# Rocky Mountain Chocolate Factory, Inc.: Form 10-Q for the period ended Aug 31, 2023

- Company: [Rocky Mountain Chocolate Factory, Inc.](/companies/rmcf.md) (CIK 1616262)
- Form: 10-Q
- Filed: 2023-10-16
- Accepted by EDGAR: Oct 16, 2023, 20:14 ET
- Period: 2023-08-31
- Accession: 0001437749-23-028282
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1616262/000143774923028282/rmcfd20230831_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616262/000143774923028282/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-06-01 to 2023-08-31 | $6.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-03-01 to 2023-08-31 | $13.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-06-01 to 2023-08-31 | $4.6m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2023-03-01 to 2023-08-31 | $9.4m | us-gaap:CostOfRevenue |
| Operating income | 3 months, 2023-06-01 to 2023-08-31 | −$1.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-03-01 to 2023-08-31 | −$2.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-06-01 to 2023-08-31 | $6.3k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-03-01 to 2023-08-31 | $12.5k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-06-01 to 2023-08-31 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-03-01 to 2023-08-31 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-06-01 to 2023-08-31 | −$999.3k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-03-01 to 2023-08-31 | −$1.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-06-01 to 2023-08-31 | −$0.16 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-03-01 to 2023-08-31 | −$0.29 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-06-01 to 2023-08-31 | −$0.16 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-03-01 to 2023-08-31 | −$0.29 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-06-01 to 2023-08-31 | 6,293,078 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-03-01 to 2023-08-31 | 6,284,846 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-03-01 to 2023-08-31 | −$966.5k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-06-01 to 2023-08-31 | $702.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 6 months, 2023-03-01 to 2023-08-31 | $1.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-08-31 | $4.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-08-31 | $10.1m | us-gaap:AssetsCurrent |
| Total assets | at 2023-08-31 | $20.5m | us-gaap:Assets |
| Current liabilities | at 2023-08-31 | $5.6m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-08-31 | $12.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 29,977 characters.

*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 for the fiscal year ended February 28, 2023 (the “Annual Report”)* filed with the Securities and Exchange Commission (“SEC”) on May 30, 2023.

### 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

We are an international franchisor, confectionery producer, and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolates and other confectionery products (“Durango Products”). Our revenues and profitability are derived principally from our franchised/licensed network of retail stores that feature chocolate and other confectionary products including gourmet caramel apples. We also sell our candy outside of our network of retail stores. As of August 31, 2023, there were two Company-owned, 113 licensee-owned and 154 franchised Rocky Mountain Chocolate stores operating in 37 U.S. states, Panama, and the Philippines.

### Labor and Supply Chain

As a result of macro-economic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue to experience higher raw material, labor, and freight costs. For additional information, see Part I, Item 1A. “Risk Factors” in our Annual Report.

### Contested Solicitation of Proxies

During the three months and six month ended August 31, 2022, we incurred costs associated with a stockholder’s contested solicitation of proxies in connection with its 2022 annual meeting of stockholders. During the three and six months ended August 31, 2022, we incurred approximately $1.8 million and $2.1 million, respectively, of costs associated with the contested solicitation of proxies, compared with no comparable costs incurred in the three and six months ended August 31, 2023. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations.

### Results of Operations

### Three Months Ended August 31, 2023, Compared to the Three Months Ended August 31, 2022

### Results Summary

Basic loss per share from continuing operations decreased from $(0.51) per share in the three months ended August 31, 2022 to a loss of $(0.16) per share in the three months ended August 31, 2023. Revenues from continuing operations were approximately unchanged at $6.6 million in the three months ended August 31, 2022 and 2023. Loss from continuing operations decreased from $2.4 million in the three months ended August 31, 2022 to a loss from continuing operations of $1.0 million in the three months ended August 31, 2023. Net loss from continuing operations decreased from $3.2 million in the three months ended August 31, 2022 to a loss of $999,000 in the three months ended August 31, 2023.

