The accompanying notes are an integral part of these consolidated financial statements.

	May 31,		February 28,		August 31,		February 28,
	2019		2019		2019		2019
	(unaudited)				(unaudited)
Assets
Current Assets
Cash and cash equivalents	$	5,895,574	$	5,384,027	$	5,753,209	$	5,384,027
Accounts receivable, less allowance for doubtful accounts of $557,916 and $489,502, respectively		3,877,170		3,993,262
Accounts receivable, less allowance for doubtful accounts of $585,306 and $489,502, respectively						4,017,572		3,993,262
Notes receivable, current portion		140,452		110,162		134,926		110,162
Refundable income taxes		4,534		190,201		44,726		190,201
Inventories, less reserve for slow moving inventory of $171,651 and $371,147, respectively		4,016,264		4,270,357
Inventories, less reserve for slow moving inventory of $178,658 and $371,147, respectively						4,195,198		4,270,357
Other		440,173		318,126		465,876		318,126
Total current assets		14,374,167		14,266,135		14,611,507		14,266,135

Property and Equipment, Net		5,855,457		5,786,139		5,857,664		5,786,139

Other Assets
Notes receivable, less current portion		357,877		281,669		317,507		281,669
Goodwill, net		1,046,944		1,046,944		1,046,944		1,046,944
Franchise rights, net		3,521,112		3,678,920		3,363,304		3,678,920
Intangible assets, net		479,601		498,337		460,865		498,337
Deferred income taxes		569,393		607,421		505,462		607,421
Lease right of use asset		3,280,508		-		3,066,826		-
Other		63,384		56,576		56,264		56,576
Total other assets		9,318,819		6,169,867		8,817,172		6,169,867

Total Assets	$	29,548,443	$	26,222,141	$	29,286,343	$	26,222,141

Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long term debt	$	829,941	$	1,176,488	$	480,445	$	1,176,488
Accounts payable		1,126,472		897,074		1,295,732		897,074
Accrued salaries and wages		732,313		655,853		597,856		655,853
Gift card liabilities		715,700		742,289		648,142		742,289
Other accrued expenses		271,863		293,094		291,353		293,094
Dividend payable		715,899		714,939		719,359		714,939
Contract liabilities		238,194		256,094		239,278		256,094
Lease liability		851,249		-		808,989		-
Total current liabilities		5,481,631		4,735,831		5,081,154		4,735,831

Lease Liability, Less Current Portion		2,429,259		-		2,257,837		-
Contract Liabilities, Less Current Portion		1,020,997		1,096,478		976,651		1,096,478

Commitments and Contingencies

Stockholders' Equity
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding		-		-		-		-
Series A Junior Participating Preferred Stock, 50,000 authorized; -0- shares issued and outstanding		-		-
Undesignated series, 200,000 shares authorized; -0- shares issued and outstanding		-		-
Common stock, $.001 par value, 46,000,000 shares authorized, 5,962,327 shares and 5,957,827 shares issued and outstanding, respectively		5,962		5,958
Series A Junior Participating Preferred Stock, authorized 50,000 shares						-		-
Undesignated series, authorized 200,000 shares						-		-
Common stock, $.001 par value, 46,000,000 shares authorized, 5,991,162 shares and 5,957,827 shares issued and outstanding, respectively						5,991		5,958
Additional paid-in capital		6,882,114		6,650,864		7,037,501		6,650,864
Retained earnings		13,728,480		13,733,010		13,927,209		13,733,010

Total stockholders' equity		20,616,556		20,389,832		20,970,701		20,389,832

Total Liabilities and Stockholders' Equity	$	29,548,443	$	26,222,141	$	29,286,343	$	26,222,141

The accompanying notes are an integral part of these consolidated financial statements.

	Three Months Ended						Six Months Ended
	May 31,						August 31,
	2019			2018			2019			2018
Cash Flows From Operating Activities
Net Income	$	711,609		$	576,944		$	1,629,697		$	1,327,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		377,654			437,505			750,486			872,454
Provision for obsolete inventory		23,766			24,185			47,945			57,614
Provision for loss on accounts and notes receivable		81,283			23,400			108,283			40,800
Asset impairment and store closure losses		-			44,000			-			67,822
Loss on sale or disposal of property and equipment		2,867			17,056			5,796			26,020
Expense recorded for stock compensation		231,254			155,807			386,670			280,728
Deferred income taxes		38,028			(54,493	)		101,959			38,814
Changes in operating assets and liabilities:
Accounts receivable		(100,089	)		672,005			(267,491	)		421,162
Refundable income taxes		185,667			-			145,475			257,685
Inventories		344,058			(916,261	)		212,138			(1,579,686	)
Contract Liabilities		(90,248	)		(78,883	)
Other current assets		(122,047	)		(168,990	)		(147,750	)		(154,537	)
Accounts payable		115,667			291,989			213,734			58,005
Accrued liabilities		28,640			349,987			(153,885	)		(254,540	)
Contract liabilities								(130,378	)		(71,671	)
Net cash provided by operating activities		1,828,109			1,374,251			2,902,679			1,388,429

Cash Flows from Investing Activities
Proceeds received on notes receivable		28,400			33,698			74,296			55,612
Proceeds from (cost of) sale or distribution of assets		-			500
Purchases of property and equipment		(283,548	)		(130,572	)		(480,984	)		(242,432	)
(Increase) decrease in other assets		312			(5,366	)		312			(13,717	)
Net cash used in investing activities		(254,836	)		(101,740	)		(406,376	)		(200,537	)

Cash Flows from Financing Activities
Payments on long-term debt		(346,547	)		(333,955	)		(696,043	)		(670,336	)
Dividends paid		(715,179	)		(708,653	)		(1,431,078	)		(1,417,305	)
Net cash used in financing activities		(1,061,726	)		(1,042,608	)		(2,127,121	)		(2,087,641	)

Net Increase in Cash and Cash Equivalents		511,547			229,903
Net Increase (Decrease) in Cash and Cash Equivalents								369,182			(899,749	)

Cash and Cash Equivalents, Beginning of Period		5,384,027			6,072,984			5,384,027			6,072,984

Cash and Cash Equivalents, End of Period	$	5,895,574		$	6,302,887		$	5,753,209		$	5,173,235

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and Securities and Exchange Commission (the “SEC”) regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and six months ended ~~May~~August 31, 2019 are not necessarily indicative of the results to be expected for the entire fiscal ~~year.~~year, or any other future period.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

~~Management evaluated all activity of~~On September 30, 2019 the Company ~~through~~executed a Revolving Line of Credit Note with Wells Fargo Bank. This document was executed to renew the ~~issue~~existing $5 million line of credit and extend the maturity date ~~of the financial statements and concluded that no subsequent events have occurred that would require recognition or disclosure in the financial statements.~~from September 30, 2019 to September 30, 2021.

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in Quarterly Reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. ~~In light of the anticipated timing of effectiveness of the~~The Company adopted these amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and is first presenting the analysis of changes in stockholders’ equity in its interim financial statements in this Quarterly Report on this Form 10-Q. The adoption of these SEC amendments did not have a material effect on the Company’s financial position, results of operations, cash flows or stockholders’ equity.ended May 31, 2019.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures.

