Rocky Mountain Chocolate Factory, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss Rocky Mountain Chocolate Factory's financial results for the fiscal second quarter 2026. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded. Joining us on the call today is the company's interim CEO, Jeff Gagan, and CFO, Carrie Cass. Please be advised this conference call will contain statements that are considered forward-looking statements under the Private Securities Litigation 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 forward-looking 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 forward-looking statements. And now I will turn the call over to the company's interim CEO, Jeff Gagan. Jeff, please go ahead.

Thank you, and good morning, everyone. Over the past 16 months, we've taken meaningful steps to modernize our business, strengthen operations, and lay the groundwork for stable growth. progress that's now becoming evident across the enterprise. These foundational steps are largely complete, and our focus is shifting towards disciplined execution. We're moving from transformational planning to transformational performance. The results of that shift are reflected in how we operate our business, how we support our franchisees, and how we present our brand to customers. The changes we're making today and in the past are intended to create value for investors over the long run. In the short run, we've made many difficult personnel and operating decisions that had to be put in place despite the immediate cost. We believe those changes were necessary and a prerequisite to allowing the company to achieve its long run potential. There's more work to be done with sales, production, and franchise development, but we believe we put the right people and processes in place to execute in ways that will allow us to return to historic levels of profitability over the coming quarters and years. Today, I'll walk you through several developments that highlight our progress, including franchise growth, brand development, and operational improvements as we move into the holiday season. Our ongoing operational challenges evidenced in our Q2 report are being met through a combination of improvements initiated by our new VP of Operations, who took over midway through the quarter. Within weeks of his onboarding, he laid out new money-saving strategies, including ways to eliminate overtime compensation, reduce scrap and waste, and improve in-stock items to fulfill incoming franchisee orders as a first step to increasing the ratio of Durango products sold in every store, a significant financial opportunity for the company. In addition, we're continuing to overall our warehouse and logistics operations to ensure lean inventory levels and more frequent delivery to franchise locations as we expand our geographic footprint. Continued improvement with operations is necessary as we enter our busy Q3 and Q4 holiday seasons, including both Christmas and Valentine's Day. We're well positioned to meet franchisee demand and that of our remaining specialty markets customers. We're deploying more technology and automation in our production facility today without compromising our beloved handcrafted legacy that accounts for much of the nostalgia from nearly 45 years of customer engagement and satisfaction. Our franchise development momentum continues to build. We're seeing renewed enthusiasm from both existing and prospective operators who recognize the opportunity within the Rocky Mountain Chocolate Factory System. We hired a new VP of franchise development in August. He attended our September National Franchisee Convention and engage with well over a dozen current franchisees to lay out a vision for future store growth and area development agreements. We're continuing to canvas the U.S. and designate where we want to locate new stores in a very thoughtful and strategic array. The first wave of new store builds will come from our existing franchisees, followed by a group of new to the system operators. We're in discussions with several now with a focus on developing new markets where we've historically had little or no presence, including both north and south of the border, where we think there are significant development opportunity. This is a renaissance for Rocky Mountain Chocolate Factory. We're entering a new era of growth, but not growth for growth's sake. We'll be very intentional with every move we make, always looking for ways to create and enhance shareholder value. we remain focused on increasing store ownership per franchisee, as I cited in our prior investor call. We recently opened a Charleston, South Carolina store, the first location to feature our refreshed branding and new store design, and the fourth store for this current franchisee. This location had its soft opening this summer, and we're planning a grand opening next month. The Chicago State Street store remains on track to open around the holidays. Construction is underway. This location will also serve as a showcase for the new Rocky Mountain Chocolate Factory, from design and layout to product presentation and customer experience. We continue to build a healthy pipeline of new locations. We recently signed franchise agreements for the Palladio in Folsom, California, and the Jersey Shore Premium Outlets in Tinton Falls, New Jersey. We're also in the final stages of negotiation for a Houston Hobby Airport location. We recently completed our first remodel at the Corpus Christi, Texas