Rocky Mountain Chocolate Factory, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss Rocky Mount Chalkin's financial result for the fiscal second quarter 2024. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. Joining us on the call today are the company's CEO, Rob Saltz, and CFO, Alan Arroyo. Please be advised, this conference call will contain statements that are considered forward-looking statements under the Private Security Investigations Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. do not place undue reliance on any forelooking statements which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to publicly update or revise any forelooking statements. The company's presentation also includes certain non-GAAP financial measures, including the Justice EBITDA, as supplemental measures of performance of the business. All non-GAAP measures have been reconciled to the directly comparable GAAP measures in accordance with SEC rules. You will find Reconciliation Tables and other important information in the Earnings Release and Form 8-K Furnished to the SEC earlier today which are currently available on the Company's Edgar page on the SEC's website and will be available on the Company's Investor Relations section of its website within approximately 24 hours after this call has ended. And now I will send a call over to the company's CEO, Rob Sarles. Rob, please go ahead.

Thank you, and good morning, everyone. During the quarter, we continued to remove impediments to the growth of the business through the execution of the three pillars of our strategic transformation plan. Do more with less, simplify and focus our operations, and amplify and elevate the Rocky Mountain Chocolate brand. These initiatives are expected to generate material revenue growth in the quarters ahead as we enter the holiday season. Specifically, the improvements we have made to our e-commerce business and the strong demand for products during the holidays are expected to lead to outsized results in the back half of our fiscal year. In fact, we expect a combination of e-commerce and specialty retail sales in our fiscal second half to exceed the sales from these channels for all of fiscal 2023. To begin with, I'd like to highlight the progress we've made towards the implementation of our long-term strategy. First, to do more with less, during the quarter we reduced our driver fleet by 33% while maintaining consistent and ever-increasing pound volume shipped from our Durango facility. This is a direct result of our logistics optimization efforts. which include increasing the use of third-party logistics partners to deliver products. We believe there is additional leverage to be realized in our existing operations, and we recently announced that supply chain industry veteran Scott Ouellette has been appointed as Senior Vice President of Manufacturing and Supply Chain to help further this objective. Since joining as an advisor last October, Scott's strong background in the confectionery industry has made him an invaluable asset to our leadership team. and I look forward to continuing to work with him as we execute our plan. During the quarter, we increased our employee compensation structure at the Durango production facility to reduce turnover and help establish a long-term foundation for more efficient and ultimately higher throughput. This has helped us to manage attrition and enabled us to attract former Rocky Mountain Chocolate employees to return to the company, which provides a quicker ramp for productivity compared to new hires. Despite the increase in base pay for our processing team, we experienced a 16% reduction in labor salaries per pound produced compared to our fiscal first quarter. Second, to simplify and focus the operations, we completed the implementation of our streamlined franchisee royalty structure and volume discount program. which we recently showcased to some of our highest performing franchisees during our 2023 Annual National Franchisee Convention in September. In addition to providing a royalty rate of as low as 4%, our franchisees, especially those with multiple units, are now eligible to receive a volume-based discount of up to 5% of all purchases of products and supplies from Durango. We believe this empowers our top franchisees to deliver even more sales of Rocky Mountain Chocolate products while also incentivizing franchisees to become multi-unit operators. We're making continued progress towards our 25% SKU reduction target as we work to sunset underperforming SKUs and increase production of our most popular items. In time, we anticipate the alignment of product offerings with consumer preference will result in higher sales, cost savings through reduced waste and lower storage expenses, as well as an improved experience for our customers and better store economics for our franchisees. Third, to amplify and elevate, we unveiled a transformational brand refresh during our 2023 Annual National Franchisee Convention. which was our highest attended convention in the history of the company, a real reflection of our re-energized franchisee network. Our brand refresh provides a streamlined trade name and logo, building upon our rich history of bringing the Rocky Mountain Chocolate experience to customers for over 40 years. As I mentioned earlier, we made significant improvements to our e-commerce experience, including the removal of shipping fees at checkout, This has resulted in a more transparent online shopping experience leading to higher volumes. Since activating this benefit, we have experienced a tripling of transaction volume and a more than doubling of sales compared to the same couple of months last year. In addition to the shipping fee removal, we have increased our coverage for two-day delivery service with shipments commencing from third-party facilities in California to serve our customers throughout the western region. By adding California, we can now reach over 90% of the U.S. population within two days, something we could not do cheaply or easily from Durango. These enhancements were made possible by the recently completed rollout of our partnership with a nationally renowned cold chain logistics company. We expect these initiatives will support our return to growth as we enter the all-important