The Company adopted ASU 2016-02 as of March 1, 2019, using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company recorded a Right of Use Asset and Lease Liability on the Consolidated Balance Sheet of $3.3 million upon adoption. The impact of the new standard did not affect the Company’s cash flows or results of operations. The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the lease term, which includes options that are likely to be exercised, discounted using an incremental borrowing rate or implicit rate. See Note 11 - Leasing Arrangements for additional information.

Three Months Ended May 31, 2018	Franchising			Manufacturing			Retail			U-Swirl		Other			Total
Three Months Ended August 31, 2018																		Franchising			Manufacturing			Retail			U-Swirl		Other			Total
Total revenues	$	1,313,206		$	5,870,514		$	361,435		$	1,133,254	$	-		$	8,678,409		$	1,470,486		$	5,032,787		$	298,359		$	1,250,905	$	-		$	8,052,537
Intersegment revenues		(1,035	)		(311,289	)		-			-		-			(312,324	)		(1,732	)		(250,717	)		-			-		-			(252,449	)
Revenue from external customers		1,312,171			5,559,225			361,435			1,133,254		-			8,366,085			1,468,754			4,782,070			298,359			1,250,905		-			7,800,088
Segment profit (loss)		489,271			1,169,335			(78,494	)		135,155		(950,093	)		765,174			693,383			1,070,613			(120,262	)		229,818		(847,923	)		1,025,629
Total assets		1,058,006			12,533,723			1,054,367			7,594,185		5,897,814			28,138,095			1,199,536			13,332,652			1,011,649			5,920,971		6,065,406			27,530,214
Capital expenditures		3,529			111,765			2,071			3,338		9,869			130,572			6			61,152			1,734			9,966		39,502			112,360
Total depreciation & amortization	$	11,924		$	141,028		$	12,675		$	244,051	$	27,827		$	437,505		$	11,631		$	142,697		$	11,179		$	241,033	$	28,409		$	434,949

Revenue from one customer of the Company’s Manufacturing segment represented approximately $1.4 million, or 16.3 percent of the Company’s revenues from external customers during the three months ended May 31, 2019 compared to $1.3 million, or 15.2 percent of the Company’s revenues from external customers during the three months ended May 31, 2018.

Revenue from one customer of the Company’s Manufacturing segment represented approximately $1.5 million, or 9.3 percent, of the Company’s revenues from external customers during the six months ended August 31, 2019, compared to $1.4 million, or 8.8 percent, of the Company’s revenues from external customers during the six months ended August 31, 2018.

Effective March 1, 2002, under Accounting Standards Codification Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.

Amortization expense related to intangible assets totaled ~~$176,544~~$353,088 and ~~$211,287~~$422,573 during the ~~three~~six months ended ~~May~~August 31, 2019 and 2018, respectively.

During the year ended February 28, 2019, the Company reviewed its estimates of the future economic life of certain intangible assets. As a result of this review, the Company accelerated the rate of amortization of certain intangible assets to better reflect their expected future value. Consistent with the treatment of a change in estimate, the new rate of amortization of intangible assets will be applied to future periods.

At ~~May~~August 31, 2019, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:

This Quarterly Report on Form 10-Q (“Quarterly Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements involve various risks and uncertainties. The nature of our operations and the environment in which we operate subject us to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect," "anticipate," "should," "plan," "estimate," "potential," or similar expressions. Factors which could cause results to differ include, but are not limited to: the outcome of our ongoing evaluation of strategic alternatives, including, but not limited to, the time table for identifying potential transactions or transaction candidates and whether any transaction will be completed, relationships and changes in our customers,changes in the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding strategy, the success of international expansion efforts and the effect of government regulations. Government regulations which we and our franchisees ~~and licensees~~ either are or may be subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, ~~licensing,~~ employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see the ~~section entitled~~ “Risk Factors” contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 28, 2019. These forward-looking statements apply only as of the date of this Quarterly Report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, we undertake no obligation to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this Quarterly Report or those that might reflect the occurrence of unanticipated events.

Unless otherwise specified, the “Company,” “we,” “us” or “our” refers to Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its consolidated subsidiaries~~(including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation~~ ~~(“RMCF”)~~).

We are an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our ~~wholly-owned~~ subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates soft-serve frozen yogurt cafés. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products. We also sell our candy ~~in select locations~~ outside of our system of retail stores and license the use of our brand with certain consumer products. As of ~~May~~August 31, 2019, there were two Company-owned, 9395 licensee-owned and ~~244~~242 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, Canada, South Korea, ~~the republic of~~ Panama, and the Philippines. As of ~~May~~August 31, 2019, U-Swirl operated four Company-owned cafés and 9692 franchised cafés located in 24 states and Qatar. U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.

In June 2019, the Company’s largest customer, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11 bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including the divisions that the Company has historically sold product to, were sold through the auction to multiple buyers. The Company is uncertain if accounts receivable and inventory balances associated with FTD at August 31, 2019 will be realized at their full value, or if any revenue will be received from FTD in the future.

Three Months Ended ~~May~~August 31, 2019 Compared to the Three Months Ended ~~May~~August 31, 2018

Basic earnings per share increased ~~20.0%~~15.4% from ~~$0.10 per share for~~$0.13 in the three months ended ~~May~~August 31, 2018 to ~~$0.12 for~~$0.15 in the three months ended ~~May~~August 31, 2019. Revenues ~~increased 0.7%~~decreased (5.3)% from ~~$8.37~~$7.8 million ~~for~~in the three months ended ~~May~~August 31, 2018 to ~~$8.43~~$7.4 million ~~for~~in the three months ended ~~May~~August 31, 2019. ~~This increase in revenues was due primarily to an increase in royalty and marketing fees, franchise fees and factory sales, partially offset by a decrease in retail sales.~~ Operating income increased ~~20.8%~~19.7% from ~~$783,000 for~~$1.0 million in the three months ended ~~May~~August 31, 2018 to ~~$946,000 for~~$1.2 million in the three months ended ~~May~~August 31, 2019. Net income increased ~~23.3%~~22.3% from ~~$577,000 for~~$751,000 in the three months ended ~~May~~August 31, 2018 to ~~$712,000 for~~$918,000 in the three months ended ~~May~~August 31, 2019. The increase in operating ~~income and net~~ income was due primarily to lower operating expenses ~~and an increase in revenue~~ in the three months ended ~~May~~August 31, 2019 compared to the three months ended ~~May~~August 31, 2018.

