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

					May 31,		February 28,
	November 30, 2020 (unaudited)		February 29, 2020		2021		2021
Assets					(unaudited)
Current Assets
Cash and cash equivalents	$	7,270,921	$	4,822,071	$	5,789,625	$	5,633,279
Accounts receivable, less allowance for doubtful accounts of $1,752,900 and $638,907, respectively		2,339,217		4,049,959
Notes receivable, current portion, less current portion of the valuation allowance of $55,751 and $0		88,873		160,700
Accounts receivable, less allowance for doubtful accounts of $1,401,294 and $1,341,853, respectively						2,122,378		2,007,502
Notes receivable, current portion, less current portion of the valuation allowance of $32,586 and $32,571, respectively						76,137		84,819
Refundable income taxes		421,571		418,319		518,553		774,527
Inventories, net		4,905,815		3,750,978
Inventories						4,399,030		4,062,885
Other		308,268		409,703		361,722		213,811
Total current assets		15,334,665		13,611,730		13,267,445		12,776,823

Property and Equipment, Net		5,270,086		5,938,013		5,593,453		5,152,015

Other Assets
Notes receivable, less current portion and valuation allowance of $67,743 and $0, respectively		98,150		289,515
Notes receivable, less current portion and valuation allowance of $79,701 and $79,716, respectively						29,573		42,525
Goodwill, net		729,701		1,046,944		729,701		729,701
Franchise rights, net		2,651,745		3,047,688		2,409,341		2,519,764
Intangible assets, net		405,972		498,393		385,030		395,946
Deferred income taxes		1,620,207		630,078		1,121,688		1,144,764
Lease right of use asset		2,114,224		2,698,765		2,214,248		1,925,591
Other		56,264		56,262		52,148		264,023
Total other assets		7,676,263		8,267,645		6,941,729		7,022,314

Total Assets	$	28,281,014	$	27,817,388	$	25,802,627	$	24,951,152

Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long term debt	$	948,968	$	-
Line of credit		3,448,165		-
Accounts payable		1,802,307		2,241,506	$	1,152,572	$	1,297,211
Accrued salaries and wages		667,602		716,860		653,697		735,241
Gift card liabilities		572,098		609,842		553,373		617,438
Other accrued expenses		381,847		316,751		388,416		253,345
Dividend payable		-		722,344
Contract liabilities		194,095		195,658		195,442		194,737
Lease liability		740,486		803,861		673,899		682,348
Total current liabilities		8,755,568		5,606,822		3,617,399		3,780,320

Lease Liability, Less Current Portion		1,408,258		1,894,904		1,576,839		1,278,354
Long-Term Debt, Less Current Portion		488,895		-
Contract Liabilities, Less Current Portion		940,716		960,151		914,858		924,909

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, authorized 50,000 shares		-		-
Undesignated series, authorized 200,000 shares		-		-
Common stock, $.001 par value, 46,000,000 shares authorized, 6,070,925 shares and 6,019,532 shares issued and outstanding, respectively		6,071		6,020
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, 6,118,995 shares and 6,074,293 shares issued and outstanding, respectively						6,119		6,074
Additional paid-in capital		7,859,516		7,459,931		8,117,824		7,971,712
Retained earnings		8,821,990		11,889,560		11,569,588		10,989,783

Total stockholders' equity		16,687,577		19,355,511		19,693,531		18,967,569

Total Liabilities and Stockholders' Equity	$	28,281,014	$	27,817,388	$	25,802,627	$	24,951,152

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

	Nine Months Ended							Three Months Ended
	November 30,							May 31,
	2020			2019				2021			2020
Cash Flows From Operating Activities
Net (loss) Income	$	(3,067,570	)	$	1,558,060
Net income (loss)								$	579,805		$	(3,667,397	)
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,004,539			1,114,678				299,914			343,115
Provision for obsolete inventory		41,433			307,836				33,285			18,285
Provision for loss on accounts and notes receivable		1,468,815			134,783				-			1,468,815
Asset impairment and store closure losses		544,060			-				-			544,060
Loss (gain) on sale or disposal of property and equipment		(199,774	)		8,307				(164,286	)		4,956
Forgiveness of indebtedness		(107,700	)		-
Expense recorded for stock compensation		399,636			503,210				146,157			143,718
Deferred income taxes		(990,129	)		57,793				23,076			(1,179,329	)
Changes in operating assets and liabilities:
Accounts receivable		435,536			(982,237	)			(114,876	)		476,533
Refundable income taxes		(3,252	)		(132,040	)			255,974			340
Inventories		(1,262,189	)		294,361				(386,868	)		(452,217	)
Contract Liabilities									(6,213	)		(27,515	)
Other current assets		101,436			(45,820	)			(147,911	)		12,393
Accounts payable		(376,375	)		1,206,354				(123,087	)		680,748
Accrued liabilities		12,613			182,625				(9,159	)		35,453
Contract liabilities		(13,688	)		(175,918	)
Net cash (used in) provided by operating activities		(2,012,609	)		4,031,992				385,811			(1,598,042	)

Cash Flows from Investing Activities
Proceeds received on notes receivable		69,583			109,342				21,634			17,825
Purchase of intangible assets		(99,048	)		763				-			(41,464	)
Proceeds from insurance recovery		304,962			-				206,336			-
Purchases of property and equipment		(77,059	)		(864,370	)			(457,435	)		(22,488	)
Decrease in other assets		-			313
Net cash used in investing activities		198,438			(753,952	)			(229,465	)		(46,127	)

Cash Flows from Financing Activities
Payments on long-term debt		-			(1,048,912	)
Proceeds from long-term debt		1,537,200			-				-			1,537,200
Proceeds from the line of credit		3,448,165			-				-			3,448,165
Dividends paid		(722,344	)		(2,150,477	)			-			(722,344	)
Net cash provided by (used in) financing activities		4,263,021			(3,199,389	)			-			4,263,021

Net Increase (Decrease) in Cash and Cash Equivalents		2,448,850			78,651
Net Increase in Cash and Cash Equivalents									156,346			2,618,852

Cash and Cash Equivalents, Beginning of Period		4,822,071			5,384,027				5,633,279			4,822,071

Cash and Cash Equivalents, End of Period	$	7,270,921		$	5,462,678			$	5,789,625		$	7,440,923

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

During FY 2021 the Company initiated formal legal proceedings against Immaculate Confections ("IC"), the operator of RMCF locations in Canada. In its complaint, the Company is alleging, among other things, that IC has utilized the Company’s trademarks and other intellectual property without authority to do so and that IC has been unjustly enriched by their use of the Company’s trademarks and intellectual property.

In June 2021 a court order was issued declaring the original 1991 Development Agreement for Canada between RMCF and IC has expired. As a result of this judgement, the Company has removed locations operated by IC from the store information above and contained herein. During the three months ended May 31, 2020 and 2021 the Company did not recognize any revenue from locations operated by IC in Canada. As of February 28, 2021 IC operated 48 locations in Canada. The Company intends to continue to pursue its claims and is expecting to proceed to a trial scheduled for August 2021.

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments ~~that~~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 nine~~ months ended ~~November 30, 2020~~May 31, 2021 are not necessarily indicative of the results to be expected for the entire fiscal ~~year, or any other future period.~~year.

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 ~~29, 2020.~~

28, 2021, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2021. The year-end balance sheet data was derived from audited financial statements, ~~for the year ended February 29, 2020,~~ but does not include all disclosures required by ~~GAAP.~~accounting principles generally accepted in the United States of America.

In December 2020 the Consolidated Appropriations Act, 2021 (bill) inclusive of additional coronavirus aid was signed into law. Among the many provisions of the bill, expenses related to the receipt of paychecks protection program funds (“PPP) that were previously determined to be non-deductible by the Internal Revenue Service (“IRS”) may now be deducted for federal income tax purposes. This change in deductibility is likely to have an impact on the Company’s effective tax rate for the remainder of fiscal year 2021, or beyond. It will also have an impact on the Company’s future effective tax rate for the portion of PPP loans that were forgiven during the three months ended November 30, 2020. The Company considered expenses associated with the PPP loan forgiven during the three months ended November 30, 2020 to be non-deductible for federal income tax purposes consistent with IRS guidance issued as of November 30, 2020.

Management evaluated all activity of the Company through the issue date of the financial statements and concluded that no subsequent events have occurred that would require recognition or disclosure in the financial statements.

As discussed in more detail throughout this Quarterly Report on Form 10-Q for the three ~~and nine~~ months ended ~~November 30, 2020~~May 31, 2021 (this “Quarterly Report”), we have experienced significant business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus (“COVID-19”), including the vast mandated self-quarantines of customers and closures of non-essential business throughout the United States and internationally. ~~Nearly~~During the year ended February 28, 2021 nearly all of the Company-owned and franchise stores were directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. As a result, franchisees and licensees are not ordering products for their stores in line with historical amounts. This trend has negatively impacted, and ~~is expected to~~may continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees. Beginning in May ~~2020 and continuing through November~~ 2020, most stores previously closed for much of March 2020 and April 2020 in response to the COVID-19 pandemic, began to re-open. As of ~~November 30, 2020,~~February 28, 2021, approximately 4353 stores ~~have~~had not re-opened and the future of these locations is uncertain. ~~This~~That is a closure rate significantly higher than historical levels. By ~~November 30, 2020, certain~~May 31, 2021, many stores have met or exceeded pre-COVID-19 sales levels, however, many retail environments have continued to be adversely impacted by changes to consumer behavior ~~because~~as a result of COVID-19. Most stores re-opened subject to various local health restrictions and often with reduced operations. It is unclear when or if store operations will return to pre-COVID-19 levels.

In addition, as previously announced inon May 11, 2020, the Board of Directors ~~suspended~~decided to suspend the Company’s first quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-19 pandemic. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of the Company and ~~its~~our stockholders.