company-owned store. As expected, store sales experienced an immediate pickup, and shortly afterwards, we had our busiest day in store history. As we have more empirical data related to remodels, we'll share that with investors. The combination of openings, remodels, and multi-unit franchise interest gives us strong development pipeline, strongest we've had in years. More importantly, we're focused on quality over quantity, partnering with well-capitalized, experienced operators in attractive, high-traffic markets. Our disciplined approach to development and franchise recruitment is expected to drive meaningful long-term potential for our system's performance. Turning to our rebrand, we've continued to make strong progress evolving the Rocky Mountain Chocolate Factory brand. Over the past year, we've modernized nearly every customer touchpoint from our new logo, contemporary store design, updated packaging, refreshed website, makeover of our longtime mascot, Truffles the Bear, and the overall in-store experience. The refreshed look elevates the brand while maintaining the warmth, quality, and authenticity customers have always associated with the Rocky Mountain Chocolate Factory. We expect most of our remodel work across the system to begin in early calendar 2026, with the goal of having nearly all stores align with the new brand identity in 24 months. These remodels will include new exterior signage, updated interior layouts, and enhanced merchandising designed to create a more cohesive and engaging customer experience across all stores, both new and remodeled. We're making meaningful progress improving product presentation and packaging. Our new packaging has rolled out to most stores and feedback from franchisees and customers has been positive. The updated design conveys the premium nature of our products and complements the in-store brand aesthetic. Our package is modular in design, so when franchisees asked for a new sampler package during our recent national convention, we were able to develop and roll that out in about six weeks, a feat never before even considered but now a reality due to our unique design, which allows us to take in customer data and respond rapidly as we adjust to real-time feedback. In addition, we recently hired a new world-class R&D executive who has experience in the confectionery business. His addition to our team will accelerate the introduction of many new and exciting products to offer our franchisees and customers. Altogether, these initiatives are strengthening how customers experience our brand. They represent the next stage of our development, a consistent, elevated experience that supports the long-term franchisee success and a deeper customer connection. We've been modernizing the way customers interact with Rocky Mountain Chocolate Factory brand online. Earlier this quarter, we launched our refreshed website, which reflects our contemporary identity and provides a cleaner, premium look. This refresh is an important step in aligning our digital presence with the in-store experience and features our updated package offerings just in time for the holidays. As originally conceived, our website will be an on-ramp for consumers to experience a small sampling of our delicious products with all signs leading to a nearby store for the full selection of premium offerings. This will lead to our next iteration of store-level SKU reorientation in which every store will carry all of the items that Rocky Mountain Chocolate Factory offers from Long Branch, New Jersey to Huntington Beach, California. To strengthen customer retention and engagement, We're preparing to roll out a new loyalty program. This loyalty program will deliver a personalized and mobile-friendly experience, allowing us to better understand purchasing behavior and reward purchase frequency. We plan to launch new programs shortly after the first of the year. We're also expanding third-party delivery to meet customers where they are. Our partnership with DoorDash and other third-party delivery services continues to progress as we standardize store listings, locations, and menu data across the system. We're encouraging franchisees to transition to DoorDash's storefront model, which provides broader reach with stronger unit economics compared to the traditional delivery structure. In addition, this creates an operating structure to expand across all major third-party delivery platforms which will be an ongoing initiative for every location. The economics of these platforms are expected to be accretive to store-level sales and profitability. Taken together, our digital initiatives represent the next phase of customer engagement for the brand. They extend the Rocky Mountain Chocolate Factory experience beyond the store walls as we take our premium offerings to mobile, third-party delivery, and corporate customers deepening relationships and supporting incremental profitable growth for our franchisees. In August, we acquired a long-standing store in Camarillo, California for $165,000. Last year, that store generated $700,000 in sales. Under our management, it will shift to a more traditional mix of Durango and store-made products. creating a pickup in Durango production demand and improving store-level profitability. If you reference our segment analysis in the current 10Q, you will see our retail operations have generated a pre-tax margin of between 15% and 20%. The acquisition of this store is expected to be accretive to our overall earnings. In