Three Months Ended

May 31,

August 31,

(

Factory Sales

The ~~increase~~decrease in factory sales for the three months ended ~~May~~August 31, 2019 ~~compared to~~versus the three months ended ~~May~~August 31, 2018 was primarily due to a ~~2.0% increase in sales of product to our network of franchised and licensed retail stores partially offset by a 2.1%~~32.4% decrease in shipments of product to customers outside our network of franchise and licensed retail locations and a 2.7% decrease in purchases by our network of franchised and licensed stores. The decrease in shipments of product to customers outside our network of franchise and licensed retail ~~stores.~~stores was primarily the result of product rationalization and a decline in revenue associated with products no longer offered for sale. Purchases by the Company’s largest customer, FTD, decreased during the three months ended ~~May~~August 31, 2019, ~~were~~with revenue from such customer decreasing to approximately ~~$1.4 million,~~$103,000, or ~~16.3%~~1.4%, of the Company’s revenues during the three months ended ~~May~~August 31, 2019, compared to ~~$1.3 million,~~$144,000, or ~~15.2%~~1.8% of the Company’s revenues during the three months ended ~~May~~August 31, ~~2018 for this same customer. If~~2018. As discussed above, FTD declared Chapter 11 bankruptcy in June 2019. Until the bankruptcy proceedings are complete, it is unclear whether the Company will realize any revenue from FTD in the future, ~~purchases from this customer decrease our sales could decline,~~ and ~~there is no assurance that sales~~if so, whether such revenues will return to ~~such customer will continue at historical~~historic levels.

Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 5.0% in the three months ended August 31, 2019, compared with the three months ended August 31, 2018.

Retail Sales

~~Retail~~The decrease in retail sales ~~at Company-owned stores decreased~~ for the three months ended ~~May~~August 31, 2019 compared to the three months ended ~~May~~August 31, 2018 ~~as a result~~was primarily due to fewer Company-owned units in operation because of the closure of certain underperforming Company-owned ~~location~~locations during the prior fiscal year. Same store sales at all Company-owned ~~Rocky Mountain Chocolate Factory~~ stores and ~~U-Swirl~~ cafés ~~increased 2.4%~~decreased 1.7% in the three months ended ~~May~~August 31, 2019 compared to the three months ended ~~May~~August 31, 2018.

~~Royalt~~y,Royalties, Marketing Fees and Franchise Fees

The ~~increase~~decrease in ~~royalty~~royalties and marketing fees ~~for~~from the three months ended ~~May~~August 31, ~~2019 compared~~2018 to the three months ended ~~May~~August 31, ~~2018~~2019 was primarily due to ~~an increase in royalty revenue associated with the Company’s purchase-based royalty structure and an increase in same store sales at franchise stores and cafes, partially offset by~~ a ~~5.0%~~6.5% decrease in domestic franchise units in operation. The average number of total domestic franchise stores in operation decreased from ~~296~~291 in the three months ended ~~May~~August 31, 2018 to ~~282~~272 during the three months ended ~~May~~August 31, 2019. This decrease is the result of ~~the number of~~ domestic store closures exceeding ~~the number of~~ domestic store openings. Same store sales at total franchise stores and cafés in operation increased ~~0.7%~~0.1% during the three months ended ~~May~~August 31, 2019 compared to the three months ended ~~May~~August 31, 2018.

The ~~increase~~decrease in franchise ~~fees~~fee revenue for the three months ended ~~May~~August 31, 2019 compared to the three months ended ~~May~~August 31, 2018 was the result of ~~an increase~~a decrease in revenue resulting from ~~store closures~~fewer franchise stores in operation and the ~~termination~~associated recognition of ~~any future contract liability associated with~~revenue over the ~~closure.~~term of the franchise agreement.

Table of Contents

Costs and Expenses

Cost of Sales

Three Months Ended

May 31,
$
%

($'s in thousands)

2019

2018

Change

Change

Cost of sales - factory
$ 4,326.5 $ 4,270.8 $ 55.7 1.3 %
Cost of sales - retail
288.2 394.4 (106.2 ) (26.9 )%
Franchise costs
483.0 493.3 (10.3 ) (2.1 )%
Sales and marketing
556.7 588.3 (31.6 ) (5.4 )%
General and administrative
1,144.7 972.6 172.1 17.7 %
Retail operating
448.9 562.5 (113.6 ) (20.2 )%
Total
$ 7,248.0 $ 7,281.9 $ (33.9 ) (0.5 )%

~~Table of Contents~~

	Three Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change

Cost of sales - factory	$	3,435.3	$	3,575.4	$	(140.1	)		(3.9	)%
Cost of sales - retail		303.1		308.5		(5.4	)		(1.8	)%
Franchise costs		441.6		582.8		(141.2	)		(24.2	)%
Sales and marketing		434.8		565.2		(130.4	)		(23.1	)%
General and administrative		830.5		813.4		17.1			2.1	%
Retail operating		469.3		498.9		(29.6	)		(5.9	)%
Total	$	5,914.6	$	6,344.2	$	(429.6	)		(6.8	)%

Gross Margin

Three Months Ended

May 31,

August 31,

(

	Three Months Ended												Three Months Ended
	May 31,						%			%			August 31,						%			%
	2019			2018			Change			Change			2019			2018			Change			Change
(Percent)
Factory gross margin		22.8	%		23.2	%		(0.4	)%		(1.7	)%		23.4	%		25.2	%		(1.9	)%		(7.4	)%
Retail gross margin		66.3	%		61.4	%		4.9	%		8.0	%		66.4	%		67.7	%		(1.3	)%		(1.9	)%
Total		28.6	%		29.1	%		(0.5	)%		(1.7	)%		30.6	%		32.3	%		(1.7	)%		(5.4	)%

Adjusted Gross Margin

Three Months Ended

May 31,

August 31,

(

Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory 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 factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider ~~them~~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 factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.

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Cost of Sales and Gross Margin

Factory margins decreased 190 basis points in the three months ended August 31, 2019 compared to the three months ended August 31, 2018 because of a charge associated with costs of excess capacity. Excess capacity was the result of a 14.8% decrease in production for the three months ended August 31, 2019 compared to the three months ended August 31, 2018. The decrease in Company-owned store margin is due primarily to a change in units in operation during the three months ended August 31, 2019 compared to the prior year.

Franchise Costs

The decrease in franchise costs in the three months ended August 31, 2019 versus the three months ended August 31, 2018 is due primarily to a decrease in legal and professional expense in the three months ended August 31, 2019 compared to the three months ended August 31, 2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 22.1% in the three months ended August 31, 2019 from 28.2% in the three months ended August 31, 2018.

Sales and Marketing

The decrease in sales and marketing costs for the three months ended August 31, 2019 compared to the three months ended August 31, 2018 is primarily due to planned cost reductions as a result of fewer domestic franchise units in operation and lower revenue associated with sales to customers outside of our network of franchised and licensed RMCF locations.

General and Administrative

The increase in general and administrative costs for the three months ended August 31, 2019 compared to the three months ended August 31, 2018 is primarily due to higher professional fees associated with the Company’s previously announced process to explore and review strategic alternatives to maximize shareholder value and position the Company for long-term success. During the three months ended August 31, 2019, the Company incurred approximately $92,000 of costs associated with the review of strategic alternatives, compared with no comparable costs incurred in the three months ended August 31, 2018. As a percentage of total revenues, general and administrative expenses increased to 11.2% in the three months ended August 31, 2019 compared to 10.4% in the three months ended August 31, 2018.

