares of preferred stock. In certain circumstances, our common stock, as well as the awards available for issuance under our equity incentive plans, can be issued by our board of directors without stockholder approval. Any future issuances of such stock would further dilute the percentage ownership of us held by holders of preferred stock and common stock. In addition, the issuance of certain securities, including pursuant to the terms of our stockholder rights plan, may be used as an “anti-takeover” device without further action on the part of our stockholders, and may adversely affect the holders of the common stock.

Current report

Future sales of shares of common stock could cause the market price for our common stock to decline.

Current report

We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of shares of common stock in the public market, or the perception that those sales will occur, could cause the market price of our common stock to decline or be depressed.

Current report

Our Credit Agreement imposes operating and financial restrictions on us.

Current report

On September 30, 2024, we entered into a credit agreement with RMC Credit Facility, LLC (the “Credit Agreement”), which is secured by certain personal property and real property of the Company. The Credit Agreement contains covenants that limit the ability of the Company to:

Current report

incur and guarantee additional debt;

Current report

incur liens;

Current report

make acquisitions and other investments;

Current report

dispose of assets; or

Current report

make capital expenditures in any fiscal year in excess of $3.5 million.

Current report

Further, the Credit Agreement contains financial covenants that require compliance with a maximum ratio of total liabilities to total net worth and a minimum current ratio, in each case tested at the end of each fiscal quarter. These covenants may adversely affect our ability to finance our operations, meet or otherwise address our capital needs, pursue business opportunities or react to market conditions, or otherwise restrict our activities or business plans. We cannot assure you that we will be able to comply with any such restrictive covenants. A breach of any of these covenants could result in an event of default under the Credit Agreement. In the event that we are unable to comply with these covenants in the future, we would seek an amendment or waiver of the covenants. We cannot assure you that any such waiver or amendment would be granted. If an event of default occurs, the lender may elect to accelerate our obligations under the Credit Agreement. We might not be able to repay our debt or borrow sufficient funds to refinance it on terms that are acceptable to us or at all.

Current report

Servicing our debt under Credit Agreement may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay all of our indebtedness.

Current report

As of September 30, 2024, we had $6.0 million principal amount outstanding under our Credit Agreement. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness under the Credit Agreement depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Additionally, the Credit Agreement contains, and any of our future debt agreements may also contain, restrictive covenants that may prohibit us from adopting some or any of these alternatives. For example, the Credit Agreement contains negative covenants that restrict the Company’s ability to incur indebtedness, create liens, make investments, dispose of assets and make certain capital expenditures. Our failure to comply with these covenants could result in an event of default under our indebtedness which, if not cured or waived, could result in the acceleration of our debt under the Credit Agreement.

Current report

require a portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital and capital expenditures, and for other general corporate purposes;

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, 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. The net proceeds raised were used for working capital and general corporate purposes.

Current report

The securities issued and sold to the Investors were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued and sold in reliance on the exemption from registration requirements thereof provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D as promulgated by the SEC under the Securities Act.

Previous report

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.

Previous report

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. In the past, we have requested, and the Lender has granted, waivers of our compliance with this requirement. There can be no assurance that the Lender will grant us a waiver for our current noncompliance or waivers for future noncompliance.

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 the date of this Quarterly Report, we do not have enough cash on hand to satisfy our obligations under the Credit Line if the Lender exercised its option to demand repayment. If the Lender exercises its option and demands repayment at some time in the future, however, 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 which would have an adverse effect on our liquidity, financial condition and results of operations.

Previous report

In addition, the Lender 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 we may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.

Previous report

None.