Rocky Mountain Chocolate Factory Inc

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. 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.

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 November 30, 2024, there were 2 Company-owned, 116 licensee-owned and 146 franchised Rocky Mountain Chocolate Factory stores operating in 35 states and the Philippines.

Previous wording

On May 1, 2023, subsequent to the end of ("fiscal year") FY 2023, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiary and frozen yogurt business, U-Swirl International, Inc. The aggregate sale price of U-Swirl was $2.75 million, consisting of (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year secured promissory note. The business divestiture of the U-Swirl segment was preceded by a separate sale of the Company’s three owned U-Swirl locations on February 24, 2023. The consolidated financial statements present the historical financial results of the former U-Swirl segment as discontinued operations for all periods presented. See Note 15 of the Notes to Consolidated Financial Statements included in Part I, Item 1 "Financial Statements", of this Quarterly Report for information on this divestiture.

Current wording

On May 1, 2023, subsequent to the end of ("fiscal year") FY 2023, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiary and frozen yogurt business, U-Swirl International, Inc. The aggregate sale price of U-Swirl was $2.75 million, consisting of (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year secured promissory note. The business divestiture of the U-Swirl segment was preceded by a separate sale of the Company’s three owned U-Swirl locations on February 24, 2023. On October 31, 2023, the Company filed a certificate of dissolution with the Secretary of State of the State of Nevada with respect to U-Swirl. As a result, U-Swirl is effectively fully dissolved and no longer in legal existence. The consolidated financial statements present the historical financial results of the former U-Swirl segment as discontinued operations for all periods presented. See Note 15 of the Notes to Consolidated Financial Statements included in Part I, Item 1 "Financial Statements", of this Quarterly Report for information on this divestiture.

Previous wording

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 wording

On September 30, 2024, the Company repaid the amount owed under its credit agreement with Wells Fargo Bank N.A. (the "Credit Agreement") 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 the Company's board of directors.

Previous 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.

Current wording

Basic loss per share decreased from a loss from continuing operations of $(0.12) per share for the three months ended November 30, 2023 to a loss from continuing operations of $(0.11) per share for the three months ended November 30, 2024. Revenues increased by 2.5% from $7.7 million for the three months ended November 30, 2023 to $7.9 million for the three months ended November 30, 2024. Operating loss was $0.8 million for the three months ended November 30, 2023 compared to an operating loss of $0.7 million for the three months ended November 30, 2024. Loss from continuing operations remained consistent from a loss of $0.8 million for the three months ended November 30, 2023 compared to a loss of $0.8 million for the three months ended November 30, 2024.

Previous 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.

Current wording

The increase in Durango product and retail sales of 4.6%, or $0.3 million for the three months ended November 30, 2024 compared to the three months ended November 30, 2023 was primarily due to price increases.

Previous 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.

Current wording

Royalty and marketing fees decreased $0.1 million during the three months ended November 30, 2024 compared to the three months ended November 30, 2023, primarily due to a change in contracting our royalty fees for certain stores. The increase in franchise fee revenue of $40 thousand during the three months ended November 30, 2024 compared to the three months ended November 30, 2023 was not material.

Previous wording

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 wording

The increase in franchise costs for the three months ended November 30, 2024 compared to the three months ended November 30, 2023 was due primarily to investments made in building a franchise development team to identify new sites and franchisees. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 52.5% for the three months ended November 30, 2024 from 45.2% for the three months ended November 30, 2023.

Previous wording

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 wording

The increase in general and administrative costs during the three months ended November 30, 2024 compared to the three months ended November 30, 2023, was due primarily to additional compliance related legal and third-party consulting fees incurred. As a percentage of total revenues, general and administrative expenses increased to 18.1% during the three months ended November 30, 2024, compared to 17.3% during the three months ended November 30, 2023.

Previous 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.

Current wording

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales was $0.1 million during the three months ended November 30, 2024, an increase of 75.0% from $36 thousand during the three months ended November 30, 2023. Depreciation and amortization included in cost of sales increased 12.2% from $0.2 million during the three months ended November 30, 2023 to $0.2 million during the three months ended November 30, 2024. This increase was the result of investment in production equipment.

Previous wording

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 wording

Basic loss per share decreased from a loss from continuing operations of $(0.51) per share for the nine months ended November 30, 2023 to a loss from continuing operations of $(0.47) per share for the nine months ended November 30, 2024. The change in revenues for the nine months ended November 30, 2023 compared to the revenues for the nine months ended November 30, 2024 remained consistent at $20.7 million for both periods. The operating loss for the nine months ended November 30, 2023 was $3.3 million compared to the operating loss for the nine months ended November 30, 2024 of $3.2 million. Loss from continuing operations decreased from a loss of $3.3 million for the nine months ended November 30, 2023 to a loss of $3.2 million for the nine months ended November 30, 2024.