Retail Operating Expenses

The decrease in retail operating expenses for the three months ended August 31, 2019 compared to the three months ended August 31, 2018 was due primarily to changes in units in operation as a result of the closure of certain underperforming Company-owned units. Retail operating expenses, as a percentage of retail sales, decreased from 52.3% in the three months ended August 31, 2018 to 52.0% in the three months ended August 31, 2019. This decrease is primarily the result of the change in units in operation from the prior year.

Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $225,000 in the three months ended August 31, 2019, a decrease of 24.0% from $297,000 in the three months ended August 31, 2018. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 8 to the financial statements for a summary of annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 6.7% from $138,000 in the three months ended August 31, 2018 to $147,000 in the three months ended August 31, 2019. This increase was the result of an increase in production assets in service primarily resulting from the replacement of obsolete equipment or equipment at the end of its operating life.

Costs Associated with Company-Owned Store Closures

There was $119,000 in costs associated with Company-owned store closures incurred during the three months ended August 31, 2018 and no costs associated with company-owned store closures incurred during the three months ended August 31, 2019. The costs incurred during the three months ended August 31, 2018 were the result of charges related to closing certain underperforming Company-owned locations.

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Other Income (Expense)

Net interest income was $3,000 in the three months ended August 31, 2019 compared to net interest expense of $15,000 incurred in the three months ended August 31, 2018. This decrease in interest expense is due to lower average outstanding promissory note balances for the three months ended August 31, 2019 compared to the three months ended August 31, 2018.

Income Tax Expense

Our effective income tax rate for the three months ended August 31, 2019 was 26.4%, compared to 26.8% for the three months ended August 31, 2018.

Six Months Ended August 31, 2019 Compared to the Six Months Ended August 31, 2018

Results Summary

Basic earnings per share increased 22.7% to $0.27 for the six months ended August 31, 2019 compared to $0.22 for the six months ended August 31, 2018. Revenues decreased (2.2)% to $15.8 million for the six months ended August 31, 2019 compared to $16.2 million in the six months ended August 31, 2018. Operating income increased 20.2% from $1.8 million in the six months ended August 31, 2018 to $2.2 million in the six months ended August 31, 2019. Net income increased 22.7% from $1.3 million in the six months ended August 31, 2018 to $1.6 million in the six months ended August 31, 2019. The increase in operating income and net income was due primarily to lower operating expenses in the six months ended August 31, 2019 compared to the six months ended August 31, 2018.

Revenues

	Six Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change
Factory sales	$	10,088.4	$	10,341.3	$	(252.9	)		(2.4	)%
Retail sales		1,756.3		1,977.1		(220.8	)		(11.2	)%
Franchise fees		188.2		200.7		(12.5	)		(6.2	)%
Royalty and marketing fees		3,778.4		3,647.1		131.3			3.6	%
Total	$	15,811.3	$	16,166.2	$	(354.9	)		(2.2	)%

Factory Sales

The decrease in factory sales for the six months ended August 31, 2019 versus the six months ended August 31, 2018 was primarily due to a 10.2% decrease in shipments of product to customers outside our network of franchise and licensed retail locations. The decrease in shipments of product to customers outside our network of franchise and licensed retail stores was primarily the result of product rationalization and a decline in revenue associated with products no longer offered for sale. Purchases by the Company’s largest customer, FTD, were approximately $1.5 million, or 9.3%, of the Company’s revenues during the six months ended August 31, 2019, compared to $1.4 million, or 8.8% of the Company’s revenues during the six months ended August 31, 2018. As discussed above, FTD declared Chapter 11 bankruptcy in June 2019. Until the bankruptcy proceedings are complete, it is unclear whether the Company will realize any revenue from FTD in the future, and if so, whether such revenues will return to historic levels.

Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 5.3% in the six months ended August 31, 2019, compared with the six months ended August 31, 2018.

Retail Sales

The decrease in retail sales for the six months ended August 31, 2019 compared to the six months ended August 31, 2018 was primarily due to fewer Company-owned units in operation because of the closure of certain underperforming Company-owned locations during the prior fiscal year. Same store sales at all Company-owned stores and cafés increased 0.2% in the six months ended August 31, 2019 compared to the six months ended August 31, 2018.

Royalties, Marketing Fees and Franchise Fees

The increase in royalties and marketing fees from the six months ended August 31, 2018 to the six months ended August 31, 2019 was primarily due to an increase in royalty revenue associated with the Company’s purchase-based royalty structure, partially offset by a 6.5% decrease in domestic franchise units in operation. The average number of total domestic franchise stores in operation decreased from 293 in the six months ended August 31, 2018 to 274 during the six months ended August 31, 2019. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at total franchise stores and cafés in operation increased 0.5% during the six months ended August 31, 2019 compared to the six months ended August 31, 2018.

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The decrease in franchise fee revenue for the six months ended August 31, 2019 compared to the six months ended August 31, 2018 was the result of a decrease in revenue resulting from fewer franchise stores in operation and the associated recognition of revenue over the term of the franchise agreement.

Costs and Expenses

Cost of Sales

	Six Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change

Cost of sales - factory	$	7,761.8	$	7,846.1	$	(84.3	)		(1.1	)%
Cost of sales - retail		591.3		703.0		(111.7	)		(15.9	)%
Franchise costs		924.7		1,076.0		(151.3	)		(14.1	)%
Sales and marketing		991.4		1,153.5		(162.1	)		(14.1	)%
General and administrative		1,975.2		1,727.8		247.4			14.3	%
Retail operating		918.2		1,061.3		(143.1	)		(13.5	)%
Total	$	13,162.6	$	13,567.7	$	(405.1	)		(3.0	)%

Gross Margin

	Six Months Ended
	August 31,				$			%
	2019		2018		Change			Change

Factory gross margin	$	2,326.6	$	2,495.2	$	(168.6	)		(6.8	)%
Retail gross margin		1,165.0		1,274.1		(109.1	)		(8.6	)%
Total	$	3,491.6	$	3,769.3	$	(277.7	)		(7.4	)%

	Six Months Ended
	August 31,						%			%
	2019			2018			Change			Change

Factory gross margin		23.1	%		24.1	%		(1.1	)%		(4.4	)%
Retail gross margin		66.3	%		64.4	%		1.9	%		2.9	%
Total		29.5	%		30.6	%		(1.1	)%		(3.7	)%

Adjusted Gross Margin

	Six Months Ended
	August 31,						$			%
($'s in thousands)	2019			2018			Change			Change

Factory gross margin	$	2,326.6		$	2,495.2		$	(168.6	)		(6.8	)%
Plus: depreciation and amortization		293.1			274.7			18.4			6.7	%
Factory adjusted gross margin		2,619.7			2,769.9			(150.2	)		(5.4	)%
Retail gross margin		1,165.0			1,274.1			(109.1	)		(8.6	)%
Total Adjusted Gross Margin	$	3,784.7		$	4,044.0		$	(259.3	)		(6.4	)%

