Rocky Mountain Chocolate Factory, Inc.: Form 10-Q for the period ended Nov 30, 2024

The following discussion and analysis of financial condition and results of operations is qualified by reference and should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on 10-K, filed with the SEC on June 13, 2024, for the fiscal year ended February 29, 2024.

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, the following discussion contains certain forward-looking information. See "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report for certain information concerning forward-looking statements.

Overview

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.

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.

With the sale of U-Swirl, we continue to focus on our confectionery franchise business to further enhance our competitive position and operating margin, simplify our business model, and deliver sustainable value to our stockholders.

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 .

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.

Current Trends Affecting Our Business and Outlook

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.

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.

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.

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.

Efforts to reverse the decline in same store pounds purchased from our production facility by franchised stores and to increase total Durango production depend on many factors, including new store openings, competition, the receptivity of our franchise system to our product introductions and promotional programs.

Results of Continuing Operations

Three Months Ended November 30, 2024 Compared To the Three Months Ended November 30, 2023

Results Summary

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.

REVENUES

($'s in thousands)

24

Durango Product and Retail Sales

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.

Royalties, Marketing Fees and Franchise Fees

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.

COSTS AND EXPENSES

($'s in thousands)

Gross Margin

($'s in thousands)

Adjusted Gross Margin

($'s in thousands)

Non-GAAP Measures

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.

Cost of Sales and Gross Margin

Total gross margin percentage for the three months ended November 30, 2024 was 10.0% and consistent with the gross margin percentage of 10.2% for the three months ended November 30, 2023.

Franchise Costs

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.

Sales and Marketing

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

General and Administrative

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.

Retail Operating Expenses

Retail operating expenses decreased 8.1% during the three months ended November 30, 2024 compared to the three months ended November 30, 2023. This decrease is primarily the result of cost cutting measures.

Depreciation and Amortization

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.

Total Other Income (Expense)

Total other income (expense) was $(0.1) million during the three months ended November 30, 2024, compared to other income of $19 thousand during for the three months ended November 30, 2023. Other expense for the three months ended November 30, 2024 was primarily due to interest expense on our New Credit Agreement.

Nine Months Ended November 30, 2024 Compared To the Nine Months Ended November 30, 2023

Results Summary

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.

REVENUES

($'s in thousands)

Durango Product and Retail Sales

The increase in Durango product and retail sales of 2.8%, or $0.5 million for the nine months ended November 30, 2024 compared to the nine months ended November 30, 2023 was primarily due to price increases.

Royalties, Marketing Fees and Franchise Fees

Royalty and marketing fees decreased $0.5 million during the nine months ended November 30, 2024 compared to the nine 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 $0.1 million during the nine months ended November 30, 2024 compared to the nine months ended November 30, 2023 was not material.

COSTS AND EXPENSES

($'s in thousands)

Gross Margin

($'s in thousands)

27

Adjusted Gross Margin

($'s in thousands)

Non-GAAP Measures

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.

Cost of Sales and Gross Margin

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.

Franchise Costs

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.

Sales and Marketing

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.

General and Administrative

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.

Retail Operating Expenses

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.

Depreciation and Amortization

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.

Other Income (Expense)

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.

Liquidity and Capital Resources

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.

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.

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.

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.

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.

The conditions above raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial statements. In addition, our independent registered public accounting firm, in their report on the Company’s February 29, 2024 audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.

New Credit Agreement and Payment of Credit Agreement

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.

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.

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.

The Company paid off the outstanding balance of $3.5 million of the previous Credit Agreement upon maturity on September 30, 2024.

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.

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.

Significant Accounting Policies

The preparation of consolidated financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, “Nature of Operations and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and in the Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024 describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024.

Off Balance Sheet Arrangements

As of November 30, 2024, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.

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.

Impact of Inflation

Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.

Depreciation expense is based on the historical cost to the Company of its fixed assets and is therefore potentially less than it would be if it were based on the current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.

Seasonality

We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of our products have occurred during key holidays and the summer vacation season. In addition, 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.

Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting

Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), that are designed to ensure that material information relating to the Company is made known to the officers who certify the Company’s financial reports and to other members of senior management and the board of directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company’s reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management, under the supervision and with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the Company’s disclosure controls and procedures. Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of November 30, 2024.

Changes in Internal Control over Financial Reporting — There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarter ended November 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part 1, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024, filed with the SEC on June 13, 2024. Except as set forth below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

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.

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.

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.

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.

Our need for future financing may result in the issuance of additional securities, which will cause investors to experience dilution.

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.

We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock.

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.

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

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.

Our New Credit Agreement imposes operating and financial restrictions on us.

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

• incur and guarantee additional debt;
• incur liens;
• make acquisitions and other investments;
• dispose of assets; or
• make capital expenditures in any fiscal year in excess of $3.5 million.

Further, the New 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 New 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 New 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.

Servicing our debt under New 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.

As of November 30, 2024, we had $6.0 million principal amount outstanding under our New Credit Agreement. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness under the New 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 New 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 New 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 New Credit Agreement.

In addition, our indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:

• 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;
• make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive conditions and adverse changes in government regulations;
• limit our flexibility in planning for, or reacting to, changes in our business and industry; and
• place us at a disadvantage compared to our competitors who have less debt.

Any of these factors could harm our business, results of operations, and financial condition. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.