addition, it gives us physical presence in the important Southern California marketplace, while also creating a third company-owned store that we'll use as a testbed to explore new ways to engage with customers. Over time, we expect to have more company-owned stores located in strategic markets where we can use those to test and develop best practices. For too many years, we've often simply taken orders, not selling. The unique attribute The unique attributes of Rocky Mountain Chocolate Factory brand and experience need to be sold. A shift to selling represents a fundamental change in how we approach our customer engagement and is the single most exciting opportunity on the horizon. Pivoting to an in-store customer experience, unlike anything the company has executed in decades. We're in the early stages of developing a clear articulation of our message, for both franchisees and customers. We're developing a message that ties together our new logo, store design, packaging, website, and Truffles the Bear. The next leg of our journey will show our transformation in its full color with all the possibilities this brand has previously been unable to capture. Of course, operational execution remains the center of our attention. the team in Durango continues to work on driving efficiency gains as we prepare for the holiday season. We now have the flexibility to extend production hours and add shifts as needed to meet upcoming seasonal demands, thanks to the insight and experience of our new VP of Operations. Inventory levels are healthy heading into the holidays, and our production plan is focused on maintaining freshness and product availability across the system. To support that, we've increased staffing to extend production runtimes, which improves efficiency and minimizes downtime between changeovers without incurring expensive overtime pay. Our raw materials and key ingredients are flowing well. We're positioned to meet demand for the season ahead. We've improved logistics by moving consumer packaging back to Durango and added warehouse capacity in Albuquerque taking it from Salt Lake City, and in the process, reducing transit time to the factory from seven hours to three hours. This change has improved responsiveness and reduced transportation cost. Combined with disciplined pricing, freight optimization, and ongoing process improvements, these initiatives are improving our cost structure and profitability. Culturally, this is a very different company than it was 16 months ago, We've built a leadership team and organization that is aligned, accountable, and focused on results. Across every function from Durango to the field, there's a growing sense of purpose, collaboration, and execution discipline. We've made tough decisions necessary to stabilize the business and have been deliberate in how we've built for the future. The progress we're seeing now is a direct result of that approach. Our transformation is continuing as planned. The foundation we've laid is solid. The factory is running more efficiently, franchisees have better tools and support, and our brand continues to evolve in ways that resonate with customers today. As we enter the holiday season, the organization is aligned around one simple objective, executional excellence. That means keeping product flowing, supporting franchisees, and delivering a consistent premium customer experience. As I began the call today, I reiterate, we are focused on creating value for our equity owners over time. We will invariably experience unforeseen challenges in the short run, be those operational, personnel, or resource driven, that we will have to navigate, but we'll never lose sight of where we're headed over the long run. Our goals are lofty. Our team is focused. Our mission is clear. Thank you for your attention. With that, I'll turn the call over to our CFO, Carrie Cass, to step you through our fiscal Q2 financial results. Carrie?

Thank you, Jeff. Please note that unless otherwise stated, all comparisons are on a year-over-year basis. Total revenue for the quarter was $6.8 million compared to $6.4 million in the same period last year. Product sales were $5.2 million compared to $4.9 million last year and franchise and royalty fees were $1.6 million up from $1.5 million in the same period last year. The total product and retail gross profit was negative $33,000 compared to $0.6 million The decrease reflects year-over-year comparability factors, the timing of inventory adjustments, and is partially offset by continued factory efficiency gains. Total costs and expenses were $7.3 million, which were essentially flat compared to the same period last year. The net loss of $0.7 million, or a negative $0.09 per share, compared to the net loss of $0.7 million, or a negative $0.11 per share, in the second fiscal quarter of 25. Turning to the balance sheet, as of August 31, 2025, we had cash of $2 million compared to $0.7 million at February 28 of 25. During the quarter, we added $1.8 million in new borrowings to support working capital and seasonal needs. This included a $1.2 million term loan and 0.6 million incremental loan under our existing credit facility. Both loans carry the same 12% interest rate, interest only payments, and the same September 30th, 27 maturity as the original 6 million facility established last year. As a result, total debt outstanding was 7.8 million as of August 31st, 25. This concludes our prepared remarks. We'll now open it up to Q&A. Operator, back to you.