Factory adjusted gross margin		26.0	%		26.8	%		(0.8	)%		(3.1	)%
Retail gross margin		66.3	%		64.4	%		1.9	%		2.9	%
Total Adjusted Gross Margin		32.0	%		32.8	%		(0.9	)%		(2.7	)%

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

Cost of Salesand Gross Margin

Factory ~~gross~~ margins decreased 40110 basis points in the ~~three~~six months ended ~~May~~August 31, 2019 compared to the ~~three~~six months ended ~~May~~August 31, 2018 ~~due primarily to~~because of a ~~decrease in manufacturing efficiencies, primarily~~charge associated with costs of excess capacity partially offset by certain cost reductions. Excess capacity was the result of ~~lower~~a 10.6% decrease in production ~~volume in~~for the ~~three~~six months ended ~~May~~August 31, 2019 compared to the ~~three~~six months ended ~~May~~August 31, 2018. ~~Retail gross margins increased 490 basis points in the three months ended May 31, 2019 compared to the same period in the prior year.~~ The increase in retail gross margins was primarily the result of ~~a reduction in inventory discounts prior to closing certain~~the closure of underperforming Company-owned locations ~~realized~~ during the prior ~~year period.~~fiscal year.

Franchise Costs

The decrease in franchise costs in the ~~three~~six months ended ~~May~~August 31, 2019 ~~compared to~~versus the ~~three~~six months ended ~~May~~August 31, 2018 ~~was~~is due primarily to ~~lower~~a decrease in legal and professional ~~fees.~~expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to ~~24.6%~~23.3% in the ~~three~~six months ended ~~May~~August 31, 2019 from ~~27.6%~~28.0% in the ~~three~~six months ended ~~May~~August 31, 2018. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of ~~higher royalty revenues.~~lower franchise costs.

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Sales and Marketing

The decrease in sales and marketing costs for the ~~three~~six months ended ~~May~~August 31, 2019 compared to the ~~three~~six months ended ~~May~~August 31, 2018 ~~was~~is primarily due to planned cost reductions as a result of fewer domestic franchise units in operation.

General and Administrative

The increase in general and administrative costs for the ~~three~~six months ended ~~May~~August 31, 2019 compared to the ~~three~~six months ended ~~May~~August 31, 2018 ~~was~~is primarily due ~~primarily~~ to higher professional fees associated with the Company’s previously announced process to explore and review strategic alternatives to maximize shareholder value and position the Company for long-term success. During the ~~three~~six months ended ~~May~~August 31, 2019, the Company incurred approximately ~~$255,000~~$347,000 of costs associated with the review of strategic alternatives, compared with no comparable costs incurred in the ~~three~~six months ended ~~May~~August 31, 2018. As a percentage of total revenues, general and administrative expenses increased to ~~13.6%~~12.5% in the ~~three~~six months ended ~~May~~August 31, 2019 compared to ~~11.6%~~10.7% in the ~~three~~six months ended ~~May~~August 31, 2018.

Retail Operating Expenses

The decrease in retail operating expenses for the ~~three~~six months ended ~~May~~August 31, 2019 compared to the ~~three~~six months ended ~~May~~August 31, 2018 was due primarily to ~~a decrease~~changes in ~~the number of~~ units in operation, ~~resulting from the sale~~as a result of ~~certain Company-owned units and~~ the closure of certain underperforming Company-owned ~~units since May 31, 2017.~~units. Retail operating expenses, as a percentage of retail sales, decreased from ~~55.0%~~53.7% in the ~~three~~six months ended ~~May~~August 31, 2018 to ~~52.5%~~52.3% in the ~~three~~six months ended ~~May~~August 31, 2019. This decrease is primarily the result of the change in units in operation from the prior year.

Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was ~~$232,000~~$457,000 in the ~~three~~six months ended ~~May~~August 31, 2019, a decrease of ~~22.9%~~23.5% from ~~$301,000 incurred~~$598,000 in the ~~three~~six months ended ~~May~~August 31, 2018. This decrease was the result of lower amortization of franchise rights, the result of a ~~change~~decrease in ~~management’s estimates related to the future value of U-Swirl intangibles and the associated acceleration of amortization expense.~~frozen yogurt cafés in operation. See Note 8 to the financial statements for a summary of annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 6.7% from ~~$136,500~~$275,000 in the ~~three~~six months ended ~~May~~August 31, 2018 to ~~$145,700~~$293,000 in the ~~three~~six months ended ~~May~~August 31, 2019. This increase was the result of an increase in production assets in ~~service.~~service primarily resulting from the replacement of obsolete equipment or equipment at the end of its operating life.

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Costs Associated with Company-Owned Store Closures

There was $177,000 in costs associated with Company-owned store closures incurred during the six months ended August 31, 2018 and no costs associated with Company-owned store closures incurred during the six months ended August 31, 2019. The costs incurred during the six months ended August 31, 2018 were the result of charges related to closing certain underperforming Company-owned locations.

Other Income (Expense)

~~Net~~Interest income was approximately equal to interest expense ~~was $2,200~~ in the ~~three~~six months ended ~~May~~August 31, 2019, compared to net interest expense of ~~$18,000 realized~~$33,000 in the ~~three~~six months ended ~~May~~August 31, 2018. This ~~change was primarily the result of less~~decrease in interest expense ~~incurred on~~is due to lower average outstanding promissory note ~~balances.~~balances for the six months ended August 31, 2019.

Income Tax Expense

Our effective income tax rate for the ~~three~~six months ended ~~May~~August 31, 2019 ~~and 2018~~ was ~~24.6%.~~25.6%, compared to 25.9% for the six months ended August 31, 2018.

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Liquidity and Capital Resources

As of ~~May~~August 31, 2019 and February 28, 2019, working capital was ~~$8.9 million, compared to~~ $9.5 ~~million as of February 28, 2019, a decrease of $0.6~~ million. The decrease in working capital was primarily due to the adoption of ASU 2016-02, Leases (Topic 842) and the inclusion of $851,000 of current lease liability in the current period with no current lease liability as of February 28, 2019.

Cash and cash equivalent balances increased ~~$512,000 from~~approximately $400,000 to $5.8 million as of August 31, 2019 compared to $5.4 million as of February 28, ~~2019 to $5.9 million as of May 31,~~ 2019, primarily as a result of cash flow generated by operating activities ~~partially offset~~exceeding cash flow used by ~~the~~financing activities, including repayment of debt and payment of ~~dividends and the purchases of property and equipment.~~dividends. Our current ratio was ~~2.6~~2.9 to 1 at ~~May~~August 31, 2019 compared to 3.0 to 1 at February 28, 2019. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

During the ~~three~~six months ended ~~May~~August 31, 2019, we had net income of $1,629,697. Operating activities provided cash of $2,902,679, with the principal adjustment to reconcile the net income to net cash provided by operating activities being depreciation and amortization of $750,486 and the expense recorded for stock compensation of $386,670. During the comparable 2018 period, we had net income of $1,327,759, and operating activities provided cash of ~~$1,828,109, primarily~~$1,388,429. The principal adjustment to reconcile the ~~result of~~net income to net cash provided by operating ~~results,~~activities was depreciation and amortization of ~~$377,654, a decrease in inventories of $344,058~~$872,454 and ~~expense related to stock-based compensation of $231,254. During~~ the ~~three months ended May 31, 2018, operating activities provided cash of $1,374,251, primarily the result of a decrease in accounts receivable of $672,005 and an~~ increase in ~~accounts payable and accrued liabilities~~inventory of ~~$587,483~~$1,579,686.