### Revenues

*($'s in thousands)*

|  | Three Months Ended August 31, 2023 | 2022 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Durango Product sales | $4,707.1 | $4,808.2 | $(101.1) | (2.1)% |
| Retail sales | 308.9 | 263.2 | 45.7 | 17.4% |
| Franchise fees | 41.0 | 44.9 | (3.9) | (8.7)% |
| Royalty and marketing fees | 1,500.9 | 1,441.1 | 59.8 | 4.1% |
| Total | $6,557.9 | $6,557.4 | $0.5 | 0.0% |

#### Durango Product Sales

The decrease in Durango Product sales for the three months ended August 31, 2023, compared to the three months ended August 31, 2022 was primarily due to a 34.0%, or $108,000, decrease in shipments of product to customers outside our network of franchised retail stores partially offset by a 0.2%, or $7,000, increase in sales of product to our network of franchised and licensed retail stores. Same store pounds purchased by domestic franchise and licensed locations decreased 0.2% during the three months ended August 31, 2023, when compared to the three months ended August 31, 2022.

#### Retail Sales

Retail sales at Company-owned stores increased 17.4% during the three months ended August 31, 2023 compared to the three months ended August 31, 2022. This increase was the result of the sale of a Company-owned store in the prior year (resulting in only one remaining Company-owned store), partially offset by the July 2023 opening of a second Company-owned store. Retail sales at our single Company-owned store in Durango, Colorado, open in both periods, increased 6.5% during the three months ended August 31, 2023 compared to the three months ended August 31, 2022.

#### Royalties, Marketing Fees, and Franchise Fees

The increase in royalties and marketing fees from the three months ended August 31, 2022 to the three months ended August 31, 2023 was primarily due to an increase in royalty revenue as a result of the Company’s purchase based royalty structure and an increase in same store sales at domestic Rocky Mountain Chocolate locations. Same store sales at domestic franchise Rocky Mountain Chocolate locations increased 2.3% during the three months ended August 31, 2023 when compared to the three months ended August 31, 2022.

The decrease in franchise fee revenue for the three months ended August 31, 2023, compared to the three months ended August 31, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition.

### Costs and Expenses

#### Cost of Sales

*($'s in thousands)*

|  | Three Months Ended August 31, 2023 | 2022 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales - Durango Product | $4,533.8 | $3,781.8 | $752.0 | 19.9% |
| Cost of sales - retail | 98.6 | 107.8 | (9.2) | (8.5)% |
| Franchise costs | 613.4 | 448.7 | 164.7 | 36.7% |
| Sales and marketing | 442.2 | 427.9 | 14.3 | 3.3% |
| General and administrative | 1,687.1 | 4,036.8 | (2,349.7) | (58.2)% |
| Retail operating | 161.8 | 151.1 | 10.7 | 7.1% |
| Total | $7,536.9 | $8,954.1 | $(1,417.2) | (15.8)% |

#### Gross Margin

*($'s in thousands)*

|  | Three Months Ended August 31,% 2023 | 2022 | Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Durango Product gross margin | $173.3 | $1,026.4 | $(853.1) | (83.1)% |
| Retail gross margin | 210.3 | 155.4 | 54.9 | 35.3% |
| Total | $383.6 | $1,181.8 | $(798.2) | (67.5)% |

| (Percent) | Three Months Ended August 31,%% 2023 | 2022 | Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Durango Product gross margin | 3.7% | 21.3% | (17.6)% | (82.6)% |
| Retail gross margin | 68.1% | 59.0% | 9.1% | 15.4% |
| Total | 7.6% | 23.3% | (15.7)% | (67.4)% |

#### Adjusted Gross Margin

*($'s in thousands)*

|  | Three Months Ended August 31, 2023 | 2022 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Durango Product gross margin | $173.3 | $1,026.4 | $(853.1) | (83.1)% |
| Plus: depreciation and amortization | 182.7 | 160.8 | 21.9 | 13.6% |
| Durango Product adjusted gross margin (non-GAAP measure) | 356.0 | 1,187.2 | (831.2) | (70.0)% |
| Retail gross margin | 210.3 | 155.4 | 54.9 | 35.3% |
| Total Adjusted Gross Margin (non-GAAP measure) | $566.3 | $1,342.6 | $(776.3) | (57.8)% |
| Durango Product adjusted gross margin (non-GAAP measure) | 7.6% | 24.7% | (17.1)% | (69.2)% |
| Retail gross margin | 68.1% | 59.0% | 9.1% | 15.4% |
| Total Adjusted Gross Margin (non-GAAP measure) | 11.3% | 26.5% | (15.2)% | (57.4)% |

