Financial Performance - Basic earnings per share decreased from $0.03 in Q3 2021 to a loss of $0.59 in Q3 2022[85] - Revenues decreased by 5.1% from $7.9 million in Q3 2021 to $7.5 million in Q3 2022[85] - Net income decreased from $197,000 in Q3 2021 to a net loss of $3.6 million in Q3 2022[85] - Basic earnings per share decreased from a net income of $0.13 per share for the six months ended August 31, 2021, to a net loss of $0.60 per share for the same period in 2022[105] - Revenues decreased by 1.1% from $15.5 million for the six months ended August 31, 2021, to $15.4 million for the same period in 2022[105] - The company incurred a net loss of $3.8 million during the six months ended August 31, 2022, compared to a net income of $776,738 in the same period in 2021[127] Sales Performance - Factory sales decreased by 6.8% to $4.8 million, while retail sales increased by 1.8% to $796,700 in Q3 2022[86] - Same store pounds purchased by domestic franchise and licensed locations decreased by 15.4% in Q3 2022 compared to Q3 2021[87] - Same store sales at domestic Rocky Mountain Chocolate Factory locations decreased by 3.1%, while U-Swirl Frozen Yogurt cafés increased by 16.2% in Q3 2022[89] - Factory sales decreased by 2.3%, or $236,000, to $9.97 million for the six months ended August 31, 2022, primarily due to a 47.2% decrease in shipments to customers outside the franchised retail network[106][107] - Same store sales at all Company-owned locations increased by 1.1% during the six months ended August 31, 2022, compared to the same period in 2021[108] Cost and Expense Analysis - Total costs increased by 28.0% to $9.6 million in Q3 2022, primarily due to a rise in general and administrative expenses[92] - Total costs and expenses increased by 22.0% to $17.47 million for the six months ended August 31, 2022, compared to $14.32 million for the same period in 2021[112] - General and administrative expenses increased to 54.0% of total revenues for the three months ended August 31, 2022, compared to 23.5% for the same period in 2021, with costs associated with a contested proxy solicitation totaling approximately $1.8 million[99] - General and administrative expenses increased to 37.1% of total revenues for the six months ended August 31, 2022, compared to 17.5% for the same period in 2021[118] - Retail operating expenses as a percentage of retail sales rose from 56.2% in the three months ended August 31, 2021, to 59.1% in the same period of 2022, primarily due to higher salaries and utility costs[100] - Retail operating expenses as a percentage of retail sales rose from 56.2% in the six months ended August 31, 2021, to 59.3% in the six months ended August 31, 2022[119] Margin Analysis - Factory gross margin decreased to 21.3% in Q3 2022 from 26.1% in Q3 2021, attributed to increased costs and lack of Employee Retention Credits[95] - Retail gross margin decreased from 67.1% in Q3 2021 to 62.7% in Q3 2022, primarily due to rising raw material costs[96] - Factory gross margin decreased to 17.6% for the six months ended August 31, 2022, from 20.6% in the same period of 2021, primarily due to wage and material inflation[114] - Retail gross margin decreased from 67.3% during the six months ended August 31, 2021, to 62.7% during the same period in 2022, mainly due to increased raw material costs[115] Franchise and Marketing Costs - Franchise costs as a percentage of total royalty and marketing fees decreased to 27.3% in Q3 2022 from 37.2% in Q3 2021[97] - Franchise costs as a percentage of total royalty and marketing fees decreased to 26.8% in the six months ended August 31, 2022, from 34.4% in the same period of 2021[116] Cash Flow and Working Capital - Working capital decreased by $2.4 million to $7.3 million as of August 31, 2022, from $9.7 million as of February 28, 2022[125] - Cash and cash equivalents decreased by approximately $2.2 million to $5.4 million as of August 31, 2022, compared to $7.6 million as of February 28, 2022[126] - The company recorded income tax expense of $1.4 million on a loss before income taxes of $2.4 million for the six months ended August 31, 2022[123] - Investing activities used cash of $598,878 during the six months ended August 31, 2022, primarily due to purchases of property and equipment[127] - As of August 31, 2022, the company had purchase obligations of approximately $53,000 for future purchases of commodities[129] - The company believes cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2023[128]