~~For~~During the ~~three~~six months ended ~~May~~August 31, 2019, investing activities used cash of ~~$254,836,~~$406,376, primarily due to the purchases of property, ~~and~~ equipment of ~~$283,548.~~$480,984. In comparison, investing activities used cash of ~~$101,740~~$200,537 during the ~~three~~six months ended ~~May~~August 31, 2018 primarily due to the purchase of property and equipment of ~~$130,572.~~$242,432.

Financing activities used cash of ~~$1,061,726~~$2,127,121 for the ~~three~~six months ended ~~May~~August 31, 2019 and used cash of ~~$1,042,608~~$2,087,641 during the ~~three months ended May 31, 2018. This was~~prior year period. The Company’s financing activities consist primarily ~~due to dividend payments and~~of payments on long-term debt ~~during the three months ended May 31, 2019~~ and ~~the three months ended May 31, 2018.~~declared dividends.

We have a $5$5.0 million ~~credit~~($5.0 million available as of August 31, 2019) working capital line of ~~which $5 million was available (subject to certain borrowing base limitations) as of May 31, 2019, secured~~credit collateralized by substantially all of our assets ~~except~~with the exception of our retail store assets. Additionally, the line of credit is subject to various financial ratio and leverage covenants. ~~At May~~As of August 31, 2019, we were in compliance with all such covenants. The line of credit ~~line~~was renewed in September 2019 and is subject to renewal again in September ~~2019.~~2021. As of August 31, 2019, no amount was outstanding under this line of credit.

Our outstanding long-term debt is comprised of a promissory note used to finance business acquisitions of SWRL ~~of which $830,000 was outstanding~~(unpaid balance as of ~~May~~August 31, ~~2019.~~2019 of $480,000). The promissory note ~~initially~~ allowed us to borrow up to a maximum of $7.0 million to finance business acquisitions ~~by SWRL~~ and bears interest at a fixed annual rate of 3.75%. ~~This~~The promissory note matures inon January 15, 2020. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of ~~May~~August 31, 2019, we were in compliance with all such covenants.

On July 15, 2014, we publicly announced a plan to repurchase up to $3.0 million of our common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, we announced a plan to purchase up to an additional $2,058,000 of our common stock under the repurchase plan, and on May 21, 2015, we announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of our common stock under the repurchase plan. We did not repurchase any shares during the three and six months ended ~~May~~August 31, ~~2019 or 2018.~~2019. As of ~~May~~August 31, 2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.

We believe cash flows generated by operating activities and available financing will be sufficient to fund our operations for at least the next twelve months. If necessary, ~~we have~~the Company has an available bank line of credit to help meet these requirements.

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Off-Balance Sheet Arrangements

As of August 31, 2019, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.

Purchase obligations: As of ~~May~~August 31, 2019, we had purchase obligations of approximately ~~$378,000.~~$714,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.

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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.

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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.

Item 3.

Quantitative and Qualitative Disclosures a~~bout~~About Market Risk

We do not engage in commodity futures trading or hedging activities and do not enter into derivative financial ~~instruments~~instrument transactions for trading or other speculative purposes. We also do not engage in transactions in foreign currencies or in interest rate swap transactions that could expose us to market risk. However, we are exposed to some commodity price and interest rate risks.

We frequently enter into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit us to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall and ~~it is~~we are unable to renegotiate the terms of the contract. As of ~~May~~August 31, 2019, based on future contractual obligations for ~~chocolate products,~~ingredients, we estimate that a ~~10% increase or decrease~~10.0% change in the prices of contracted ingredients would result in a ~~$38,000~~$71,000 favorable or unfavorable price benefit or cost, respectively, resulting from our ~~commodity purchase~~ contracts.

We have a $5 million bank line of credit that bears interest at a variable rate. As of ~~May~~August 31, 2019, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.

We also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually that was used to finance the previous acquisitions by SWRL. As of ~~May~~August 31, 2019, ~~$830,000~~$480,445 was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.

Item 4.

Controls and Procedures

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 Securities and Exchange Commission’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.

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, our Chief Executive ~~Officer~~ and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of ~~May~~August 31, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended ~~May~~August 31, 2019 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II.

OTHER INFORMATION

~~Item1.~~Item 1.

Legal Proceedings

The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Item 1A.

Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, 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, 2019. 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 28, 2019.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not ~~applicable.~~Applicable.

Item 5.

Other Information

None.

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Item 6.

Exhibits

3.1

Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015).

3.2

Certificate of Designations of Series A Junior Participating Preferred Stock, ~~Par Value~~par value $0.001 ~~Per Share,~~per share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015).

3.3

Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K filed on March 2, 2015).

10.1*

Revolving Line of Credit Note, dated September 30, 2019, between Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank, National Association.

31.1*

Certification Filed Pursuant To Section 302 Ofof The Sarbanes-Oxley Act of 2002.

32.1**

Certification Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002.

101.INS

*XBRL Instance Document.

101.SCH

*XBRL Taxonomy Extension Schema Document.

101.CAL

*XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

*XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

*XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

*XBRL Taxonomy Extension Presentation Linkbase Document.

____________________________

* Filed herewith.

** Furnished herewith.

2528

Table of Contents

~~Signature~~Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

(Registrant)

Date: ~~July 15,~~October 11, 2019

/s/ Bryan J. Merryman

Bryan J. Merryman, Chief Executive Officer,

Chief Financial Officer, Treasurer and ~~Director~~Chairman of the Board of Directors

s in thousands)

2019

2018

Change

2019

2018

Change

Factory sales

5,606.0

5,559.2

46.8

0.8

4,482.4

4,782.1

(299.7

)

(6.3

Retail sales

854.6

1,022.8

(168.2

)

(16.4

901.7

954.3

(52.6

)

(5.5

Franchise fees

106.3

93.2

13.1

14.1

81.9

107.5

(25.6

)

(23.8

Royalty and marketing fees

1,859.1

1,690.9

168.2

9.9

1,919.3

1,956.2

(36.9

)

(1.9

Total

8,426.0

8,366.1

59.9

0.7

7,385.3

7,800.1

(414.8

)