holiday season. To further amplify and elevate, we participated in our first investor conference in nearly a decade this past quarter, inaugurating our re-engagement with the investment community under the new leadership team. Our active participation in these events not only served to reaffirm our commitment to proactive engagement with shareholders and prospective investors, but also amplifies the reach of our message about the plans for the future of Rocky Mountain Shoplifting. The improvements we're making today are foundational to our three- to five-year transformation plan. Our strategy implementation is yielding strong operational improvements, and we can continue to expect these initiatives to result in short- and long-term financial benefits. In other news, I'd like to highlight a few additional developments from company-owned stores, our Durango production facility, and network and logistics. We increased sales by 7% year-over-year at our Durango retail store for the quarter, driven by higher average revenue per customer transaction. We celebrated the grand reopening of our Corpus Christi location in July, which is now a company-owned store. This store exemplifies how a Rocky Mountain chocolate store should be run. Clean and well-lit, fully stocked with fresh product, ample sampling, and a passionate, caring staff attending to our local customers. I was privileged to work with the team at that grand reopening. With the new management, sales for August were up 48% versus the prior year and have since remained well above 20%. Corpus Christi is a classic example of the impact store transformations can have on our underperforming locations and of the potential of generating substantial incremental sales from within our existing franchise network. We expect to see this trend continue as we roll out updates of our storefronts nationwide as part of our brand refresh. Excluding the planned exit of two wholesale customers during our prior fiscal year, second quarter sales from our Durango facility increased modestly despite headwinds from record high temperatures over the summer which impacted consumer demand for chocolate and confectionery products. Likewise, the same stores of pounds shipped across our domestic franchise and licensed locations were also approximately unchanged compared to the prior year. And lastly, this fall, we partnered with a respected third-party co-packer to fulfill all our final consumer packaging needs, where final assembly of our boxed items will now take place, Labor has been a continuing challenge in Durango, and we accelerated this planned move to handle not only this year's base holiday volumes, but also to remove any labor constraints as our future Durango production volumes increase. This is crucial to the fulfillment of our strategic plan and necessary to handle higher volumes in the second half of this fiscal year and beyond. To summarize, We are working hard to implement our strategic transformation plan, and our efforts are bearing fruit. We continue to position Rocky Mountain Chocolate for long-term growth and profitability, and we're building a strong foundation to execute our plan as we progress through the remainder of this fiscal year. I will now hand it over to our CFO, Alan Arroyo, to discuss our fiscal second quarter financial highlights before returning for closing remarks. Alan?

Thank you, Rob. Please note that all financial results discussed today are for continuing operations, while all variance commentary is on a year-over-year basis unless otherwise stated. Now moving on to our results. Total revenue of $6.6 million was unchanged from the $6.6 million in the prior year. We benefited from the reopening of the Corpus Christi store in July which mostly offset lower shipments of product related to the planned exit of two out-of-network customers earlier this year. Looking further at our sales, total product sales were 4.7 million compared to 4.8 million. Royalty and marketing revenue increased to 1.5 million compared to 1.4 million. Retail sales at our company-operated stores increased 17% to $309,000 compared to $263,000. This increase was partially due to a store closure in the prior year and the reopening of the Corpus Christi store. Same-store sales for our company-owned store in Durango were up 7% year-over-year. Same store sales at all domestic Rocky Mountain Chocolate locations increased 2.3% during the quarter compared to the prior year. And franchise fee revenue was $41,000 compared to $45,000. Moving on. Total product and retail gross profit was $0.4 million compared to $1.2 million with a gross profit margin of 7.6% compared to 23.3%. The decrease was primarily due to lower production volume and higher costs related to wages and inflation as we resolved a labor shortage. This was partially offset by higher retail gross margins, primarily attributable to better cost management following the creation of a flagship operations manager role in our Durango store. Total operating expenses were $7.6 million compared to $9 million. The improvement was primarily due to lower professional fees associated with a contested solicitation of proxies in the prior year, as well as lower costs related to employee severance and relocation. This was partially offset by increased franchise and personnel costs. Net loss from continuing operations improved 68% to $1 million, or $0.16 per share, compared to a net loss from continuing operations of $3.2 million, or $0.51 per share. Adjusted EBITDA loss was $600,000 compared to adjusted EBITDA of $700,000. The year-ago period benefited from a $2.8 million add-back related to professional fees associated with the contested solicitation of proxies, as well as costs associated with employee severance and relocation. Turning to our balance sheet, we ended the second quarter with a cash balance of $4 million compared to $4.7 million at the end of fiscal 2023. The decrease in our cash position was primarily attributable to purchases of property and equipment partially offset by inventory reductions. We ended the second quarter with total inventories of $3.2 million compared to $3.6 million at year-end fiscal 2023. And as of August 31, 2023, the company remained debt-free. With that, I'd like to turn the call back over to Rob for closing remarks.