PART I. FINANCIAL INFORMATION This section presents the company's interim financial statements, management's analysis of financial performance and liquidity, and disclosures regarding market risk and internal controls [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The financial statements reveal a net loss of $114,941 for the quarter, driven by increased expenses despite a slight revenue rise, with operating cash flow significantly reduced [Consolidated Statements of Operations](index=4&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) The company reported a net loss of $114,941 for the quarter, a reversal from prior-year income, due to a 14.8% increase in costs and expenses despite a 3.1% revenue growth Consolidated Statements of Operations Highlights (Three Months Ended May 31) | Financial Metric | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Revenue** | **$7,826,572** | **$7,593,711** | **+3.1%** | | Total costs and expenses | $7,975,909 | $6,947,807 | +14.8% | | **Income (Loss) from Operations** | **($149,337)** | **$645,904** | **-123.1%** | | **Consolidated Net Income (Loss)** | **($114,941)** | **$579,805** | **-119.8%** | | Diluted Earnings (Loss) per Share | ($0.02) | $0.09 | -122.2% | - General and administrative expenses nearly doubled, increasing from **$844,821** in Q1 2021 to **$1,631,223** in Q1 2022, primarily driving the operating loss[9](index=9&type=chunk) [Consolidated Balance Sheets](index=5&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) Total assets increased to $27.5 million, while cash and cash equivalents decreased to $6.0 million, offset by a new $1.3 million restricted cash balance Key Balance Sheet Figures | Balance Sheet Item | May 31, 2022 (unaudited) | February 28, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,989,510 | $7,587,374 | | Restricted cash | $1,344,813 | $0 | | Total current assets | $15,426,280 | $14,997,966 | | **Total Assets** | **$27,491,591** | **$26,880,761** | | Total current liabilities | $5,699,244 | $5,311,732 | | **Total stockholders' equity** | **$19,416,582** | **$19,399,926** | [Consolidated Statements of Cash Flows](index=6&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) Net cash from operating activities significantly decreased to **$11,298**, primarily due to the net loss and increased inventories, impacting overall cash flow Cash Flow Summary (Three Months Ended May 31) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,298 | $385,811 | | Net cash used in investing activities | ($264,349) | ($229,465) | | **Net Increase (Decrease) in Cash** | **($253,051)** | **$156,346** | [Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CHANGES%20IN%20STOCKHOLDERS%27%20EQUITY) Total stockholders' equity slightly decreased to **$19.42 million** due to the **$114,941** net loss, reducing retained earnings for the quarter - Retained earnings decreased by **$114,941** due to the net loss, contrasting with a **$579,805** increase from net income in the prior-year period[15](index=15&type=chunk) [Notes to Interim (Unaudited) Consolidated Financial Statements](index=8&type=section&id=NOTES%20TO%20INTERIM%20(UNAUDITED)%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) Key disclosures include revenue sources, store network details, **$305,000** in proxy solicitation costs, and a **$1.34 million** rabbi trust for a former CEO's termination payment - The company's revenue is derived from three main sources: sales of confectionery products to franchisees, franchise fees and royalties, and sales at Company-owned stores[19](index=19&type=chunk) - As of May 31, 2022, the company's network consisted of **338** total locations, including franchised, licensed, and company-owned stores for both Rocky Mountain Chocolate Factory and U-Swirl brands[21](index=21&type=chunk) - The company incurred approximately **$305,000** in costs during the quarter related to a stockholder's contested solicitation of proxies for the 2022 annual meeting[65](index=65&type=chunk) - The company established a rabbi trust and contributed **$1,344,813** for the termination payment to its former CEO, classified as restricted cash[66](index=66&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Revenue increased by **3.1%** due to higher sales and royalties, but a **93.1%** surge in G&A expenses, including proxy contest costs, led to an operating loss and impacted liquidity [Results of Operations](index=21&type=section&id=Results%20of%20Operations) Total revenues grew **3.1%** to **$7.8 million**, driven by factory sales and royalty fees, but a **93.1%** increase in G&A expenses led to a net loss Revenue Breakdown (Three Months Ended May 31) | Revenue Source | 2022 ($ thousands) | 2021 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Factory sales | $5,157.6 | $5,040.7 | +2.3% | | Retail sales | $792.7 | $789.5 | +0.4% | | Royalty and marketing fees | $1,809.1 | $1,707.3 | +6.0% | | **Total** | **$7,826.6** | **$7,593.7** | **+3.1%** | - The increase in royalty and marketing fees was primarily due to a **3.9%** increase in same-store sales at all domestic franchise locations, with frozen yogurt cafés showing a strong **20.5%** increase[79](index=79&type=chunk) - General and administrative costs surged by **93.1%**, from **$844,800** to **$1,631,200**, mainly due to increased professional fees related to board support, CEO transition, and a contested proxy solicitation[81](index=81&type=chunk)[87](index=87&type=chunk) - Factory gross margin decreased by **70 basis points** to **14.2%**, attributed to wage and material inflation, partially offset by price increases effective May 1, 2022[83](index=83&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) Working capital stood at **$9.7 million**, but cash and cash equivalents decreased by **$1.6 million** due to a **$1.3 million** trust funding, with minimal operating cash flow - Working capital was **$9.7 million** as of May 31, 2022[92](index=92&type=chunk) - Cash and cash equivalents decreased by **$1.6 million**, largely due to a **$1.3 million** increase in restricted cash used to fund a rabbi trust for former CEO severance[93](index=93&type=chunk) - The company has a **$5.0 million** credit line, fully available as of May 31, 2022, and subject to renewal in September 2022[41](index=41&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=26&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) As a smaller reporting company, the registrant is exempt from providing quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[102](index=102&type=chunk) [Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of May 31, 2022, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of May 31, 2022[103](index=103&type=chunk) - No material changes occurred in the company's internal control over financial reporting during the quarter[104](index=104&type=chunk) PART II. OTHER INFORMATION This section addresses legal proceedings, confirms no material changes to risk factors, reports on equity sales, and lists filed exhibits [Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) Management anticipates that the resolution of ordinary course legal proceedings will not materially adversely affect the company's financial condition or operations - Management believes that the resolution of various legal proceedings arising in the ordinary course of business will not have a material adverse effect on the Company's financial position, results of operations or cash flows[106](index=106&type=chunk) [Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) No material changes have occurred in the company's risk factors since the Annual Report on Form 10-K for the fiscal year ended February 28, 2022 - No material changes have occurred in the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended February 28, 2022[107](index=107&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the reporting period - None[108](index=108&type=chunk) [Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including the CEO offer letter and Sarbanes-Oxley Act certifications - Exhibits filed include the CEO offer letter and certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[113](index=113&type=chunk)

Revenue Growth - Revenues increased by 37.7% from $23.5 million in FY 2021 to $32.3 million in FY 2022, with factory sales rising by 29.2% to $22.37 million[197][198] - Total revenue for the year ended February 28, 2022, was $32,342,579, an increase of 37.5% from $23,480,705 in 2021[255] - Sales increased to $25,227,495 in 2022 from $19,179,447 in 2021, representing a growth of 31.5%[255] - Total revenues for FY 2022 amounted to $33,416,321, with external customer revenue of $32,342,579 after intersegment eliminations[364] - The company experienced a 70.0% increase in sales to its network of franchised and licensed retail stores in FY 2022, despite a 40.7% decrease in shipments to customers outside this network[199] Store Performance - Same store pounds purchased from franchised and co-branded licensed stores increased by 58.9% overall in FY 2022 compared to FY 2021, with quarterly increases of 325.5% in Q1 and 63.8% in Q2[195] - Same store sales at domestic franchise locations increased by 18.9% in FY 2022 compared to FY 2020, indicating recovery from COVID-19 disruptions[202] - The company operated a total of 337 stores under its brand and subsidiaries as of February 28, 2022, including 160 domestic franchise stores[267] Profitability and Loss - Operating loss decreased from $(3.5) million in FY 2021 to $(484,000) in FY 2022, while net loss improved from $(900,000) to $(342,000) in the same period[197] - The company reported a net loss of $342,000 in FY 2022, an improvement from a net loss of $900,000 in FY 2021[221] - Consolidated net loss for 2022 was $(341,697), compared to a net loss of $(899,777) in 2021, showing an improvement of 62%[255] Costs and Expenses - The company incurred approximately $1.7 million in costs related to a contested proxy solicitation during FY 2022, compared to no such costs in FY 2021[189] - General and administrative expenses rose to 23.3% of total revenues in FY 2022, up from 22.4% in FY 2021, largely due to costs associated with a contested proxy solicitation[210] - Total cost of sales increased by 23.1% from $26,186.8 thousand in FY 2021 to $32,240.8 thousand in FY 2022[204] - The company reported a total cost of sales of $19,167,672 in 2022, up from $16,118,625 in 2021, an increase of 12.7%[255] Cash and Liquidity - Cash and cash equivalents increased from $5.6 million as of February 28, 2021, to $7.6 million as of February 28, 2022, due to financing activities[220] - Working capital improved to $9.7 million as of February 28, 2022, compared to $9.0 million in FY 2021, aided by liquidity preservation efforts[219] - The Company has a $5.0 million revolving credit line, with $5.0 million available for borrowing as of February 28, 2022, and was in compliance with all financial covenants[224] Investments and Capital Expenditures - The Company anticipates making approximately $1.7 million in capital expenditures for FY 2023, an increase from an average of $695,000 per year over the previous three years, to invest in machinery and equipment[226] - Capital expenditures for FY 2022 totaled $947,690, with significant investments in Manufacturing and Retail segments[364] Tax and Deferred Tax - The total income tax expense for FY 2022 was $35,382, compared to an income tax benefit of $(891,914) in FY 2021 and an expense of $368,500 in FY 2020[351] - The effective tax rate for FY 2022 was (11.6)%, significantly lower than 49.8% in FY 2021 and 26.3% in FY 2020, primarily due to permanent differences in expense valuation[351] - The net deferred tax assets increased to $1,388,271 in FY 2022 from $1,144,764 in FY 2021, reflecting a gain associated with the revaluation of deferred tax assets[354] Franchise and Licensing - The strategic alliance with Edible Arrangements resulted in purchases of approximately $1.7 million in FY 2022, accounting for 5.3% of total revenues, down from $3.5 million or 15.1% in FY 2021[185][199] - Franchise fee revenue decreased in FY 2022 due to fewer franchise closures compared to FY 2021[203] - The Company recognized a ten percent (10%) royalty on all sales of products sold at franchise locations, excluding those purchased from the Company[288] Inventory and Assets - Total inventories as of February 28, 2022, were valued at $4,354,202, an increase from $4,062,885 in 2021, representing a growth of approximately 7.2%[316] - Goodwill and intangible assets totaled $8,212,306 as of February 28, 2022, compared to $5,050,854 in 2021, indicating a significant increase of approximately 62.5%[319] Other Financial Metrics - The Company recognized $1,073,115 in stock-based compensation expense for FY 2022, compared to $511,835 in FY 2021[293] - The Company recognized gift card breakage of $89,525 in FY 2022, compared to $53,160 in FY 2021[277] - The allowance for doubtful accounts associated with notes receivable was $112,287 as of February 28, 2022, unchanged from the previous year[271]

PART I. FINANCIAL INFORMATION This section provides the company's unaudited consolidated financial statements and management's discussion and analysis for the period [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited consolidated financial statements for the three and nine months ended November 30, 2021, covering operations, balance sheets, and cash flows [Consolidated Statements of Operations](index=4&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) Total revenue increased 17.7% year-over-year for the three months ended November 30, 2021, but surging G&A expenses led to a net loss Consolidated Statements of Operations | Financial Metric | Three Months Ended Nov 30, 2021 | Three Months Ended Nov 30, 2020 | Nine Months Ended Nov 30, 2021 | Nine Months Ended Nov 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $8,507,634 | $7,228,867 | $24,027,422 | $15,258,706 | | **Income (Loss) from Operations** | $(1,958,708) | $398,564 | $(1,054,979) | $(4,311,042) | | **Consolidated Net Income (Loss)** | $(1,477,646) | $523,695 | $(700,908) | $(3,067,570) | | **Diluted Earnings (Loss) per Share** | $(0.24) | $0.08 | $(0.11) | $(0.51) | [Consolidated Balance