24

### 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 and Durango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our Durango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Durango Product adjusted gross margin is equal to Durango Product gross margin plus depreciation and amortization expense. We believe adjusted gross margin and Durango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, Durango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and Durango Product adjusted gross margin are 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 and Durango Product adjusted gross margin rather than gross margin and Durango Product gross margin to make incremental pricing decisions. Adjusted gross margin and Durango Product adjusted gross margin have 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 and Durango Product adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and Durango Product gross margin.

#### Cost of Sales and Gross Margin

Durango Product gross margins decreased to 3.7% in the three months ended August 31, 2023 compared to 21.3% during the three months ended August 31, 2022, due primarily to a 22.4% decrease in production volume, a 19.9% increase in overhead costs, and an increase in costs from wage and material inflation realized in the three months ended August 31, 2023 compared to the three months ended August 31, 2022.

Retail gross margins increased from 59.0% during the three months ended August 31, 2022 to 68.1% during the three months ended August 31, 2023. The increase in retail gross margins was primarily the result of better cost management following the creation of the Flagship Operations Manager role in our Durango company-owned store.

#### Franchise Costs

The increase in franchise costs in the three months ended August 31, 2023 compared to the three months ended August 31, 2022 was due primarily to an increase in professional fees, an increase compensation expense and an increase in travel expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 39.8% in the three months ended August 31, 2023 from 30.2% in the three months ended August 31, 2022. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of unchanged royalty revenues and higher franchise costs during the three months ended August 31, 2023.

#### Sales and Marketing

Sales and marketing costs were approximately unchanged for the three months ended August 31, 2023 compared to the three months ended August 31, 2022.

#### General and Administrative

The decrease in general and administrative costs for the three months ended August 31, 2023 compared to the three months ended August 31, 2022 was due primarily to an increase in compensation expense more than offset by lower professional fees related primarily to costs associated with the contested solicitation of proxies and costs associated with the hiring of a new CEO in the three months ended August 31, 2022. As a percentage of total revenues, general and administrative expenses decreased to 25.7% in the three months ended August 31, 2023 compared to 61.6% in the three months ended May 31, 2022.

#### Retail Operating Expenses

The increase in retail operating expenses for the three months ended August 31, 2023 compared to the three months ended August 31, 2022 was due primarily the conversion of a franchise unit into a Company-owned unit in July 2023, mostly offset by the sale of a Company-owned store in the prior year. Retail operating expenses, as a percentage of retail sales, decreased from 57.4% in the three months ended August 31, 2022 to 52.4% in the three months ended August 31, 2023. This decrease is primarily the result of higher retail revenues.

#### Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $32,000 in the three months ended August 31, 2023, an increase of 10.3% from $29,000 in the three months ended August 31, 2022. Depreciation and amortization included in cost of sales increased 13.7% to $183,000 in the three months ended August 31, 2023 compared to $161,000 in the three months ended August 31, 2022. This increase was the result of acquiring new equipment for production and the associated increase to depreciation expense.

#### Other Income

Net interest income was $11,400 in the three months ended August 31, 2023 compared to net interest income of $3,900 incurred in the three months ended August 31, 2022. This increase was primarily the result of an increase in interest income on cash balances.

#### Income Tax Expense

During the three months ended August 31, 2023, we did not incur any income tax benefit on a loss before income taxes of $999,000. During the three months ended August 31, 2022, we incurred income tax expense of $731,000 on a loss before income taxes of $2.4 million. This expense was the result of recording a full reserve on our deferred income tax asset. See Note 15 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.