During this challenging time, the Company’s foremost priority is the safety and well-being of our employees, customers, franchisees and communities. In addition to the already stringent practices for the quality and safety of the Company’s confections, the Company is diligently following health and safety guidance issued by the World Health Organization, the Centers for Disease Control and state and local governmental agencies. The COVID-19 pandemic has had an unprecedented impact on the retail industry as containment measures continue to impact the Company’s operations and the retail industry. Numerous countries, states and local governments have effected ordinances to protect the public through social distancing, which has caused, and we expect will continue to cause, a significant decrease in, among other things, retail traffic and as a result, factory sales, retail sales and royalty and marketing fees. With that said, Rocky Mountain Chocolate Factory products have remained available for sale online. The Company’s current focus is on supporting its franchisees and licensees during this challenging time and driving growth in online sales, especially in light of the ecommerce licensing agreement with Edible, as discussed below, while also sensibly managing costs. The number of Company-owned and franchise stores remaining open may change frequently and significantly due to the ever-changing nature of the COVID-19 outbreak.

In these challenging and unprecedented times, management is taking all necessary and appropriate action to maximize liquidity as the Company navigates the current landscape. These actions include significantly reducing operating expenses and production volume to reflect reduced sales volumes as well as the elimination of all non-essential spending and capital expenditures. Further, in an abundance of caution and to maintain ample financial flexibility, the Company drew down the full amount under our line of credit and the Company received loans under the Paycheck Protection Program (the “PPP”). See Note 9 for additional information regarding our debt obligations. The receipt of funds under our debt obligations has allowed the Company to temporarily avoid workforce reduction measures amidst a steep decline in revenue and production volume. While the Company believes it has sufficient liquidity with its current cash position, the Company will continue to monitor and evaluate all financing alternatives as necessary as these unprecedented events evolve. For more information, please see Item 1A “Risk Factors—The Novel Coronavirus (COVID-19) Pandemic Has, and May Continue to, Materially and Adversely Affect our Sales, Earnings, Financial Condition and Liquidity” in our Annual Report on Form 10-K as filed on May 29, 2020 with the United States Securities and Exchange Commission

Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on our condensed consolidated financial statements.

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, 2023 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 January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We ~~will adopt~~adopted this ASU ~~2019-12~~ effective March 1, 2021 ~~and do not expect the~~(the first quarter of our 2022 fiscal year). The adoption of ~~this guidance to~~the ASU did not have a material impact on our consolidated financial statements.

As described above, in FY 2020, we entered into a long-term strategic alliance whereby we became the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Also in FY 2020, the founder and Chief Executive Officer of Edible was elected to the Company’s Board of Directors at the Company’s Annual Meeting of Stockholders. During the nine months ended November 30, 2020, the Company recognized approximately $2,126,000 of revenue related to purchases from Edible, its affiliates and its franchisees. As of November 30, 2020 the company recognized approximately $225,000 of accounts receivable from Edible its affiliates and its franchisees.

~~At November 30, 2020,~~On May 31, 2021, annual revenue expected to be recognized in the future, related to performance obligations that are not yet fully satisfied, are estimated to be the following:

The Company’s franchisees sell gift cards which do not have either expiration dates, or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing ~~revenue~~breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.

Depreciation expense related to property and equipment totaled ~~$189,522~~$178,575 and ~~$576,128~~$194,557 during the three ~~and nine~~ months ended ~~November 30,~~May 31, 2021 and 2020, ~~compared to $187,648 and $585,046 during the three and nine months ended November 30, 2019,~~ respectively.

Amortization expense related to intangible assets totaled ~~$137,050~~$121,339 and ~~$428,411~~$148,557 during the three ~~and nine~~ months ended ~~November 30,~~May 31, 2021 and 2020, ~~compared to $176,544 and $529,632 during the three and nine months ended November 30, 2019,~~ respectively.

At ~~November 30, 2020,~~May 31, 2021, annual amortization of placed in service intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:

During FY 2020, the Company initiated a store design project. The initiative is expected to add approximately $250,000 of intangible assets, of which, $174,000 was recorded as of November 30, 2020. This amount will be subject to amortization upon conclusion of the project.

The Company ~~did not issue any~~issued 7,000 unrestricted shares of stock to non-employee directors during the ~~nine~~three months ended ~~November 30, 2020~~May 31, 2021 compared to ~~an aggregate of 5,168~~no shares issued during the ~~nine~~three months ended ~~November 30, 2019.~~May 31, 2020. In connection with these non-employee director stock issuances, the Company recognized $0$34,650 and ~~$48,774~~$0 of stock-based compensation expense during the ~~nine~~three months ended ~~November 30,~~May 31, 2021 and 2020, ~~and 2019,~~ respectively.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

During the ~~three- and nine-month periods~~three months ended ~~November 30, 2020,~~May 31, 2021, the Company recognized ~~$112,199 and $399,636, respectively,~~$111,507 of stock-based compensation expense related to ~~restricted stock unit grants. The~~non-vested, non-forfeited restricted stock unit grants compared to $143,718 during the three months ended May 31, 2020. The restricted stock units generally vest in equal annual ~~or quarterly~~ installments over a period of five to six years. ~~During the nine-month periods ended November 30, 2020 and 2019, 51,393 and 32,002 restricted stock units vested and were issued as common stock, respectively.~~ Total unrecognized stock-based compensation expense of non-vested, non-forfeited restricted stock units, ~~granted~~ as of ~~November 30, 2020~~May 31, 2021, was ~~$1,726,339,~~$1,494,326, which is expected to be recognized over the ~~weighted-average~~weighted average period of ~~3.92~~3.41 years.

The Company has no outstanding stock options as of ~~November 30, 2020.~~May 31, 2021.

As of May 31, 2021, maturities of lease liabilities for our operating leases were as follows:

During the three months ended May 31, 2021 the Company entered into lease amendments to extend the terms of leases for certain Company-owned locations. These lease amendments resulted in the Company recognizing a present value of future lease liability of $475,908 based upon a total lease liability of $504,946.

Three Months Ended November 30, 2019	Franchising			Manufacturing			Retail			U-Swirl		Other			Total
Three Months Ended May 31, 2020																		Franchising			Manufacturing			Retail			U-Swirl			Other			Total
Total revenues	$	1,110,143		$	6,100,755		$	260,002		$	757,475	$	-		$	8,228,375		$	254,477		$	2,293,093		$	59,981		$	254,047		$	-		$	2,861,598
Intersegment revenues		(671	)		(314,452	)		-			-		-			(315,123	)		(683	)		(158,478	)		-			-			-			(159,161	)
Revenue from external customers		1,109,472			5,786,303			260,002			757,475		-			7,913,252			253,794			2,134,615			59,981			254,047			-			2,702,437
Segment profit (loss)		427,705			1,001,264			(4,649	)		455		(1,518,634	)		(93,859	)		(451,319	)		(783,469	)		(477,825	)		(457,718	)		(2,676,394	)		(4,846,725	)
Total assets		1,189,288			12,346,000			1,046,795			5,540,055		9,055,397			29,177,535			1,090,475			10,430,680			604,386			5,565,436			11,417,149			29,108,126
Capital expenditures		16,223			347,310			(7,837	)		2,324		25,330			383,350			-			13,854			-			1,712			6,922			22,488
Total depreciation & amortization	$	11,909		$	151,771		$	2,572		$	175,359	$	22,581		$	364,192		$	10,138		$	161,830		$	3,403		$	146,949		$	20,795		$	343,115

This Quarterly Report on Form 10-Q (“(“Quarterly ~~Report”~~Report”) includes statements of our expectations, intentions, plans and beliefs that constitute ~~“forward-looking statements”~~“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”~~“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 R~~eport~~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 impact of the novel coronavirus (“~~COVID-19~~”)(COVID-19) on our business, including, among other things, online sales, factory sales, retail sales and royalty and marketing fees, our liquidity, our cost cutting and capital preservation measures,achievement of the anticipated potential benefits of the strategic alliance with Edible (as defined herein), our ability to provide products to Edible under the s~~trategic~~ a~~lliance,~~strategic alliance, the ability to increase our online sales through the agreements with Edible,, the outcome of the legal proceedings initiated against Immaculate Confections, the operator of RMCF locations in Canada, 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”~~Risk Factors” contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 29~~, 20~~20. 28, 2021, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2021. Additional factors that might cause such differences include, but are not limited to: the length and severity of the current COVID-19 pandemic and its effect on among other things, factory sales, retail sales, royalty and marketing fees and operations, the effect of any governmental action or mandated employer-paid benefits in response to the COVID-19 pandemic, our ability to manage costs and reduce expenditures in the current economic environment and the availability of additional financing if and when required. These forward-looking statements apply only as of the date of this Quarterly R~~eport.~~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 R~~eport~~Report or those that might reflect the occurrence of unanticipated events.

Unless otherwise specified, the ~~“Company,~~“Company,” ~~“we,~~“we,” ~~“us”~~“us” or ~~“our”~~“our” refers to Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its consolidated subsidiaries~~(including~~ (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“ ~~(“RMCF”)~~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~~confectionery 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 ~~November 30, 2020,~~May 31, 2021, there were two Company-owned, 9795 licensee-owned and ~~212~~163 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, ~~Canada,~~ South Korea, the republic of Panama, and the Philippines. As of ~~November 30, 2020,~~May 31, 2021, U-Swirl operated three Company-owned cafés and 7470 franchised cafés located in 2422 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 ~~December 2019, the Company~~FY 2020 and early FY 2021, we entered into a long-term strategic alliance ~~(the “Strategic Alliance”)~~and ecommerce agreements with Edible, ~~Arrangements, LLC and its affiliates (collectively, “Edible”), pursuant to which, among other things, the Company will~~whereby it is intended that we would become the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. ~~In connection with~~Under the ~~Strategic Alliance, the Company entered into a~~ strategic alliance, ~~agreement, an exclusive supplier operating agreement and a warrant agreement with Edible.~~Rocky Mountain Chocolate Factory branded products are intended to be available for purchase both on Edible’s website as well as through over 1,000 franchised Edible locations nationwide. In addition, ~~in March 2020, the Company entered into~~due to Edible’s significant e-commerce expertise and scale, we have also executed an ecommerce licensing agreement with Edible, whereby Edible ~~sells~~is expected to sell a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites. There is no assurance that the strategic alliance and ecommerce agreements will be deployed into our operations and to our satisfaction, or that we will achieve the expected full benefits from these agreements. During the three months ended May 31, 2021, certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable. There can be no assurance historical revenue levels will be indicative of future revenues.