Sheets](index=5&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) As of November 30, 2021, total assets increased to **$27.3 million**, driven by higher current assets, with total liabilities rising to **$8.4 million** Consolidated Balance Sheets | Balance Sheet Item | November 30, 2021 (unaudited) | February 28, 2021 | | :--- | :--- | :--- | | **Total Current Assets** | $15,079,748 | $12,776,823 | | **Total Assets** | $27,298,664 | $24,951,152 | | **Total Current Liabilities** | $6,118,602 | $3,780,320 | | **Total Liabilities** | $8,384,069 | $4,983,583 | | **Total Stockholders' Equity** | $18,914,595 | $18,967,569 | [Consolidated Statements of Cash Flows](index=7&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) For the nine months ended November 30, 2021, net cash from operating activities turned positive, leading to an increase in cash and cash equivalents Consolidated Statements of Cash Flows | Cash Flow Activity | Nine Months Ended Nov 30, 2021 | Nine Months Ended Nov 30, 2020 | | :--- | :--- | :--- | | **Net cash (used in) provided by operating activities** | $857,048 | $(2,012,609) | | **Net cash (used in) provided by investing activities** | $(407,457) | $198,438 | | **Net cash provided by (used in) financing activities** | $(61,276) | $4,263,021 | | **Net Increase (Decrease) in Cash** | $388,315 | $2,448,850 | | **Cash and Cash Equivalents, End of Period** | $6,021,594 | $7,270,921 | [Notes to Financial Statements](index=9&type=section&id=NOTES%20TO%20INTERIM%20(UNAUDITED)%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) Notes detail operations, accounting policies, and financial items, covering COVID-19 recovery, Edible Arrangements disagreements, and significant one-time costs - The company is experiencing a strong recovery from COVID-19, with most stores meeting or exceeding pre-pandemic sales levels. However, this recovery is partially constrained by labor and supply chain issues[30](index=30&type=chunk) - Disagreements have arisen with Edible Arrangements regarding their strategic alliance, and the outcome is currently indeterminable. Purchases by Edible decreased significantly to **$1.2 million** in the first nine months of FY22 from **$2.1 million** in the prior year[23](index=23&type=chunk) - The company incurred substantial costs of approximately **$1.7 million** in the nine months ended Nov 30, 2021, related to a stockholder's contested solicitation of proxies[85](index=85&type=chunk) - A letter agreement with the interim CEO, Bryan J. Merryman, resulted in accrued severance compensation of **$1,344,813** and accelerated restricted stock unit compensation expense of **$525,000** during the third quarter[89](index=89&type=chunk)[88](index=88&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses revenue recovery, profitability impacts from one-time costs, and emerging headwinds from labor shortages and supply chain disruptions [Results of Operations - Three Months Ended November 30, 2021](index=27&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20November%2030,%202021) Total revenues increased 17.7% year-over-year to **$8.5 million**, but a 390.2% surge in G&A expenses led to an operating loss for the quarter Revenue Stream - Three Months Ended November 30, 2021 | Revenue Stream | Q3 2021 ($ thousands) | Q3 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $6,376.4 | $5,570.4 | 14.5% | | Retail sales | $636.0 | $531.4 | 19.7% | | Royalty and marketing fees | $1,433.5 | $1,081.0 | 32.6% | | **Total** | **$8,507.6** | **$7,228.9** | **17.7%** | - General and administrative costs surged by **$3.1 million (390.2%)** due to costs from a contested proxy solicitation (**$800k**) and change in control severance expenses (**$1.9 million**)[112](index=112&type=chunk)[97](index=97&type=chunk) - Factory gross margin improved to **22.2%** from **19.1%** in the prior year, driven by higher production volume and average selling prices, which offset increased material and labor costs[108](index=108&type=chunk) [Results of Operations - Nine Months Ended November 30, 2021](index=33&type=section&id=Results%20of%20Operations%20-%20Nine%20Months%20Ended%20November%2030,%202021) Revenues grew 57.5% for the nine-month period, narrowing the operating loss, despite significant proxy and severance costs impacting overall profitability Revenue Stream - Nine Months Ended November 30, 2021 | Revenue Stream | Nine Months 2021 ($ thousands) | Nine Months 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $16,578.5 | $11,203.7 | 48.0% | | Retail sales | $2,208.1 | $1,214.4 | 81.8% | | Royalty and marketing fees | $5,075.8 | $2,665.9 | 90.4% | | **Total** | **$24,027.4** | **$15,258.7** | **57.5%** | - Factory