(5.3

Factory Sales

Retail Sales

~~Royalt~~y,Royalties, Marketing Fees and Franchise Fees

Table of Contents

Costs and Expenses

Cost of Sales

~~Table of Contents~~

	Three Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change

Cost of sales - factory	$	3,435.3	$	3,575.4	$	(140.1	)		(3.9	)%
Cost of sales - retail		303.1		308.5		(5.4	)		(1.8	)%
Franchise costs		441.6		582.8		(141.2	)		(24.2	)%
Sales and marketing		434.8		565.2		(130.4	)		(23.1	)%
General and administrative		830.5		813.4		17.1			2.1	%
Retail operating		469.3		498.9		(29.6	)		(5.9	)%
Total	$	5,914.6	$	6,344.2	$	(429.6	)		(6.8	)%

Gross Margin

Three Months Ended

May 31,
$
%

($'s in thousands)

2019

2018

Change

Change

Factory gross margin
$ 1,279.5 $ 1,288.4 $ (8.9 ) (0.7 )%
Retail gross margin
566.4 628.4 (62.0 ) (9.9 )%
Total
$ 1,845.9 $ 1,916.8 $ (70.9 ) (3.7 )%

	Three Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change

Factory gross margin	$	1,047.1	$	1,206.7	$	(159.6	)		(13.2	)%
Retail gross margin		598.6		645.8		(47.2	)		(7.3	)%
Total	$	1,645.7	$	1,852.5	$	(206.8	)		(11.2	)%

Three Months Ended

May 31,

%

%

2019

2018

Change

Change

(Percent)

Factory gross margin
22.8 % 23.2 % (0.4 )% (1.7 )%
Retail gross margin
66.3 % 61.4 % 4.9 % 8.0 %
Total
28.6 % 29.1 % (0.5 )% (1.7 )%

	Three Months Ended
	August 31,						%			%
	2019			2018			Change			Change
(Percent)
Factory gross margin		23.4	%		25.2	%		(1.9	)%		(7.4	)%
Retail gross margin		66.4	%		67.7	%		(1.3	)%		(1.9	)%
Total		30.6	%		32.3	%		(1.7	)%		(5.4	)%

Adjusted Gross Margin

Three Months Ended

May 31,
$
%

($'s in thousands)

2019

2018

Change

Change

Factory gross margin
$ 1,279.5 $ 1,288.4 $ (8.9 ) (0.7 )%
Plus: depreciation and amortization
145.7 136.5 9.2 6.7 %
Factory adjusted gross margin
1,425.2 1,424.9 0.3 0.0 %
Retail gross margin
566.4 628.4 (62.0 ) (9.9 )%
Total Adjusted Gross Margin
$ 1,991.6 $ 2,053.3 $ (61.7 ) (3.0 )%

Factory adjusted gross margin
25.4 % 25.6 % (0.2 )% (0.8 )%
Retail gross margin
66.3 % 61.4 % 4.9 % 8.0 %
Total Adjusted Gross Margin
30.8 % 31.2 % (0.4 )% (1.3 )%

	Three Months Ended
	August 31,						$			%
($'s in thousands)	2019			2018			Change			Change

Factory gross margin	$	1,047.1		$	1,206.7		$	(159.6	)		(13.2	)%
Plus: depreciation and amortization		147.4			138.2			9.2			6.7	%
Factory adjusted gross margin		1,194.5			1,344.9			(150.4	)		(11.2	)%
Retail gross margin		598.6			645.8			(47.2	)		(7.3	)%
Total Adjusted Gross Margin	$	1,793.1		$	1,990.7		$	(197.6	)		(9.9	)%

Factory adjusted gross margin		26.6	%		28.1	%		(1.5	)%		(5.2	)%
Retail gross margin		66.4	%		67.7	%		(1.3	)%		(1.9	)%
Total Adjusted Gross Margin		33.3	%		34.7	%		(1.4	)%		(4.0	)%

Table of Contents

Cost of Sales and Gross Margin

Franchise Costs

Sales and Marketing

General and Administrative

Retail Operating Expenses

Depreciation and Amortization

Costs Associated with Company-Owned Store Closures

Table of Contents

Other Income (Expense)

Income Tax Expense

Our effective income tax rate for the three months ended August 31, 2019 was 26.4%, compared to 26.8% for the three months ended August 31, 2018.

Six Months Ended August 31, 2019 Compared to the Six Months Ended August 31, 2018

Results Summary

Revenues

	Six Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change
Factory sales	$	10,088.4	$	10,341.3	$	(252.9	)		(2.4	)%
Retail sales		1,756.3		1,977.1		(220.8	)		(11.2	)%
Franchise fees		188.2		200.7		(12.5	)		(6.2	)%
Royalty and marketing fees		3,778.4		3,647.1		131.3			3.6	%
Total	$	15,811.3	$	16,166.2	$	(354.9	)		(2.2	)%

Factory Sales

Retail Sales

Royalties, Marketing Fees and Franchise Fees

Table of Contents

Costs and Expenses

Cost of Sales

	Six Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change

Cost of sales - factory	$	7,761.8	$	7,846.1	$	(84.3	)		(1.1	)%
Cost of sales - retail		591.3		703.0		(111.7	)		(15.9	)%
Franchise costs		924.7		1,076.0		(151.3	)		(14.1	)%
Sales and marketing		991.4		1,153.5		(162.1	)		(14.1	)%
General and administrative		1,975.2		1,727.8		247.4			14.3	%
Retail operating		918.2		1,061.3		(143.1	)		(13.5	)%
Total	$	13,162.6	$	13,567.7	$	(405.1	)		(3.0	)%

Gross Margin

	Six Months Ended
	August 31,				$			%
	2019		2018		Change			Change

Factory gross margin	$	2,326.6	$	2,495.2	$	(168.6	)		(6.8	)%
Retail gross margin		1,165.0		1,274.1		(109.1	)		(8.6	)%
Total	$	3,491.6	$	3,769.3	$	(277.7	)		(7.4	)%

	Six Months Ended
	August 31,						%			%
	2019			2018			Change			Change

Factory gross margin		23.1	%		24.1	%		(1.1	)%		(4.4	)%
Retail gross margin		66.3	%		64.4	%		1.9	%		2.9	%
Total		29.5	%		30.6	%		(1.1	)%		(3.7	)%

Adjusted Gross Margin

	Six Months Ended
	August 31,						$			%
($'s in thousands)	2019			2018			Change			Change

Factory gross margin	$	2,326.6		$	2,495.2		$	(168.6	)		(6.8	)%
Plus: depreciation and amortization		293.1			274.7			18.4			6.7	%
Factory adjusted gross margin		2,619.7			2,769.9			(150.2	)		(5.4	)%
Retail gross margin		1,165.0			1,274.1			(109.1	)		(8.6	)%
Total Adjusted Gross Margin	$	3,784.7		$	4,044.0		$	(259.3	)		(6.4	)%

Factory adjusted gross margin		26.0	%		26.8	%		(0.8	)%		(3.1	)%
Retail gross margin		66.3	%		64.4	%		1.9	%		2.9	%
Total Adjusted Gross Margin		32.0	%		32.8	%		(0.9	)%		(2.7	)%

Table of Contents

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

Cost of Salesand Gross Margin

Franchise Costs

~~Table of Contents~~

Sales and Marketing

General and Administrative

Retail Operating Expenses

Depreciation and Amortization

Table of Contents

Costs Associated with Company-Owned Store Closures

Other Income (Expense)

Income Tax Expense

Our effective income tax rate for the ~~three~~six months ended ~~May~~August 31, 2019 ~~and 2018~~ was ~~24.6%.~~25.6%, compared to 25.9% for the six months ended August 31, 2018.