In June 2019, the Company’s largest customer at the time, 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 November 30, 2020 will be realized at their full value, or if any revenue will be received from FTD in the future. See Note 14 to the consolidated financial statements contained herein for additional information about the FTD bankruptcy.

As discussed in more detail throughout this Quarterly Report on Form 10-Q for the three ~~and nine~~ months ended ~~November 30, 2020~~May 31, 2021 (this “Quarterly Report”), we have experienced significant business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus (“COVID-19”), including the vast mandated self-quarantines of customers and closures of non-essential business throughout the United States and internationally. ~~Nearly~~During the year ended February 28, 2021, nearly all of the Company-owned and franchise stores were directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. As a result, franchisees and licensees are not ordering products for their stores in line with historical amounts. This trend has negatively impacted, and ~~is expected to~~may continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees. Beginning in May ~~2020 and continuing through November~~ 2020, most stores previously closed for much of March 2020 and April 2020 in response to the COVID-19 pandemic began to re-open. As of ~~November 30, 2020,~~February 28, 2021, approximately 4353 stores ~~have~~had not re-opened and the future of these locations is uncertain. ~~This~~That is a closure rate significantly higher than historical levels. By ~~November 30, 2020, certain~~May 31, 2021, many stores have met or exceeded pre-COVID-19 sales levels, however, many retail environments have continued to be adversely impacted by changes to consumer behavior as a result of COVID-19. Most stores re-opened subject to various local health restrictions and often with reduced operations. It is unclear when or if store operations will return to pre-COVID-19 levels.

In addition, as previously announced on May 11, 2020, the Board of Directors decided to suspend the Company’s first quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-19 pandemic. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of us and our stockholders.

During this challenging time, the Company’s foremost priority is the safety and well-being of our employees, customers, franchisees and communities. In addition to the already stringent practices for the quality and safety of the Company’s confections, the Company is diligently following health and safety guidance issued by the World Health Organization, the Centers for Disease Control and state and local governmental agencies. COVID-19 has had an unprecedented impact on the retail industry as containment measures continue to impact the Company’s operations and the retail industry. Numerous countries, states and local governments have effected ordinances to protect the public through social distancing, which has caused, and we expect will continue to cause, a significant decrease in, among other things, retail traffic and as a result, factory sales, retail sales and royalty and marketing fees. With that said, Rocky Mountain Chocolate Factory products remain available for sale online. The Company’s current focus is on supporting its franchisees and licensees during this challenging time and driving growth in online sales, especially in light of the ecommerce licensing agreement with Edible, as discussed above, while also sensibly managing costs. The number of Company-owned and franchise stores remaining open may change frequently and significantly due to the ever-changing nature of the COVID-19 outbreak.

In these challenging and unprecedented times, management is taking all necessary and appropriate action to maximize liquidity as the Company navigates the current landscape. These actions include significantly reducing operating expenses and production volume to reflect reduced sales volumes as well as the elimination of all non-essential spending and capital expenditures. Further, in an abundance of caution and to maintain ample financial flexibility, the Company drew down the full amount under our line of credit and the Company received loans under the Paycheck Protection Program (the “PPP”). The receipt of funds under the PPP has allowed the Company to temporarily avoid workforce reduction measures amidst a steep decline in revenue and production volume. While the Company believes it has sufficient liquidity with its current cash position, the Company will continue to monitor and evaluate all financing alternatives as necessary as these unprecedented events evolve. For more information, please see Item 1A “Risk Factors—The Novel Coronavirus (COVID-19) Pandemic Has, and May Continue to, Materially and Adversely Affect our Sales, Earnings, Financial Condition and Liquidity” in our Annual Report on Form 10-K as filed on May 29, 2020 with the United States Securities and Exchange Commission.

Three Months Ended ~~November 30,~~2020May 31, 2021 Compared to the Three Months Ended~~November 30,~~~~201~~9 May 31, 2020

Basic earnings per share increased from a net loss of ~~$(0.01)~~$(0.61) per share infor the three months ended ~~November 30, 2019~~May 31, 2020 to ~~earnings of~~ $0.09 per share infor the three months ended ~~November 30, 2020.~~May 31, 2021. Revenues ~~decreased 8.6%~~increased 181% from ~~$7.9~~$2.7 million infor the three months ended ~~November 30, 2019~~May 31, 2020 to ~~$7.2~~$7.6 million infor the three months ended ~~November 30, 2020.~~May 31, 2021. Operating income increased from an operating loss of ~~$98,000 in~~$(4.83) million for the three months ended ~~November 30, 2019~~May 31, 2020 to operating income of ~~$399,000 in~~$646,000 for the three months ended ~~November 30, 2020.~~May 31, 2021. Net income increased from a ~~net~~ loss of ~~$72,000 in~~$(3.67) million for the three months ended ~~November 30, 2019~~May 31, 2020 to net income of ~~$524,000 in~~$580,000 for the three months ended ~~November 30, 2020.~~May 31, 2021. The ~~decrease~~increase in revenue, operating income and net income was due primarily to the ~~continued~~ impacts from the COVID-19 pandemic during the three months ended May 31, 2020, including its impact on our operation and the operations of our franchised, licensed and Company-owned locations. ~~The increase in operating income was due primarily to lower general and administrative costs, primarily~~During the three months ended May 31, 2021 many of the disruptions experienced as a result of ~~lower costs associated with an analysis~~the COVID-19 pandemic were no longer impacting our network of ~~strategic alternatives in the prior year period. The increase in net income was due primarily~~franchised and licensed retail stores and many of our locations had returned to, ~~the increase in operating income, a gain on insurance recovery and debt forgiveness income.~~or exceeded, pre-pandemic levels.

Three Months Ended

November 30,

May 31,

(

Factory Sales

The ~~decrease~~increase in factory sales for the three months ended ~~November 30, 2020~~May 31, 2021 compared to the three months ended ~~November 30, 2019~~May 31, 2020 was primarily due to a ~~22.5% decrease~~281% increase in sales of product to our network of franchised and licensed retail stores partially offset by ~~a $855,000 increase~~an 11.7% decrease in shipments of product to customers outside our network of franchised retail stores. Purchases by the Company’s largest customer, Edible Arrangements LLC (“Edible”), during the three months ended May 31, 2021 were approximately $484,000, or 6.4% of the Company’s revenues, compared to $335,000, or 12.4% of the Company’s revenues during the three months ended May 31, 2020. The ~~decrease~~increase in sales of product to our network of franchised and licensed retail stores was primarily the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended ~~November 30,~~May 31, 2020, which significantly reduced traffic in our stores. ~~The increase in shipments~~During the three months ended May 31, 2021 many of ~~product to customers outside~~the disruptions experienced as a result of the COVID-19 pandemic were no longer impacting our network of ~~franchise~~franchised and licensed retail stores ~~was primarily~~and many of our locations had returned to, or exceeded, pre-pandemic levels. During the three months ended May 31, 2021, certain disagreements arose between RMCF and Edible related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of ~~sales associated with our strategic alliance with Edible.~~

which are not currently determinable. There can be no assurance historical revenue levels will be indicative of future revenues. Same store pounds purchased by domestic ~~Rocky Mountain Chocolate Factory~~ franchise and ~~license~~licensed locations ~~decreased 16.9% in~~increased 11.3% during the three months ended ~~November 30, 2020,~~May 31, 2021 when compared ~~with~~to the three months ended ~~November 30,~~May 31, 2019 ~~as result~~(the most recent comparable period prior to the business disruptions of ~~store closures, reduced operations and reduced demand in stores as a result~~COVID-19).

Table of ~~the impacts of the COVID-19 pandemic.~~

Contents

Retail Sales

~~The decrease in retail~~Retail sales ~~for~~at Company-owned stores increased 321% during the three months ended ~~November 30, 2020~~May 31, 2021 compared to the three months ended ~~November 30, 2019 was primarily the~~May 31, 2020 as a result of ~~limited operations and limited foot traffic~~all of our Company-owned stores being open during the three months ended ~~November 30,~~May 31, 2021 compared to the closure of all of our Company-owned stores for much of the three months ended May 31, 2020. The ~~limited operations at~~closure of our Company-owned stores in the prior year period was the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended ~~November 30,~~May 31, 2020. As of ~~November 30, 2020,~~May 31, 2021 all Company-owned stores had resumed ~~limited~~ operations following COVID-19 related closure. ~~Same store sales at all Company-owned stores and cafés decreased 16.3% in the three months ended November 30, 2020 compared to the three months ended November 30, 2019.~~

~~Royalties,~~Royalty, Marketing Fees and Franchise Fees

The ~~decrease~~increase in ~~royalties~~royalty and marketing fees ~~from~~for the three months ended ~~November 30, 2019~~May 31, 2021 compared to the three months ended ~~November 30,~~May 31, 2020 was primarily due to the majority of our franchise locations having resumed normal operations during the three months ended May 31, 2021, due to the relaxing of restrictions related to the COVID-19 pandemic and the associated public health measures in place during the three months ended ~~November 30,~~May 31, 2020 ~~and a decrease in domestic franchise units in operation.~~as well as the rollout of vaccines. Nearly all of our franchised locations experienced reduced operations and periods of full closure during the three months ended ~~November 30,~~May 31, 2020. ~~The average number of total~~Same store sales at domestic franchise ~~stores in operation decreased 9.4% from 267 in the three months ended November 30, 2019 to 242~~locations increased 14.0% during the three months ended November 30, 2020. This decrease is the result of domestic store closures exceeding domestic store openings, a trend which has accelerated as a result of the COVID-19 pandemic. Same store sales at total franchise stores and cafés in operation decreased 8.5% during the three months ended November 30, 2020May 31, 2021 when compared to the three months ended ~~November 30, 2019.~~May 31, 2019 (the most recent comparable period prior to the business disruptions of COVID-19).