### Six Months Ended August 31, 2023 Compared to the Six Months Ended August 31, 2022

### Results Summary

Basic loss per share from continuing operations decreased from $(0.55) per share for the six months ended August 31, 2022, to a net loss of $(0.40) per share for the six months ended August 31, 2023. Revenues from continuing operations decreased 3.5% from $13.5 million for the six months ended August 31, 2022, to $13.0 million for the six months ended August 31, 2023. Loss from continuing operations decreased from $2.7 million for the six months ended August 31, 2022, to a loss from continuing operations of $2.6 million for the six months ended August 31, 2023. Net loss from continuing operations decreased from $3.4 million for the six months ended August 31, 2022, to a net loss of $2.5 million for the six months ended August 31, 2023.

### Revenues

*($'s in thousands)*

|  | Six Months Ended August 31, 2023 | 2022 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Durango Product sales | $9,531.3 | $9,965.8 | $(434.5) | (4.4)% |
| Retail sales | 500.8 | 513.6 | (12.8) | (2.5)% |
| Franchise fees | 85.9 | 98.8 | (12.9) | (13.1)% |
| Royalty and marketing fees | 2,875.9 | 2,881.4 | (5.5) | (0.2)% |
| Total | $12,993.9 | $13,459.6 | $(465.7) | (3.5)% |

#### Durango Product Sales

The decrease in Durango product sales for the six months ended August 31, 2023, compared to the six months ended August 31, 2022 was primarily due to a 42.1%, or $318,000, decrease in shipments of product to customers outside our network of franchised retail stores partially and a 1.3%, or $117,000, decrease in sales of product to our network of franchised and licensed retail stores.

#### Retail Sales

Retail sales at Company-owned stores declined 2.5% during the six months ended August 31, 2023 compared to the six months ended August 31, 2022. This decrease was the result of the sale of a Company-owned store in the prior year (resulting in only one remaining Company-owned store), partially offset by the July 2023 opening of a second Company-owned store. Retail sales at our remaining Company-owned store increased 10.5% during the six months ended August 31, 2023 compared to the six months ended August 31, 2022.

#### Royalties, Marketing Fees and Franchise Fees

Royalty and marketing fees were approximately unchanged from the six months ended August 31, 2022 to the six months ended August 31, 2023. Same store sales at domestic franchise Rocky Mountain Chocolate locations were approximately unchanged during the six months ended August 31, 2023 when compared to the six months ended August 31, 2022.

The decrease in franchise fee revenue for the three months ended August 31, 2023, compared to the three months ended August 31, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition.

### Costs and Expenses

#### Cost of Sales

*($'s in thousands)*

|  | Six Months Ended August 31, 2023 | 2022 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales - Durango Product | $9,213.2 | $8,209.5 | $1,003.7 | 12.2% |
| Cost of sales - retail | 177.7 | 206.4 | (28.7) | (13.9)% |
| Franchise costs | 1,293.0 | 867.8 | 425.2 | 49.0% |
| Sales and marketing | 915.1 | 908.9 | 6.2 | 0.7% |
| General and administrative | 3,619.0 | 5,642.7 | (2,023.7) | (35.9)% |
| Retail operating | 264.8 | 309.4 | (44.6) | (14.4)% |
| Total | $15,482.8 | $16,144.7 | $(661.9) | (4.1)% |

#### Gross Margin

*($'s in thousands)*

|  | Six Months Ended August 31, 2023 | 2022 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Durango Product gross margin | $318.1 | $1,756.3 | $(1,438.2) | (81.9)% |
| Retail gross margin | 323.1 | 307.2 | 15.9 | 5.2% |
| Total | $641.2 | $2,063.5 | $(1,422.3) | (68.9)% |

| (Percent) | Six Months Ended August 31,%% 2023 | 2022 | Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Durango Product gross margin | 3.3% | 17.6% | (14.3)% | (81.1)% |
| Retail gross margin | 64.5% | 59.8% | 4.7% | 7.9% |
| Total | 6.4% | 19.7% | (13.3)% | (67.5)% |