gross margin expanded significantly to **21.2%** from **8.9%** in the prior year, attributed to a **39.4%** increase in production volume, higher prices, and Employee Retention Credits[127](index=127&type=chunk) - General and administrative costs for the nine months included approximately **$1.7 million** for the contested proxy solicitation and **$1.9 million** in change in control severance expenses[132](index=132&type=chunk) [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained a stable liquidity position with **$6.0 million** in cash and positive cash flow from operations, deemed sufficient for the next twelve months - Cash and cash equivalents increased by approximately **$400,000** to **$6.0 million** as of November 30, 2021, compared to February 28, 2021[140](index=140&type=chunk) - The company has a **$5.0 million** credit line which was fully available as of November 30, 2021[52](index=52&type=chunk) - The Board of Directors suspended the quarterly cash dividend in May 2020 to preserve cash, and it remains suspended[31](index=31&type=chunk)[54](index=54&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the registrant is exempt from providing quantitative and qualitative disclosures about market risk - The company is exempt from this disclosure requirement due to its status as a smaller reporting company[148](index=148&type=chunk) [Controls and Procedures](index=39&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of November 30, 2021, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[150](index=150&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[151](index=151&type=chunk) PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, and other miscellaneous items, confirming no material changes or unreported events [Legal Proceedings](index=40&type=section&id=Item%201.%20Legal%20Proceedings) Management believes that ongoing legal proceedings arising in the ordinary course of business will not materially impact the company's financial condition - Management believes that ongoing legal proceedings will not materially impact the company's financial position, results of operations, or cash flows[153](index=153&type=chunk) [Risk Factors](index=40&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - The company reports no material changes to its risk factors from those disclosed in its most recent Form 10-K[154](index=154&type=chunk) [Other Items (Items 2, 3, 4, 5, 6)](index=40&type=section&id=Other%20Items) This section confirms no unregistered equity sales, no senior security defaults, and no other material information for the period - No information was reported for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), or Item 5 (Other Information)[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk)

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section provides the company's financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for the three and six months ended August 31, 2021, and 2020, including detailed notes on accounting policies and financial items [Consolidated Statements of Operations](index=4&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) For the three months ended August 31, 2021, the company reported total revenues of **$7.9 million** and a net income of **$196,933**, with six-month revenues at **$15.5 million** and net income of **$776,738**, a significant improvement from the prior-year net loss Three Months Ended August 31, 2021 vs 2020 | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | **Total Revenue** | $7,926,077 | $5,327,402 | | **Income from Operations** | $257,825 | $119,357 | | **Consolidated Net Income** | $196,933 | $76,132 | | **Diluted EPS** | $0.03 | $0.01 | Six Months Ended August 31, 2021 vs 2020 | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | **Total Revenue** | $15,519,788 | $8,029,839 | | **Income (Loss) from Operations** | $903,729 | $(4,709,606) | | **Consolidated Net Income (Loss)** | $776,738 | $(3,591,265) | | **Diluted EPS (Loss)** | $0.12 | $(0.59) | [Consolidated Balance Sheets](index=5&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) As of August 31, 2021, total assets increased to **$27.4 million** from **$25.0 million** at February 28, 2021, driven by higher cash and inventories, with total stockholders' equity also increasing to **$20.0 million** Balance Sheet Summary (as of August 31, 2021) | Account | August 31, 2021 ($) | February 28, 2021 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | $6,731,330 | $5,633,279 | | Inventories, net | $5,188,433 | $4,062,885 | | Total current assets | $15,204,875 | $12,776,823 | | **Total Assets** | **$27,417,592** | **$24,951,152** | | Total current liabilities | $5,022,547 | $3,780,320 | | **Total Liabilities** | **$7,403,661** | **$5,983,583** | | **Total stockholders' equity** | **$20,013,931** | **$18,967,569** | [Consolidated Statements of Cash Flows](index=7&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) For the six months ended August 31, 2021, net cash provided by operating activities was **$1.4 million**, a significant turnaround from the **$3.1 million** used in the prior-year period, with investing activities using **$329,405** and no financing activities Cash Flow Summary (Six Months Ended August 31) | Activity | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net cash from operating activities | $1,427,456 | $(3,056,480) | | Net cash used in investing activities | $(329,405) | $(104,905) | | Net cash from financing activities | $0 | $4,263,021 | | **Net Increase in Cash** | **$1,098,051** | **$1,101,636** | [Notes to Interim (Unaudited) Consolidated Financial Statements](index=9&type=section&id=NOTES%20TO%20INTERIM%20(UNAUDITED)%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) The notes detail the company's operations, revenue recognition, segment performance, and significant events, including COVID-19 impact, strategic alliance disagreements, legal proceedings, and proxy solicitation costs - The company is an international franchisor and confectionery manufacturer with revenues from product sales, franchise fees, and company-owned stores[19](index=19&type=chunk)[20](index=20&type=chunk) - Disagreements have arisen with Edible Arrangements® regarding their strategic alliance, and purchases from Edible decreased to **$797,000 (5.1% of revenue)** in the first six months of fiscal 2022 from **$949,000 (11.8% of revenue)** in the prior year period[21](index=21&type=chunk) - The company incurred approximately **$907,000** in costs during the three months ended August 31, 2021, related to a stockholder's contested solicitation of proxies[75](index=75&type=chunk) - A change in control has occurred due to changes in the Board of Directors, which may trigger severance payments of approximately **$2.2 million** and accelerated RSU vesting of **$690,000** if certain executives are terminated[76](index=76&type=chunk)[77](index=77&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, highlighting a strong recovery from the COVID-19 pandemic's impact, with significant revenue and net income increases, improved liquidity, and working capital, despite substantial proxy solicitation costs [Results of Operations - Three Months Ended August 31, 2021](index=27&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20August%2031%2C%202021) For the three months ended August 31, 2021, revenues increased **48.8%** to **$7.9 million**, and net income rose to **$197,000** from **$76,000** year-over-year, driven by product sales growth, partially offset by **$907,000** in proxy solicitation costs Revenue Breakdown (Three Months Ended August 31) | Revenue Source | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $5,161.4 | $3,498.8 | 47.5% | | Retail sales | $782.6 | $495.4 | 58.0% | | Royalty and marketing fees | $1,935.0 | $1,259.6 | 53.6% | | **Total** | **$7,926.1** | **$5,327.4** | **48.8%** | - Same-store pounds purchased by domestic franchise locations increased **20.0%** compared to the pre-pandemic period of Q2 2019[92](index=92&type=chunk) - General and administrative costs increased **136.4%** to **$1.86 million**, primarily due to **$907,000** in costs associated with a contested proxy solicitation[96](index=96&type=chunk)[102](index=102&type=chunk) - Factory gross margin improved significantly to **26.1%** from **16.9%** in the prior year, driven by higher production volume and the benefit of Employee Retention Credits[97](index=97&type=chunk)[98](index=98&type=chunk) [Results of Operations - Six Months Ended August 31, 2021](index=31&type=section&id=Results%20of%20Operations%20-%20Six%20Months%20Ended%20August%2031%2C%202021) For the six months ended August 31, 2021, the company reported a net income of **$777,000**, a reversal from a **$3.6 million** net loss in the prior-year period, with revenues growing **93.3%** to **$15.5 million**, reflecting strong recovery despite proxy contest costs Revenue Breakdown (Six Months Ended August 31) | Revenue Source | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $10,202.2 | $5,633.4 | 81.1% | | Retail sales | $1,572.1 | $683.0 | 130.2% | | Royalty and marketing fees | $3,642.3 | $1,584.8 | 129.8% | | **Total** | **$15,519.8** | **$8,029.8** | **93.3%** | - General and administrative costs decreased primarily due to lower bad debt expense and the absence of asset impairment charges that were recorded in the prior