Franchise fees were approximately unchanged during the three months ended May 31, 2021 compared to the three months ended May 31, 2020.

Costs and Expenses

Cost of Sales

	Three Months Ended
	May 31,				$			%
($'s in thousands)	2021		2020		Change			Change

Cost of sales - factory	$	4,290.0	$	2,790.6	$	1,499.4			53.7	%
Cost of sales - retail		256.6		92.6		164.0			177.1	%
Franchise costs		551.7		421.2		130.5			31.0	%
Sales and marketing		412.7		474.1		(61.4	)		(13.0	)%
General and administrative		844.8		3,179.5		(2,334.7	)		(73.4	)%
Retail operating		444.1		319.2		124.9			39.1	%
Total	$	6,799.9	$	7,277.2	$	(477.3	)		(6.6	)%

Gross Margin

	Three Months Ended
	May 31,					$		%
($'s in thousands)	2021		2020			Change		Change

Factory gross margin	$	750.7	$	(656.0	)	$	1,406.7		(214.4	)%
Retail gross margin		532.9		95.0			437.9		460.9	%
Total	$	1,283.6	$	(561.0	)	$	1,844.6		(328.8	)%

2218

Table of Contents

The decrease in franchise fee revenue for the three months ended November 30, 2020 compared to the three months ended November 30, 2019 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~~

Three Months Ended

November 30,
$
%

($'s in thousands)

2020

2019

Change

Change

Cost of sales - factory
$ 4,505.4 $ 4,689.9 $ (184.5 ) (3.9 )%
Cost of sales - retail
182.6 266.3 (83.7 ) (31.4 )%
Franchise costs
440.7 428.2 12.5 2.9 %
Sales and marketing
382.5 435.0 (52.5 ) (12.1 )%
General and administrative
788.7 1,529.3 (740.6 ) (48.4 )%
Retail operating
361.4 445.9 (84.5 ) (19.0 )%
Total
$ 6,661.3 $ 7,794.6 $ (1,133.3 ) (14.5 )%

~~Gross Margin~~

Three Months Ended

November 30,
$
%

($'s in thousands)

2020

2019

Change

Change

Factory gross margin
$ 1,065.0 $ 1,096.4 $ (31.4 ) (2.9 )%
Retail gross margin
348.8 438.0 (89.2 ) (20.4 )%
Total
$ 1,413.8 $ 1,534.4 $ (120.6 ) (7.9 )%

	Three Months Ended												Three Months Ended
	November 30,						%			%			May 31,						%			%
	2020			2019			Change			Change			2021			2020			Change			Change
(Percent)
Factory gross margin		19.1	%		18.9	%		0.2	%		0.9	%		14.9	%		-30.7	%		45.6	%		(148.5	)%
Retail gross margin		65.6	%		62.2	%		3.4	%		5.5	%		67.5	%		50.6	%		16.9	%		33.4	%
Total		23.2	%		23.6	%		(0.4	)%		(2.0	)%		22.0	%		-24.2	%		46.2	%		(190.9	)%

Adjusted Gross Margin

Three Months Ended

November 30,
$
%

($'s in thousands)

2020

2019

Change

Change

Factory gross margin
$ 1,065.0 $ 1,096.4 $ (31.4 ) (2.9 )%
Plus: depreciation and amortization
157.6 147.3 10.3 7.0 %
Factory adjusted gross margin
1,222.6 1,243.7 (21.1 ) (1.7 )%
Retail gross margin
348.8 438.0 (89.2 ) (20.4 )%
Total Adjusted Gross Margin
$ 1,571.4 $ 1,681.7 $ (110.3 ) (6.6 )%

Factory adjusted gross margin
21.9 % 21.5 % 0.5 % 2.1 %
Retail gross margin
65.6 % 62.2 % 3.4 % 5.5 %
Total Adjusted Gross Margin
25.8 % 25.9 % (0.1 )% (0.6 )%

~~Table of Contents~~

	Three Months Ended
	May 31,						$			%
($'s in thousands)	2021			2020			Change			Change

Factory gross margin	$	750.7		$	(656.0	)	$	1,406.7			(214.4	)%
Plus: depreciation and amortization		151.9			157.5			(5.6	)		(3.6	)%
Factory adjusted gross margin		902.6			(498.5	)		1,401.1			(281.1	)%
Retail gross margin		532.9			95.0			437.9			460.9	%
Total Adjusted Gross Margin	$	1,435.5		$	(403.5	)	$	1,839.0			(455.8	)%

Factory adjusted gross margin		17.9	%		-23.4	%		41.3	%		(176.5	)%
Retail gross margin		67.5	%		50.6	%		16.9	%		33.4	%
Total Adjusted Gross Margin		24.6	%		-17.4	%		42.0	%		(241.4	)%

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 itthem 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 Sales and Gross Margin

Factory gross margins increased ~~200 basis points~~to 14.9% in the three months ended ~~November 30,~~May 31, 2021 compared to negative gross margin of (30.7)% during the three months ended May 31, 2020, due primarily to lower production volume in the three months ended May 31, 2020 compared to the three months ended ~~November 30, 2019 due primarily to a loss on inventory associated with the bankruptcy of FTD in~~May 31, 2021. During the three months ended ~~November 30, 2019 with no comparable costs incurred~~May 31, 2021, production volume increased 129% in response to a 136% increase in factory sales, primarily due to a resumption of normal factory operations during the three months ended ~~November 30,~~May 31, 2021 compared to significantly reduced operations during the three months ended May 31, 2020. Operations during the three months ended May 31, 2020 were lower than historical levels as a result of the impacts of the COVID-19 pandemic. As a result of the decrease in production volume, factory fixed costs, including idle labor, exceeded revenue during the three months ended May 31, 2020. During the three months ended ~~November 30,~~May 31, 2020 the Company incurred approximately $280,000 of production ~~volume decreased 15.4%~~labor costs associated with paying employees who abided by local stay at home orders related to COVID-19 public health measures. This excess capacity cost, in ~~response to a 3.7% decrease~~the form of idle labor, was included in ~~factory sales and an increase in inventory, primarily due to the impacts~~cost of ~~the COVID-19 pandemic.~~sales.

Retail gross margins increased from ~~62.2%~~50.6% during the three months ended ~~November 30, 2019~~May 31, 2020 to ~~65.6%~~67.5% during the three months ended ~~November 30, 2020.~~May 31, 2021. The increase in retail gross margins was primarily the result of the resumption of normal operations during the three months ended May 31, 2021 compared to the the temporary closure of all of our Company-owned stores for much of the three months ended May 31, 2020 due to the COVID-19 pandemic, and the associated impact on perishable inventory.

Franchise Costs

The increase in franchise costs in the three months ended ~~November 30, 2020~~May 31, 2021 compared to the three months ended ~~November 30, 2019 is~~May 31, 2020 was due primarily to an increase in professional fees, ~~partially offset by lower travel costs,~~ the result of ~~COVID-19 related travel restrictions.~~litigation with our licensee in Canada. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs ~~increased~~decreased to ~~39.1%~~31.3% in the three months ended ~~November 30, 2020~~May 31, 2021 from ~~30.1%~~110.8% in the three months ended ~~November 30, 2019.~~May 31, 2020. This ~~increase~~decrease as a percentage of royalty, marketing and franchise fees is primarily a result of ~~lower~~higher royalty ~~revenues.~~revenues during the three months ended May 31, 2021.

Table of Contents

Sales and Marketing

The decrease in sales and marketing costs for the three months ended ~~November 30, 2020~~May 31, 2021 compared to the three months ended ~~November 30, 2019 is~~May 31, 2020 was primarily due to ~~lower advertising and promotion costs, partially offset by an increase~~a decrease in online advertising cost.

General and Administrative

The decrease in general and administrative costs for the three months ended ~~November 30, 2020~~May 31, 2021 compared to the three months ended ~~November 30, 2019 is~~May 31, 2020 was due primarily ~~due~~ to a decrease in bad debt expense, a decrease in the impairment of certain intangible assets, and lower professional fees associated with the Company’s review of strategic alternatives in the 2019 period. During the three months ended November 30, 2019 the Company incurred approximately $771,000 of costs associated with the review of strategic alternatives and the contested solicitation of proxies, compared with no comparable costs incurred in the three months ended November 30, 2020.fees. As a percentage of total revenues, general and administrative expenses decreased to ~~10.9%~~11.1% in the three months ended ~~November 30, 2020~~May 31, 2021 compared to ~~19.3%~~117.7% in the three months ended ~~November 30, 2019.~~May 31, 2020. These costs during the three months ended May 31, 2020 were a direct result of public health measures in place due to responses to COVID-19 and the financial burden experienced by the majority of our network of franchised and licensed locations. See Note 8 to the financial statements for a summary of costs associated with the impairment of certain intangible assets during the three months ended May 31, 2020.

Retail Operating Expenses

The ~~decrease~~increase in retail operating expenses for the three months ended ~~November 30, 2020~~May 31, 2021 compared to the three months ended ~~November 30, 2019~~May 31, 2020 was ~~due primarily to reduced operations as~~ a result of the ~~COVID-19 pandemic. Retail operating expenses, as a percentage~~re-opening of ~~retail sales, increased from 63.3% in~~all of our Company-owned stores so that all stores were open during the three months ended ~~November 30, 2019~~May 31, 2021 compared to ~~68.0% in~~the closure of all of our Company-owned stores for much of the three months ended ~~November 30,~~May 31, 2020. ~~This increase is primarily~~The closure of our Company-owned stores was the result of ~~lower retail sales.~~COVID-19 and the associated public health measures in place during the three months ended May 31, 2020.

Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was ~~$169,000~~$148,000 in the three months ended ~~November 30, 2020,~~May 31, 2021, a decrease of ~~22.1%~~20.3% from ~~$217,000~~$186,000 incurred in the three months ended ~~November 30, 2019.~~May 31, 2020. This decrease was ~~the result of lower amortization of franchise rights,~~ the result of a decrease in frozen yogurt cafés in ~~operation.~~operation and lower amortization of the associated franchise rights. See Note 7 to the ~~consolidated~~ 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 7.0%~~decreased 3.6% from ~~$147,000~~$157,500 in the three months ended ~~November 30, 2019~~May 31, 2020 to ~~$158,000~~$151,900 in the three months ended ~~November 30, 2020.~~May 31, 2021. This ~~increase~~decrease was the result of ~~an increase in~~certain production assets ~~in service primarily resulting from the replacement of obsolete equipment or equipment at the end of its operating life.~~becoming fully depreciated.

~~Table of Contents~~

Other Income (Expense)

Other income was ~~$298,000~~$171,700 in the three months ended ~~November 30, 2020~~May 31, 2021 compared to other expense of $17,800 during the three months ended May 31, 2020. Net interest income ~~of $4,000 realized~~was $4,600 in the three months ended ~~November 30, 2019.~~May 31, 2021 compared to net interest expense of $17,800 during the three months ended May 31, 2020. This change was primarily the result of ~~a gain on insurance recovery and the forgiveness of debt partially offset by higher interest expense resulting from~~ the Company’s increased debt as a result of measures taken during the three months ended May 31, 2020 to ensure adequate liquidity during the COVID-19 pandemic. During the three months ended May 31, 2020, the Company borrowed $3.4 million from its line of credit and borrowed $1.5 million of loans under the ~~Paycheck~~Paychecks Protection Program.

The Company recognized a gain on insurance recovery of ~~$210,500 and recognized forgiveness of debt in the amount of $108,300~~$167,100 during the three months ended ~~November 30, 2020,~~May 31, 2021, compared with no similar amounts recognized during the three months ended ~~November 30, 2019. The debt forgiveness was the result of one of the Company’s PPP loans being forgiven during the three months ended November 30,~~May 31, 2020.

Income Tax Expense

Our effective income tax rate was 29.1% for the three months ended ~~November 30, 2020~~May 31, 2021 and was ~~24.8%, compared to 23.7%~~24.3% for the three months ended November 30, 2019. This change was primarily the result of lower deductions realized during the three months ended November 30, 2020, compared to the three months ended November 30, 2019.

~~Nine months~~ ~~Ended~~ ~~November 30,~~2020~~Compared to the~~ ~~Nine months~~ ~~Ended~~ ~~November 30,~~~~201~~9

~~Results Summary~~

Basic earnings per share decreased from $0.26 per share for the nine months ended November 30, 2019 to a net loss of $(0.51) per share for the nine months ended November 30, 2020. Revenues decreased 35.7% from $23.7 million for the nine months ended November 30, 2019 to $15.3 million for the nine months ended November 30, 2020. Operating income decreased from $2.1 million for the nine months ended November 30, 2019 to an operating loss of $(4.3) million for the nine months ended November 30, 2020. Net income decreased from $1.6 million for the nine months ended November 30, 2019 to a net loss of $(3.1) million for the nine months ended November 30, 2020. The decrease in revenue, operating income and net income was due primarily to the impacts from the COVID-19 pandemic, including its impact on our operation and the operations of our franchised, licensed and Company-owned locations.

~~Revenues~~

Nine Months Ended

November 30,
$
%

($'s in thousands)

2020

2019

Change

Change

Factory sales
$ 11,203.7 $ 15,874.7 $ (4,671.0 ) (29.4 )%
Retail sales
1,214.4 2,460.5 (1,246.1 ) (50.6 )%
Franchise fees
174.7 270.5 (95.8 ) (35.4 )%
Royalty and marketing fees
2,665.9 5,118.8 (2,452.9 ) (47.9 )%
Total
$ 15,258.7 $ 23,724.5 $ (8,465.8 ) (35.7 )%

~~Factory Sales~~

The decrease in factory sales for the nine months ended November 30, 2020 compared to the nine months ended November 30, 2019 was primarily due to a 42.2% decrease in sales of product to our network of franchised and licensed retail stores partially offset by a 24.2% increase in shipments of product to customers outside our network of franchised retail stores. Purchases resulting from our strategic alliance with Edible were approximately $2.1 million, or 13.9%, of the Company’s revenues during the nine months ended November 30, 2020, compared to no revenue from the strategic alliance during the nine months ended November 30, 2019. Purchases resulting from our strategic alliance with Edible were partially offset by lower purchases from FTD, the Company’s historically largest customer. There was no revenue from FTD during the nine months ended November 30, 2020 compared to revenue of $1.5 million during the nine months ended November 30, 2019. As discussed above, FTD declared Chapter 11 bankruptcy in June 2019. The decrease in sales of product to our network of franchised and licensed retail stores was primarily the result of the COVID-19 pandemic and the associated public health measures in place during the nine months ended November 30, 2020, which significantly reduced traffic in our stores and increased store closures. Beginning in May 2020, most stores previously closed for much of March 2020 and April 2020, in response to COVID-19, began to re-open. Most stores re-opened subject to various local health restrictions and with reduced operations. It is unclear when or if store operations will return to pre COVID-19 levels.

Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 38.0% in the nine months ended November 30, 2020, compared with the nine months ended November 30, 2019.

~~Table of Contents~~

~~Retail Sales~~

The decrease in retail sales for the nine months ended November 30, 2020 compared to the nine months ended November 30, 2019 was primarily due to the closure of all of our Company-owned stores for much of the three months ended May 31, 2020. The closure of our Company-owned stores was the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended May 31, 2020. As of November 30, 2020, all of our Company-owned stores had resumed limited operations following the COVID-19 related closures.

~~Royalties, Marketing Fees and Franchise Fees~~

The decrease in royalties and marketing fees from the nine months ended November 30, 2019 to the nine months ended November 30, 2020 was primarily due to the COVID-19 pandemic and the associated public health measures in place during the nine months ended November 30, 2020. Nearly all of our franchised locations experienced reduced operations and periods of full closure during the nine months ended November 30, 2020. The average number of total domestic franchise stores in operation decreased 7.4% from 272 in the nine months ended November 30, 2019 to 252 during the nine months ended November 30, 2020. This decrease is the result of domestic store closures exceeding domestic store openings, a trend which has accelerated as a result of the COVID-19 pandemic.

The decrease in franchise fee revenue for the nine months ended November 30, 2020 compared to the nine months ended November 30, 2019 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~~

Nine Months Ended

November 30,
$
%

($'s in thousands)

2020

2019

Change

Change

Cost of sales - factory
$ 10,203.7 $ 12,451.8 $ (2,248.1 ) (18.1 )%
Cost of sales - retail
421.1 857.6 (436.5 ) (50.9 )%
Franchise costs
1,312.9 1,352.9 (40.0 ) (3.0 )%
Sales and marketing
1,265.5 1,426.4 (160.9 ) (11.3 )%
General and administrative
4,756.7 3,504.4 1,252.3 35.7 %
Retail operating
1,010.0 1,364.1 (354.1 ) (26.0 )%
Total
$ 18,969.9 $ 20,957.2 $ (1,987.3 ) (9.5 )%

~~Gross Margin~~

Nine Months Ended

November 30,
$
%

2020

2019

Change

Change

Factory gross margin
$ 1,000.0 $ 3,422.9 $ (2,422.9 ) (70.8 )%
Retail gross margin
793.3 1,602.9 (809.6 ) (50.5 )%
Total
$ 1,793.3 $ 5,025.8 $ (3,232.5 ) (64.3 )%

Nine Months Ended

November 30,

%

%

2020

2019

Change

Change

Factory gross margin
8.9 % 21.6 % (12.6 )% (58.6 )%
Retail gross margin
65.3 % 65.1 % 0.2 % 0.3 %
Total
14.4 % 27.4 % (13.0 )% (47.3 )%

~~Table of Contents~~

~~Adjusted Gross Margin~~

Nine Months Ended

November 30,
$
%

($'s in thousands)

2020

2019

Change

Change

Factory gross margin
$ 1,000.0 $ 3,422.9 $ (2,422.9 ) (70.8 )%
Plus: depreciation and amortization
473.3 440.5 32.8 7.4 %
Factory adjusted gross margin
1,473.3 3,863.4 (2,390.1 ) (61.9 )%
Retail gross margin
793.3 1,602.9 (809.6 ) (50.5 )%
Total Adjusted Gross Margin
$ 2,266.6 $ 5,466.3 $ (3,199.7 ) (58.5 )%

Factory adjusted gross margin
13.2 % 24.3 % (11.2 )% (46.0 )%
Retail gross margin
65.3 % 65.1 % 0.2 % 0.3 %
Total Adjusted Gross Margin
18.3 % 29.8 % (11.6 )% (38.8 )%

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 Sales~~ ~~and Gross Margin~~

Factory gross margins decreased to 8.9% in the nine months ended November 30, 2020 compared to 21.6% during the nine months ended November 30, 2019, due primarily to lower production volume in the nine months ended November 30, 2020 compared to the nine months ended November 30, 2019. During the nine months ended November 30, 2020, production volume decreased 28.2% in response to a 29.4% decrease in factory sales, primarily due to the impacts of the COVID-19 pandemic. During the nine months ended November 30, 2020, the Company also incurred approximately $280,000 of production labor costs associated with paying employees who abided by local stay at home orders related to COVID-19 public health measures. This excess capacity cost, in the form of idle labor, was included in cost of sales.