Previous 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.

Current wording

Total gross margin percentage decreased to 5.5% for the nine months ended November 30, 2024 compared to a gross margin of 7.9% during the nine months ended November 30, 2023, due primarily to increased raw material and labor costs.

Previous 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.

Current wording

The increase in franchise costs for the nine months ended November 30, 2024 compared to the nine months ended November 30, 2023 was due primarily to investments made in building a franchise development team to identify new sites and franchisees. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 56.0% for the nine months ended November 30, 2024 from 44.1% for the nine months ended November 30, 2023.

Previous wording

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 wording

The decrease in sales and marketing costs during the nine months ended November 30, 2024 compared to the nine months ended November 30, 2023 was due primarily to operational efficiencies and in part to timing of anticipated expenses.

Previous 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.

Current wording

The decrease in general and administrative costs during the nine months ended November 30, 2024 compared to the nine months ended November 30, 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 20.7% during the nine months ended November 30, 2024, compared to 23.9% during the nine months ended November 30, 2023.

Previous 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.

Current wording

Retail operating expenses increased 25.1% during the nine months ended November 30, 2024 compared to the nine months ended November 30, 2023. This increase is primarily the result of the addition of our Company owned Corpus Christi location.

Previous wording

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.

Current wording

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales was $0.1 million during the nine months ended November 30, 2024, and consistent with $0.1 million during the nine months ended November 30, 2023. Depreciation and amortization included in cost of sales increased 10.4% from $0.5 million during the nine months ended November 30, 2023 to $0.6 million during the nine months ended November 30, 2024. This increase was the result of investment in production equipment.

Previous wording

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 wording

Other income was $17 thousand during the nine months ended November 30, 2024, compared to other income of $44 thousand during for the nine months ended November 30, 2023. This was primarily due to a net gain on the disposal of assets for $0.3 million during the nine months ended November 30, 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 $21 thousand for the nine months ended November 30, 2024 compared to $0.1 million for the nine months ended November 30, 2023, and interest expense of $0.3 million for the nine months ended November 30, 2024 compared to $24 thousand during for the nine months ended November 30, 2023.

Previous wording

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 wording

As of November 30, 2024, working capital was $6.9 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 entered into its New Credit Agreement for proceeds of $6.0 million, part of which was used to pay the outstanding $3.5 million of the Credit Agreement. In addition, the Company 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. Expected future cash requirements include supporting current operations and building inventory including capital expenditures to support our business.

Previous 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.

Current wording

Cash and cash equivalent balances decreased from $2.1 million as of February 29, 2024 to $1.1 million as of November 30, 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 2.60 to 1.0 on November 30, 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 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.

Current wording

During the nine months ended November 30, 2024, we had a consolidated net loss of $3.2 million. Operating activities used cash of $7.8 million, with the principal adjustments to reconcile net income to net cash used in operating activities being depreciation and amortization of $0.7 million and a gain on sale of assets of $0.3 million. Changes in operating assets and liabilities resulted in a net cash outflow of $7.8 million from cash used in the normal course of business. During the nine months ended November 30, 2023, we had a consolidated net loss of $2.6 million. Operating activities used cash of $2.6 million, with the principal adjustments to reconcile net income to net cash used in operating activities being depreciation and amortization of $0.6 million, and stock compensation expense of $0.5 million.

Previous 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.

Current wording

During the nine months ended November 30, 2024, cash flows used in investing activities was $0.1 million, primarily due to the purchases of property and equipment of $2.1 million, offset by proceeds from sale of assets of $1.9 million. In comparison, investing activities used cash of $1.1 million during the nine months ended November 30, 2023, primarily due cash flows from discontinued operations of $1.4 million, partially offset by purchases of property and equipment of $2.6 million.

Previous 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.

Current wording

There were $6.9 million cash flows from financing activities during the nine months ended November 30, 2024 compared to $1.0 million cash flows from financing activities during the nine months ended November 30, 2023. The Company received $6.0 million in proceeds from its New Credit Agreement in addition to $2.2 million on its revolving line of credit during the nine months ended November 30, 2024, offset by payment of the line of credit on maturity of $3.5 million, in addition to proceeds of $2.2 million from the issuance and sale of common stock.

Previous wording

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 wording

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 the Company's board of directors.

Previous wording

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 wording

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. The Company was in compliance with these covenants as of November 30, 2024.

Previous 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.

Current wording

As of November 30, 2024, we had purchase obligations of approximately $3.2 million. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.