#### Adjusted Gross Margin

*($'s in thousands)*

|  | Six Months Ended August 31, 2023 | 2022 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Durango Product gross margin | $318.1 | $1,756.3 | $(1,438.2) | (81.9)% |
| Plus: depreciation and amortization | 353.6 | 320.5 | 33.1 | 10.3% |
| Durango Product adjusted gross margin (non-GAAP measure) | 671.7 | 2,076.8 | (1,405.1) | (67.7)% |
| Retail gross margin | 323.1 | 307.2 | 15.9 | 5.2% |
| Total Adjusted Gross Margin (non-GAAP measure) | $994.8 | $2,384.0 | $(1,389.2) | (58.3)% |
| Durango Product adjusted gross margin (non-GAAP measure) | 7.0% | 20.8% | (13.8)% | (66.2)% |
| Retail gross margin | 64.5% | 59.8% | 4.7% | 7.9% |
| Total Adjusted Gross Margin (non-GAAP measure) | 9.9% | 22.7% | (12.8)% | (56.4)% |

28

### 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 and Durango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our Durango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Durango Product adjusted gross margin is equal to Durango Product gross margin plus depreciation and amortization expense. We believe adjusted gross margin and Durango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, Durango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and Durango Product adjusted gross margin are 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 and Durango Product adjusted gross margin rather than gross margin and Durango Product gross margin to make incremental pricing decisions. Adjusted gross margin and Durango Product adjusted gross margin have 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 and Durango Product adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and Durango Product gross margin.

#### Cost of Sales and Gross Margin

Durango Product gross margins decreased to 3.3% in the six months ended August 31, 2023 compared to 17.6% during the six months ended August 31, 2022, due primarily to a 29.6% decrease in production volume, a 22.6% increase in overhead costs and an increase in costs from wage and material inflation realized in the six months ended August 31, 2023 compared to the six months ended August 31, 2022, partially offset by an increase in product prices that became effective on May 1, 2022.

Retail gross margins increased from 59.8% during the six months ended August 31, 2022 to 64.5% during the six months ended August 31, 2023. The decrease in retail gross margins was primarily the result of improved management of costs and a change in product mix resulting from the sale of a Company-owned location in the prior year.

#### Franchise Costs

The increase in franchise costs in the six months ended August 31, 2023 compared to the six months ended August 31, 2022 was due primarily to an increase in professional fees, an increase in stock compensation expense and an increase in travel expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 43.7% in the six months ended August 31, 2023 from 29.1% in the six months ended August 31, 2022. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of higher franchise costs during the six months ended August 31, 2023.

#### Sales and Marketing

Sales and marketing costs were approximately unchanged for the six months ended August 31, 2023, compared to the six months ended August 31, 2022.

#### General and Administrative

The decrease in general and administrative costs for the six months ended August 31, 2023, compared to the six months ended August 31, 2022 was due primarily to costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the six months ended August 31, 2022, the Company incurred approximately $2.1 million of costs associated with the contested solicitation of proxies, compared with no costs associated with a contested solicitation of proxies during the six months ended August 31, 2023. During the six months ended August 31, 2022 the Company also incurred increased professional fees related to legal support for our Board of Directors and legal costs associated with compensation arrangements for our former Chief Executive Officer and Chief Financial Officer and legal and professional costs associated with the search for, and appointment of, a new Chief Executive Officer and a new Chief Financial Officer, with no comparable costs incurred during the six months ended August 31, 2023. Additionally, during the six months ended August 31, 2022, the Company had recorded $859,000 of severance compensation as a result of an executive’s departure last year with no comparable compensation costs during the six months ended August 31, 2023. As a percentage of total revenues, general and administrative expenses decreased to 27.9% in the six months ended August 31, 2023, compared to 41.9% in the six months ended August 31, 2022.

#### Retail Operating Expenses

The decrease in retail operating expenses for the six months ended August 31, 2023, compared to the six months ended August 31, 2022, was due primarily to a change in Company-owned stores in operation, the result of the sale of a Company-owned store in the prior year and the conversion of a franchise store into a Company owned store in July 2023. Retail operating expenses, as a percentage of retail sales, decreased from 60.2% in the six months ended August 31, 2022, to 52.9% in the six months ended August 31, 2023. This decrease is primarily the result of lower retail operating expenses.

#### Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $63,000 in the six months ended August 31, 2023, an increase of 8.6% from $58,000 in the six months ended August 31, 2022. Depreciation and amortization included in cost of sales increased 10.6% from $320,000 in the six months ended August 31, 2022 to $354,000 in the six months ended August 31, 2023. This increase was the result of acquiring new equipment for production and the associated increase to depreciation expense.

#### Other Income

Net interest income was $25,000 in the six months ended August 31, 2023, compared to other income of $6,500 during the six months ended August 31, 2022. This increase was primarily the result of an increase in interest income on cash balances.

#### Income Tax Expense

During the six months ended August 31, 2023, we did not incur any income tax benefit on a loss before income taxes of $2.5 million. During the six months ended August 31, 2022, we incurred income tax expense of $702,000 on a loss before income taxes of $2.7 million. This expense was the result of recording a full reserve on our deferred income tax assets. See Note 15 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.

### Liquidity and Capital Resources

As of August 31, 2023, working capital was $4.5 million, compared to $6.2 million as of February 28, 2023, a decrease of $1.8 million. The decrease in working capital was primarily due to operating activities.

Cash and cash equivalent balances decreased approximately $700,000 to $4.0 million as of August 31, 2023 compared to $4.7 million as of February 28, 2023. This decrease in cash and cash equivalents was primarily due to proceeds from the sale of U-Swirl assets mostly offset by operating results and the purchase of property and equipment. Our current ratio was 1.8 to 1 at August 31, 2023 compared to 2.2 to 1 at February 28, 2023. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

During the six months ended August 31, 2023, we had a net loss of $1.8 million. Operating activities used cash of $966,538, primarily the result of operating results offset by depreciation and amortization of $416,454, a decrease in inventory of $375,045, and stock compensation expense of $324,583. During the comparable 2022 period, we had a net loss of $3.8 million, and operating activities used cash of $1,584,693. The principal adjustment to reconcile the net income to net cash used by operating activities being an increase in accounts payable of $2,165,022, deferred income taxes of $722,163, depreciation and amortization of $378,416, and refunded income taxes of $304,779, partially offset by an increase in inventory of $2,078,673.

During the six months ended August 31, 2023, investing activities provided cash of $234,077, primarily due to cash provided by discontinued operation (the result of the sale of U-Swirl assets) of $1,417,768 partially offset by the purchases of property and equipment of $1,251,728. In comparison, investing activities used cash of $598,878 during the six months ended August 31, 2022, primarily due to the purchase of property and equipment of $554,332.

There were no cash flows from financing activities during the six months ended August 31, 2023 and 2022.

### Off-Balance Sheet Arrangements

As of August 31, 2023, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.

As of August 31, 2023, we had purchase obligations of approximately $309,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our production.

### Impact of Inflation

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

Depreciation expense is based on the historical cost to us of our fixed assets, and is therefore potentially less than it would be if it were based on 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.

## Controls and procedures

As filed, 3,258 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain 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 us is made known to the officers who certify as to our 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 our 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 by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended February 28, 2023 and Part I, Item 4 of our Quarterly Report on Form 10-Q for the three months ended May 31, 2023, management concluded that our internal control over financial reporting was not effective as of February 28, 2023 and May 31, 2023, due to a material weakness in our internal controls resulting from our finance department not being able to process and account for complex, non-routine transactions in accordance with GAAP.

During the period covered by this Quarterly Report, we implemented a remediation plan to address the material weakness described above by retaining the assistance of several accounting experts to assist us in the accounting and reporting of complex, non-routine transactions. Although management believes that it has taken the necessary steps to resolve the material weakness, it may not be considered completely remediated until the applicable controls operate for a sufficient period and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of the current fiscal year.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, and in light of the material weakness described above, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of August 31, 2023.

### Changes in Internal Control over Financial Reporting

Except for the changes in connection with our implementation of the remediation plan discussed above, there were no other 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 our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 426 characters.

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 28, 2023 (our “Annual Report”), filed with the Securities and Exchange Commission on May 30, 2023. There have been no material changes in our risk factors from those disclosed in our Annual Report.

Filed Oct 16, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-028282. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.