~~Retail gross margins increased from 65.1% during the nine months ended November 30, 2019 to 65.3% during the nine months ended November 30, 2020.~~

~~Franchise Costs~~

The decrease in franchise costs in the nine months ended November 30, 2020 compared to the nine months ended November 30, 2019 is due primarily to lower travel costs, the result of COVID-19 related travel restrictions. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 46.2% in the nine months ended November 30, 2020 from 25.1% in the nine months ended November 30, 2019. This increase ~~as a percentage of royalty, marketing and franchise fees is primarily a result of lower franchise and royalty fees.~~

~~Sales and Marketing~~

The decrease in sales and marketing costs for the nine months ended November 30, 2020 compared to the nine months ended November 30, 2019 was primarily due to lower advertising and promotion costs, partially offset by an increase in online advertising cost.

~~General and Administrative~~

The increase in general and administrative costs for the nine months ended November 30, 2020 compared to the nine months ended November 30, 2019 was due primarily to an increase in bad debt expense, the impairment of certain intangible assets and higher professional fees. As a percentage of total revenues, general and administrative expenses increased to 31.2% in the nine months ended November 30, 2020 compared to 14.8% in the nine months ended November 30, 2019. Bad debt expense was primarily the result of ~~management’s assessment~~the impact of ~~the likelihood~~different values of ~~collecting accounts and notes receivable. As a result of this assessment total allowances~~vested restricted stock units for ~~potentially uncollectable accounts and notes receivable increased to $1,876,400 at November 30, 2020,~~financial reporting purposes compared to ~~$638,907 at February 29, 2020. This cost was a direct result of public health measures in place due to responses to COVID-19 and~~how the ~~financial burden experienced by the majority of our network of franchised and licensed locations. See Note 8 to the financial statements~~same vested restricted stock units are valued for ~~a summary of costs associated with the impairment of certain intangible assets.~~

~~Table of Contents~~

~~Retail Operating Expenses~~

The decrease in retail operating expenses for the nine months ended November 30, 2020 compared to the nine months ended November 30, 2019 was due to the temporary closure of all of our Company-owned stores for much of the three months ended May 31, 2020. The closure of our Company-owned stores was the result of COVID-19 and the associated public health measures in place. Retail operating expenses, as a percentage of retail sales, increased from 55.4% in the nine months ended November 30, 2019 to 83.2% in the nine months ended November 30, 2020. This increase is primarily the result of lower retail sales.

~~Depreciation and Amortization~~

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $531,000 in the nine months ended November 30, 2020, a decrease of 21.2% from $674,000 in the nine months ended November 30, 2019. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 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 7.5% from $440,000 in the nine months ended November 30, 2019 to $473,000 in the nine months ended November 30, 2020. 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.

~~Other Income~~

Other income was $261,000 in the nine months ended November 30, 2020 compared to other income of $5,000 during the nine months ended November 30, 2019. This change was primarily the result of a gain on insurance recovery and the forgiveness of debt partially offset by higher interest expense resulting from the Company’s increased debt as a result of measures taken during the nine months ended November 30, 2020 to ensure adequate liquidity during the COVID-19 pandemic. During the nine months ended November 30, 2020, the Company borrowed $3.4 million from its line of credit and borrowed $1.5 million of loans under the Paycheck Protection Program of which approximately $108,000 and associated interest has been forgiven.

The Company recognized a gain on insurance recovery of $210,500 and recognized forgiveness of debt in the amount of $108,300 during the nine months ended November 30, 2019, compared with no similar amounts recognized during the nine months ended November 30, 2019. The debt forgiveness was the result of one of the Company’s PPP loans being forgiven during the nine months ended November 30, 2020.

~~Income Tax Expense~~

~~Our effective income~~ tax rate for the nine months ended November 30, 2020 was 24.3%, compared to 25.7% for the nine months ended November 30, 2019. The decrease in the effective income tax rate is primarily the result of lower state income taxes.purposes.

Liquidity and Capital Resources

As discussed ~~below,~~herein, during the three months ended May 31, 2020 we ~~have taken~~took several defensive measures to maximize liquidity in response to the COVID-19 pandemic, including the suspension of our cash dividend, reducing expenses, extending payment terms with vendors, reducing production volume and deferring discretionary capital expenditures. Based on these actions, we believe that cash flows from operations and our cash and cash equivalents on hand, will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months. Additional future financing may be necessary to fund our operations, and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at ~~all, especially in light of the market volatility and uncertainty as a result of the COVID-19 pandemic.~~all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, ~~in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic,~~ among other factors, could impact our business and liquidity.

Table of Contents

As of ~~November 30, 2020,~~May 31, 2021, working capital was ~~$6.6~~$9.7 million, compared to ~~$8.0~~$9.0 million as of February ~~29, 2020, a decrease~~28, 2021, an increase of ~~$1.4 million.~~$700,000. The ~~decrease~~increase in working capital was primarily due to ~~an increase in current liabilities, the result of the Company’s response to COVID-19 and measures taken to ensure sufficient short-term liquidity.~~improved operating results.

Cash and cash equivalent balances increased ~~approximately $2.4 million to $7.3 million as of November 30, 2020 compared to $4.8~~$200,000 from $5.6 million as of February ~~29,~~28, 2021 to $5.8 million as of May 31, 2021, primarily due to improved operating results. Our current ratio was 3.7 to 1 at May 31, 2021 compared to 3.4 to 1 at February 28, 2021. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

During the three months ended May 31, 2021, operating activities provided cash of $385,811, primarily the result of operating results and depreciation and amortization of $299,914, partially offset by an increase of inventory of $386,868. During the three months ended May 31, 2020, operating activities used cash of $1,598,042, primarily the result of operating results, the provision for loss on accounts and notes receivable of $1,468,815, asset impairment and store closure losses of $544,060, depreciation and amortization of $343,115, an increase in accounts payable of $680,748 and expense related to stock-based compensation of $143,718.

For the three months ended May 31, 2021, investing activities used cash of $229,465, primarily due to the purchases of property and equipment of $457,435 partially offset by proceeds from insurance recovery of $206,336. In comparison, investing activities used cash of $46,127 during the three months ended May 31, 2020, primarily due to the purchase of property and equipment and intangible assets of $63,952.

There were no cash flows from financing activities during the three months ended May 31, 2021. In comparison, financing activities provided cash of $4,236,021 during the three months ended May 31, 2020, primarily as a result of the use of the line of credit and receipt of loans under the Paycheck Protection Program, as described ~~below. Our current ratio~~above. There was 1.8 to 1 at November 30, 2020 compared to 2.4 to 1 at February 29, 2020. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

~~Table of Contents~~

During the nine months ended November 30, 2020, we had a net loss of $(3,067,570). Operating activities used cash of $2,012,609, with the principal adjustment to reconcile the net income to net cash used by operating activities being the provision for loss on accounts and notes receivable of $1,468,815, asset impairment and store closure losses of $544,060, depreciation and amortization of $1,004,539 and expenseno amount outstanding related to stock-based compensation of $399,636. During the comparable 2019 period, we had net income of $1,558,060, and operating activities provided cash of $4,031,992. The principal adjustment to reconcile the net income to net cash provided by operating activities was depreciation and amortization of $1,114,678 and the expense recorded for stock compensation of $503,210.

During the nine months ended November 30, 2020, investing activities provided cash of $198,438, primarily due to proceeds from the sale of assets, the result of insurance proceeds, of $304,962. In comparison, investing activities used cash of $753,952 during the nine months ended November 30, 2019 primarily due to the purchase of property and equipment of $864,370.

~~Financing activities provided cash of $4,263,021 for the nine months ended November 30, 2020 primarily as a as a result of the use of the~~our line of credit and ~~receipt of~~ loans under the Paycheck Protection Program as ~~described below. In comparison, financing activities used cash~~ of ~~$3,199,389 during~~May 31, 2021, the ~~prior year period primarily due to payments on long-term debt and declared dividends.~~

~~Revolving Credit Line~~

The Company has a $5.0 million credit line for general corporate and working capital purposes. On March 16, 2020, as a precautionary measure in light of the COVID-19 pandemic and the related economic impacts, the Company drew the maximum amount available on the credit line in an amount equal to $3.4 million (the full amount of $5.0 million under the credit line, subject to the borrowing base of 50% of eligible accounts receivable plus 50% of eligible inventories). The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (2.4% at November 30, 2020). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At November 30, 2020, the Company was not compliant with a covenant of the line of credit that requires the Company to have $1.5 million of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the trailing twelve months ended November 30, 2020. As a result of ~~COVID-19, the Company failed to meet the amount of EBITDA required by this covenant. On June 26, 2020~~repayment and on October 5, 2020 Wells Fargo Bank, NA (“Wells Fargo”) delivered to the Company Reservation of Rights Letters (“Bank Letters”). The Bank Letters reserved all rights available to Wells Fargo under the Credit Agreement dated October 30, 2015 including, but not limited to, the right of Wells Fargo to demand immediate payment of all amounts outstanding under the Credit Agreement. The Bank Letters also placed restrictions on the Company’s ability to draw any further funds on the Line of Credit. On December 22, 2020 the Company and Wells Fargo executed an amendment to the credit agreement. The amendment to the credit agreement reduced the amount of EBITDA required for the Company to be compliant with the covenant and introduced certain exemptions for the covenant specific to the impacts of COVID -19. Upon execution of this amendment, the Company became compliant with covenants associated with the line of credit and is compliant with such covenants as of the date of this Quarterly Report on Form 10-Q. The credit line is subject to renewal in September 2021 and the Company believes it is likely to be renewed on terms similar to the current terms, subject to the Company’s recovery from the impacts of COVID-19.