~~Table of Contents~~

Liquidity and Capital Resources

Table of Contents

Off-Balance Sheet Arrangements

As of August 31, 2019, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.

~~Table of Contents~~

Impact of Inflation

~~Table of Contents~~

Seasonality

Item 3.

Quantitative and Qualitative Disclosures a~~bout~~About Market Risk

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Changes in Internal Control over Financial Reporting

2226

Table of Contents

PART II.

OTHER INFORMATION

~~Item1.~~Item 1.

Legal Proceedings

Item 1A.

Risk Factors

~~Table of Contents~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not ~~applicable.~~Applicable.

Item 5.

Other Information

None.

2427

Table of Contents

Item 6.

Exhibits

3.1

3.2

3.3

Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K filed on March 2, 2015).

10.1*

Revolving Line of Credit Note, dated September 30, 2019, between Rocky Mountain Chocolate Factory, Inc. and Wells Fargo Bank, National Association.

31.1*

Certification Filed Pursuant To Section 302 Ofof The Sarbanes-Oxley Act of 2002.

32.1**

Certification Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002.

101.INS

*XBRL Instance Document.

101.SCH

*XBRL Taxonomy Extension Schema Document.

101.CAL

*XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

*XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

*XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

*XBRL Taxonomy Extension Presentation Linkbase Document.

____________________________

* Filed herewith.

** Furnished herewith.

2528

Table of Contents

~~Signature~~Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

(Registrant)

Date: ~~July 15,~~October 11, 2019

/s/ Bryan J. Merryman

Bryan J. Merryman, Chief Executive Officer,

Chief Financial Officer, Treasurer and ~~Director~~Chairman of the Board of Directors

s in thousands)

2019

2018

Change

2019

2018

Change

Factory gross margin

1,279.5

1,288.4

(8.9

)

(0.7

1,047.1

1,206.7

(159.6

)

(13.2

Retail gross margin

566.4

628.4

(62.0

)

(9.9

598.6

645.8

(47.2

)

(7.3

Total

1,845.9

1,916.8

(70.9

)

(3.7

1,645.7

1,852.5

(206.8

)

(11.2

	Three Months Ended
	August 31,						%			%
	2019			2018			Change			Change
(Percent)
Factory gross margin		23.4	%		25.2	%		(1.9	)%		(7.4	)%
Retail gross margin		66.4	%		67.7	%		(1.3	)%		(1.9	)%
Total		30.6	%		32.3	%		(1.7	)%		(5.4	)%

Adjusted Gross Margin

	Three Months Ended
	August 31,						$			%
($'s in thousands)	2019			2018			Change			Change

Factory gross margin	$	1,047.1		$	1,206.7		$	(159.6	)		(13.2	)%
Plus: depreciation and amortization		147.4			138.2			9.2			6.7	%
Factory adjusted gross margin		1,194.5			1,344.9			(150.4	)		(11.2	)%
Retail gross margin		598.6			645.8			(47.2	)		(7.3	)%
Total Adjusted Gross Margin	$	1,793.1		$	1,990.7		$	(197.6	)		(9.9	)%

Factory adjusted gross margin		26.6	%		28.1	%		(1.5	)%		(5.2	)%
Retail gross margin		66.4	%		67.7	%		(1.3	)%		(1.9	)%
Total Adjusted Gross Margin		33.3	%		34.7	%		(1.4	)%		(4.0	)%

Table of Contents

Cost of Sales and Gross Margin

Franchise Costs

Sales and Marketing

General and Administrative

Retail Operating Expenses

Depreciation and Amortization

Costs Associated with Company-Owned Store Closures

Table of Contents

Other Income (Expense)

Income Tax Expense

Our effective income tax rate for the three months ended August 31, 2019 was 26.4%, compared to 26.8% for the three months ended August 31, 2018.

Six Months Ended August 31, 2019 Compared to the Six Months Ended August 31, 2018

Results Summary

Revenues

	Six Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change
Factory sales	$	10,088.4	$	10,341.3	$	(252.9	)		(2.4	)%
Retail sales		1,756.3		1,977.1		(220.8	)		(11.2	)%
Franchise fees		188.2		200.7		(12.5	)		(6.2	)%
Royalty and marketing fees		3,778.4		3,647.1		131.3			3.6	%
Total	$	15,811.3	$	16,166.2	$	(354.9	)		(2.2	)%

Factory Sales

Retail Sales

Royalties, Marketing Fees and Franchise Fees

Table of Contents

Costs and Expenses

Cost of Sales

	Six Months Ended
	August 31,				$			%
($'s in thousands)	2019		2018		Change			Change

Cost of sales - factory	$	7,761.8	$	7,846.1	$	(84.3	)		(1.1	)%
Cost of sales - retail		591.3		703.0		(111.7	)		(15.9	)%
Franchise costs		924.7		1,076.0		(151.3	)		(14.1	)%
Sales and marketing		991.4		1,153.5		(162.1	)		(14.1	)%
General and administrative		1,975.2		1,727.8		247.4			14.3	%
Retail operating		918.2		1,061.3		(143.1	)		(13.5	)%
Total	$	13,162.6	$	13,567.7	$	(405.1	)		(3.0	)%

Gross Margin

	Six Months Ended
	August 31,				$			%
	2019		2018		Change			Change

Factory gross margin	$	2,326.6	$	2,495.2	$	(168.6	)		(6.8	)%
Retail gross margin		1,165.0		1,274.1		(109.1	)		(8.6	)%
Total	$	3,491.6	$	3,769.3	$	(277.7	)		(7.4	)%

	Six Months Ended
	August 31,						%			%
	2019			2018			Change			Change

Factory gross margin		23.1	%		24.1	%		(1.1	)%		(4.4	)%
Retail gross margin		66.3	%		64.4	%		1.9	%		2.9	%
Total		29.5	%		30.6	%		(1.1	)%		(3.7	)%

Adjusted Gross Margin

	Six Months Ended
	August 31,						$			%
($'s in thousands)	2019			2018			Change			Change

Factory gross margin	$	2,326.6		$	2,495.2		$	(168.6	)		(6.8	)%
Plus: depreciation and amortization		293.1			274.7			18.4			6.7	%
Factory adjusted gross margin		2,619.7			2,769.9			(150.2	)		(5.4	)%
Retail gross margin		1,165.0			1,274.1			(109.1	)		(8.6	)%
Total Adjusted Gross Margin	$	3,784.7		$	4,044.0		$	(259.3	)		(6.4	)%

Factory adjusted gross margin		26.0	%		26.8	%		(0.8	)%		(3.1	)%
Retail gross margin		66.3	%		64.4	%		1.9	%		2.9	%
Total Adjusted Gross Margin		32.0	%		32.8	%		(0.9	)%		(2.7	)%