~~PPP Loan~~

On April 13, 2020 and April 20, 2020, the Company entered into Loan Agreements and Promissory Notes (collectively, the “SBA Loans”) with 1st SOURCE BANK pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received total proceeds of $1.5 million from the SBA Loans. In November 2020 one of the loans in the amount of $108,000 was fully forgiven. The remaining SBA Loan is scheduled to mature on April 14, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The remaining SBA Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

The remaining SBA Loan contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the SBA Loan may be forgiven in whole or in part by applying for forgiveness, pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by the Company during the eight-week period after the loan origination for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that, among other things, at least 75% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at a certain level. In accordance with the requirements of the CARES Act and the PPP, the Company has used the proceeds from the SBA Loan primarily for payroll costs. No assurance can be given that the Company will be granted forgiveness of the remaining SBA Loan in whole or in part.respectively.

Off-Balance Sheet Arrangements

~~As of November 30, 2020, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.~~

~~Table of Contents~~

Purchase obligations: As of ~~November 30, 2020,~~May 31, 2021, we had purchase obligations of approximately ~~$323,000.~~$234,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.

Impact of Inflation

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

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

Seasonality

We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of our products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.

Item 3. ~~Quantitative and Qualitative Disclosures About Market Risk~~

Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 4.~~Controls and Procedures~~

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 ~~principal executive~~Chief Executive Officer and ~~financial officer,~~Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our ~~principal executive~~Chief Executive Officer and ~~financial officer~~Chief Financial Officer concluded that our disclosure controls and procedures are effective as of ~~November 30, 2020.~~May 31, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended ~~November 30, 2020~~May 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. ~~OTHER INFORMATION~~

OTHER INFORMATION

Item 1. ~~Legal Proceedings~~

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.

~~Table of Contents~~

Item 1A. ~~Risk Factors~~

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 ~~29, 2020.~~28, 2021, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2021. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February ~~29, 2020.~~28, 2021, as amended by Amendment No. 1 on Form 10-K/A.

Item 2. ~~Unregistered Sales of Equity Securities and Use of Proceeds~~

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

None.

Item 3. ~~Defaults Upon Senior Securities~~

Defaults Upon Senior Securities

None.

Item 4.~~Mine Safety Disclosures~~

Mine Safety Disclosures

Not ~~Applicable.~~applicable.

Item 5. ~~Other Information~~

Other Information

None.

Table of Contents

Item 6. ~~Exhibits~~

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

Second Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit ~~3.3~~3.1 to the Current Report on Form 8-K filed on ~~March 2, 2015)~~December 6, 2019).

~~10.1+~~

~~Rocky Mountain Chocolate Factory, Inc. 2007 Equity Incentive Plan (as Amended and Restated) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on September 18, 2020).~~

31.1*

Certification Filed Pursuant toTo Section 302 ofOf The Sarbanes-Oxley Act of 2002.

32.1**

Certification Furnished Pursuant toTo 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.

~~+ Management contract or compensatory plan.~~

Table of Contents

~~Signatures~~Signature

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: ~~January 13,~~July 15, 2021		/s/ Bryan J. Merryman
		Bryan J. Merryman, Chief Executive Officer, Chief Financial Officer, Treasurer and ~~Chairman of the Board of Directors~~
		Director

3324

s in thousands)

2020

2019

Change

2021

2020

Change

Factory sales

5,570.4

5,786.3

(215.9

)

(3.7

5,040.7

2,134.6

2,906.1

136.1

Retail sales

531.4

704.3

(172.9

)

(24.5

789.5

187.6

601.9

320.8

Franchise fees

46.1

82.3

(36.2

)

(44.0

56.2

55.0

1.2

2.2

Royalty and marketing fees

1,081.0

1,340.4

(259.4

)

(19.4

1,707.3

325.2

1,382.1

425.0

Total

7,228.9

7,913.3

(684.4

)

(8.6

7,593.7

2,702.4

4,891.3

181.0

Franchise fees were approximately unchanged during the three months ended May 31, 2021 compared to the three months ended May 31, 2020.

~~Nine months~~ ~~Ended~~ ~~November 30,~~2020~~Compared to the~~ ~~Nine months~~ ~~Ended~~ ~~November 30,~~~~201~~9

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.

~~Retail gross margins increased from 65.1% during the nine months ended November 30, 2019 to 65.3% during the nine months ended November 30, 2020.~~

~~As of November 30, 2020, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.~~

As a smaller reporting company, we are not required to provide the information required by this Item.

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.

Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.001 par value per share	RMCF	Nasdaq Global Market
Preferred Stock Purchase Rights	RMCF	Nasdaq Global Market

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐☒	Smaller reporting company	☒

		Emerging growth company	☐

PART I. FINANCIAL INFORMATION

		Item 1.	Financial Statements	3
			CONSOLIDATED STATEMENTS OF OPERATIONS		3
			CONSOLIDATED BALANCE SHEETS		4
			CONSOLIDATED STATEMENTS OF CASH FLOWS		5
			CONSOLIDATED STATEMENT OF CHANGES IN ~~STOCKHOLDERS’~~STOCKHOLDERS’ EQUITY		6
			NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS		7
		Item 2.	~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	2016
		Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3021
Item 4.		Controls and Procedures	21

PART II.OTHER INFORMATION			22

Item 1.		Legal Proceedings	22
Item 1A.		Risk Factors	22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.		Defaults Upon Senior Securities	22
Item 4.		~~Controls and Procedures~~Mine Safety Disclosures	3022
Item 5.		Other Information	22
Item 6.		Exhibits	23

~~PART II.~~~~OTHER INFORMATION~~Signatures			3024

	~~Item 1.~~	~~Legal Proceedings~~	30
	~~Item 1A.~~	~~Risk Factors~~	31
	~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	31
	~~Item 3.~~	~~Defaults Upon Senior Securities~~	31
	~~Item 4.~~	~~Mine Safety Disclosures~~	31
	~~Item 5.~~	~~Other Information~~	31
	~~Item 6.~~	~~Exhibits~~	32

~~Signatures~~			33

	Three Months Ended November 30,						Nine Months Ended November 30,						Three Months Ended May 31,
	2020			2019			2020			2019			2021		2020
Revenues
Sales	$	6,101,776		$	6,490,601		$	12,418,139		$	18,335,252		$	5,830,198	$	2,322,211
Franchise and royalty fees		1,127,091			1,422,651			2,840,567			5,389,269			1,763,513		380,226
Total Revenue		7,228,867			7,913,252			15,258,706			23,724,521			7,593,711		2,702,437

Costs and Expenses
Cost of sales		4,688,011			4,956,177			10,624,790			13,309,356			4,546,597		2,883,216
Franchise costs		440,669			428,236			1,312,917			1,352,887			551,650		421,245
Sales and marketing		382,462			434,989			1,265,471			1,426,422			412,657		474,090
General and administrative		788,717			1,529,271			4,756,735			3,504,453			844,821		3,179,475
Retail operating		361,454			445,899			1,010,032			1,364,105			444,067		319,211
Depreciation and amortization, exclusive of depreciation and amortization expense of $157,582, $147,338, $473,294 and $440,452, respectively, included in cost of sales		168,990			216,854			531,245			674,226
Depreciation and amortization, exclusive of depreciation and amortization expense of $151,899, $157,510, respectively, included in cost of sales														148,015		185,605
Costs associated with Company-owned store closures		-			-			68,558			-			-		68,558
Total costs and expenses		6,830,303			8,011,426			19,569,748			21,631,449			6,947,807		7,531,400

Income (Loss) from Operations		398,564			(98,174	)		(4,311,042	)		2,093,072			645,904		(4,828,963	)

Other Income (Expense)
Interest expense		(24,690	)		(2,890	)		(72,241	)		(18,775	)
Interest income		3,461			7,205			14,626			23,391
Interest Expense														-		(23,562	)
Interest Income														4,571		5,800
Gain on insurance recovery		210,464			-			210,464			-			167,123		-
Debt forgiveness income		108,309			-			108,309			-
Other income, net		297,544			4,315			261,158			4,616
Other income (expense), net														171,694		(17,762	)

Income (Loss) Before Income Taxes		696,108			(93,859	)		(4,049,884	)		2,097,688			817,598		(4,846,725	)

Income Tax Provision (Benefit)		172,413			(22,222	)		(982,314	)		539,628			237,793		(1,179,328	)

Consolidated Net Income (Loss)	$	523,695		$	(71,637	)	$	(3,067,570	)	$	1,558,060		$	579,805	$	(3,667,397	)

Basic Earnings (Loss) per Common Share	$	0.09		$	(0.01	)	$	(0.51	)	$	0.26		$	0.09	$	(0.61	)
Diluted Earnings (Loss) per Common Share	$	0.08		$	(0.01	)	$	(0.51	)	$	0.25		$	0.09	$	(0.61	)

Weighted Average Common Shares
Outstanding - Basic		6,070,887			5,994,955			6,065,237			5,978,270			6,118,433		6,058,851
Dilutive Effect of Employee
Stock Awards		213,432			-			-			271,667			171,277		-
Weighted Average Common Shares
Outstanding - Diluted		6,284,319			5,994,955			6,065,237			6,249,937			6,289,710		6,058,851

	Common Stock Shares		Amount		Additional Paid-in Capital			Retained Earnings			Total
Balance as of August 31, 2019		5,991,162	$	5,991	$	7,037,501		$	13,927,209		$	20,970,701
Consolidated net (loss) income									(71,637	)		(71,637	)
Issuance of common stock, vesting of restricted stock units and other		3,835		4		(4	)					-
Equity compensation, restricted stock units						116,540						116,540
Cash dividends declared									(719,440	)		(719,440	)
Balance as of November 30, 2019		5,994,997	$	5,995	$	7,154,037		$	13,136,132		$	20,296,164

Balance as of February 28, 2019		5,957,827		5,958	$	6,650,864		$	13,733,010		$	20,389,832
Consolidated net (loss) income									1,558,060			1,558,060
Issuance of common stock, vesting of restricted stock units and other		37,170		37		(37	)					-
Equity compensation, restricted stock units						503,210						503,210
Cash dividends declared									(2,154,938	)		(2,154,938	)
Balance as of November 30, 2019		5,994,997	$	5,995	$	7,154,037		$	13,136,132		$	20,296,164

Balance as of August 31, 2020		6,067,461	$	6,068	$	7,747,320		$	8,298,295		$	16,051,683
Consolidated net (loss) income									523,695			523,695
Issuance of common stock, vesting of restricted stock units and other		3,464		3		(3	)					-
Equity compensation, restricted stock units						112,199						112,199
Balance as of November 30, 2020		6,070,925	$	6,071	$	7,859,516		$	8,821,990		$	16,687,577

Balance as of February 29, 2020		6,019,532		6,020	$	7,459,931		$	11,889,560		$	19,355,511
Consolidated net (loss) income									(3,067,570	)		(3,067,570	)
Issuance of common stock, vesting of restricted stock units and other		51,393		51		(51	)					-
Equity compensation, restricted stock units						399,636						399,636
Balance as of November 30, 2020		6,070,925	$	6,071	$	7,859,516		$	8,821,990		$	16,687,577

	Sold, Not Yet Open		Open		Total		Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		2		2		-		2		2
Franchise stores - Domestic stores and kiosks		6		161		167		4		158		162
International license stores		1		51		52		1		5		6
Cold Stone Creamery - co-branded		5		97		102		5		95		100
U-Swirl (Including all associated brands)												-
Company-owned stores - co-branded		-		3		3		-		3		3
Franchise stores - Domestic stores		-		66		66		-		63		63
Franchise stores - Domestic - co-branded		-		7		7		1		6		7
International license stores		-		1		1		-		1		1
Total		12		388		400		11		333		344

	Nine Months Ended						Three Months Ended
	November 30:						May 31:
	2020			2019			2021			2020
Contract liabilities at the beginning of the year:	$	1,155,809		$	1,352,572		$	1,119,646		$	1,155,809
Revenue recognized		(174,689	)		(270,501	)		(56,213	)		(55,016	)
Contract fees received		161,000			94,583			50,000			27,500
Amortized gain on the financed sale of equipment		(7,309	)		(9,398	)		(3,133	)		(1,043	)
Contract liabilities at the end of the period:	$	1,134,811		$	1,167,256		$	1,110,300		$	1,127,250

FY 21	$	49,539
FY 22		191,420
FY 23		179,694
FY 24		147,093
FY 25		133,812
Thereafter		433,253
Total	$	1,134,811

FYE 22	$	147,079
FYE 23		187,974
FYE 24		155,606
FYE 25		140,530
FYE 26		128,239
Thereafter		350,872
Total	$	1,110,300

	May 31, 2021			February 28, 2021
Ingredients and supplies	$	2,541,283		$	2,464,123
Finished candy		2,168,502			1,888,818
U-Swirl food and packaging		47,129			39,518
Reserve for slow moving inventory		(357,884	)		(329,574	)
Total inventories	$	4,399,030		$	4,062,885

	November 30, 2020			February 29, 2020
Ingredients and supplies	$	2,587,311		$	2,186,652
Finished candy		2,435,624			1,827,767
U-Swirl food and packaging		37,006			56,708
Reserve for slow moving inventory		(154,126	)		(320,149	)
Total inventories	$	4,905,815		$	3,750,978

2021		137,656
2022		466,554
2023		391,988
2024		329,267
2025		277,022
Thereafter		1,281,184
Total	$	2,883,671

FYE 22	$	362,619
FYE 23		409,393
FYE 24		346,672
FYE 25		294,427
FYE 26		251,342
Thereafter		1,129,918
Total	$	2,794,371

Company store goodwill impairment	$	317,243
Trademark intangible asset impairment		159,000
Company-owned store impairment of long-lived assets and inventory		68,558

Total	$	544,801

	November 30, 2020			February 29, 2020
Paycheck protection program note payable in monthly installments of principal and interest at 1.0% per annum through April 2022	$	1,437,863		$	-
Less: current maturities		(948,968	)		-
Long-term obligations	$	488,895		$	-

	November 30, 2020			February 29, 2020			May 31, 2021			February 28, 2021
Land	$	513,618		$	513,618		$	513,618		$	513,618
Building		4,827,807			5,031,395			5,167,023			4,827,807
Machinery and equipment		10,057,880			10,664,396			10,241,098			10,129,508
Furniture and fixtures		797,498			852,557			797,698			797,303
Leasehold improvements		985,407			1,154,396			985,407			985,407
Transportation equipment		429,789			440,989			516,278			429,789
		17,611,999			18,657,351			18,221,122			17,683,432

Less accumulated depreciation		(12,341,913	)		(12,719,338	)		(12,627,669	)		(12,531,417	)
Property and equipment, net	$	5,270,086		$	5,938,013		$	5,593,453		$	5,152,015

				November 30, 2020				February 29, 2020								May 31, 2021				February 28, 2021
	Amortization Period (Years)			Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization			Amortization Period (in years)			Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Intangible assets subject to amortization
Store design		10		$	394,826	$	216,778	$	295,779	$	215,653			10		$	394,826	$	226,230	$	394,826	$	221,504
Packaging licenses	3	-	5		120,830		120,830		120,830		120,830		3	-	5		120,830		120,830		120,830		120,830
Packaging design		10			430,973		430,973		430,973		430,973			10			430,973		430,973		430,973		430,973
Trademark/Non-competition agreements	5	-	20		556,339		328,415		715,339		297,072		5	-	20		556,339		339,905		556,339		333,715
Franchise rights		20			5,979,637		3,327,892		5,979,637		2,931,949			20			5,979,637		3,570,296		5,979,637		3,459,873
Total				$	7,482,605	$	4,424,888	$	7,542,558	$	3,996,477						7,482,605		4,688,234		7,482,605		4,566,895
Intangible assets not subject to amortization												Intangible assets not subject to amortization
Franchising segment-
Company stores goodwill				$	515,065			$	832,308							$	515,065			$	515,065
Franchising goodwill					97,318				97,318								97,318				97,318
Manufacturing segment-goodwill					97,318				97,318								97,318				97,318
Trademark					20,000				20,000								20,000				20,000
Total goodwill					729,701				1,046,944								729,701				729,701

Total Intangible Assets				$	8,212,306	$	4,424,888	$	8,589,502	$	3,996,477					$	8,212,306	$	4,688,234	$	8,212,306	$	4,566,895

FY 21	$	205,893
FY 22		694,755
FY 23		437,445
FY 24		315,962
FY 25		164,223
Thereafter		552,818
Total	$	2,371,096

Less: imputed interest		(222,352	)
Present value of lease liabilities:	$	2,148,744

Weighted average lease term (years)		6.7

FYE 22	$	551,974
FYE 23		536,712
FYE 24		417,930
FYE 25		268,966
FYE 26		171,324
Thereafter		521,138
Total	$	2,468,044

Less: imputed interest		(217,306	)
Present value of lease liabilities:	$	2,250,738

Weighted average lease term		6.6

Three Months Ended November 30, 2020	Franchising			Manufacturing			Retail		U-Swirl			Other			Total
Three Months Ended May 31, 2021																		Franchising			Manufacturing			Retail		U-Swirl		Other			Total
Total revenues	$	934,793		$	5,880,361		$	273,378	$	451,466		$	-		$	7,539,998		$	1,435,366		$	5,285,106		$	282,978	$	836,283	$	-		$	7,839,733
Intersegment revenues		(1,145	)		(309,986	)		-		-			-			(311,131	)		(1,639	)		(244,383	)		-		-		-			(246,022	)
Revenue from external customers		933,648			5,570,375			273,378		451,466			-			7,228,867			1,433,727			5,040,723			282,978		836,283		-			7,593,711
Segment profit (loss)		274,748			986,763			35,935		(30,060	)		(571,278	)		696,108			644,866			668,024			18,265		145,542		(659,099	)		817,598
Total assets		1,232,759			10,647,718			640,383		5,036,284			10,723,870			28,281,014			1,430,823			10,075,833			638,670		5,379,850		8,277,451			25,802,627
Capital expenditures		-			16,830			-		-			9,376			26,206			1,182			432,411			1,068		1,399		21,375			457,435
Total depreciation & amortization	$	8,998		$	161,902		$	1,393	$	134,773		$	19,506		$	326,572		$	9,498		$	153,620		$	1,401	$	116,730	$	18,665		$	299,914

Nine Months Ended November 30, 2020	Franchising			Manufacturing			Retail			U-Swirl			Other			Total
Total revenues	$	2,230,132		$	11,941,869		$	527,061		$	1,300,326		$	-		$	15,999,388
Intersegment revenues		(2,555	)		(738,127	)		-			-			-			(740,682	)
Revenue from external customers		2,227,577			11,203,742			527,061			1,300,326			-			15,258,706
Segment profit (loss)		189,964			692,962			(419,967	)		(475,875	)		(4,036,968	)		(4,049,884	)
Total assets		1,232,759			10,647,718			640,383			5,036,284			10,723,870			28,281,014
Capital expenditures		150			42,027			72			1,712			33,098			77,059
Total depreciation & amortization	$	29,231		$	486,254		$	6,188		$	422,545		$	60,321		$	1,004,539

Nine Months Ended November 30, 2019	Franchising			Manufacturing			Retail			U-Swirl		Other			Total
Total revenues	$	4,054,989		$	16,681,908		$	758,083		$	3,040,031	$	-		$	24,535,011
Intersegment revenues		(3,278	)		(807,212	)		-			-		-			(810,490	)
Revenue from external customers		4,051,711			15,874,696			758,083			3,040,031		-			23,724,521
Segment profit (loss)		1,874,593			3,125,311			(11,683	)		576,499		(3,467,032	)		2,097,688
Total assets		1,189,288			12,346,000			1,046,795			5,540,055		9,055,397			29,177,535
Capital expenditures		24,723			732,989			24,787			3,997		77,874			864,370
Total depreciation & amortization	$	33,093		$	453,751		$	7,715		$	551,336	$	68,783		$	1,114,678