year, partially offset by **$917,000** in proxy contest costs[120](index=120&type=chunk) - Factory gross margin increased to **20.6%** from **-1.2%** in the prior year period, due to a **55.0%** increase in production volume and higher average selling prices[116](index=116&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) The company's financial position strengthened, with working capital increasing by **$1.2 million** to **$10.2 million** and cash balances growing by **$1.1 million** to **$6.7 million** as of August 31, 2021, supported by positive operating cash flow - Working capital increased to **$10.2 million** as of August 31, 2021, from **$9.0 million** at February 28, 2021[128](index=128&type=chunk) - Cash and cash equivalents increased by **$1.1 million** to **$6.7 million** during the first six months of the fiscal year[129](index=129&type=chunk) - Net cash provided by operating activities was **$1.4 million** for the six months ended August 31, 2021, compared to net cash used of **$3.1 million** in the same period of 2020[130](index=130&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the company is not required to provide this information - The company is not required to provide information for this item as it qualifies as a smaller reporting company[137](index=137&type=chunk) [Item 4. Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of August 31, 2021, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of August 31, 2021[139](index=139&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[140](index=140&type=chunk) [PART II. OTHER INFORMATION](index=38&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides information on legal proceedings, risk factors, equity security sales, and filed exhibits [Item 1. Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings, but management does not expect a material adverse effect on financial condition or results of operations - Management believes that the resolution of various legal proceedings arising in the ordinary course of business will not have a material adverse effect on the Company's financial position, results of operations or cash flows[141](index=141&type=chunk) [Item 1A. Risk Factors](index=38&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended February 28, 2021 - There have been no material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the fiscal year ended February 28, 2021[142](index=142&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=38&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no issuer purchases of equity securities during the period - There were no issuer purchases of equity securities[143](index=143&type=chunk) [Item 6. Exhibits](index=39&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, a cooperation agreement, and Sarbanes-Oxley Act certifications - Exhibits filed include the Cooperation Agreement with Global Value Investment Corp., and certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[148](index=148&type=chunk)

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Q1 2021 financial statements show significant recovery, with revenue up 181% to $7.6 million and a shift from net loss to net income [Consolidated Statements of Operations](index=4&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) Consolidated Statements of Operations Highlights (Three Months Ended May 31) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | **$7,593,711** | **$2,702,437** | **+181.0%** | | Income (Loss) from Operations | $645,904 | $(4,828,963) | N/A | | **Consolidated Net Income (Loss)** | **$579,805** | **$(3,667,397)** | **N/A** | | Diluted Earnings (Loss) per Share | $0.09 | $(0.61) | N/A | - The company experienced a **significant turnaround**, moving from a substantial operating loss in Q1 2020 to an **operating profit** in Q1 2021, primarily due to the recovery from COVID-19 pandemic impacts[9](index=9&type=chunk) [Consolidated Balance Sheets](index=5&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) Consolidated Balance Sheet Highlights | Metric | May 31, 2021 | February 28, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,789,625 | $5,633,279 | | Total current assets | $13,267,445 | $12,776,823 | | **Total Assets** | **$25,802,627** | **$24,951,152** | | Total current liabilities | $3,617,399 | $3,780,320 | | **Total stockholders' equity** | **$19,693,531** | **$18,967,569** | [Consolidated Statements of Cash Flows](index=7&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) Consolidated Cash Flow Highlights (Three Months Ended May 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $385,811 | $(1,598,042) | | Net cash used in investing activities | $(229,465) | $(46,127) | | Net cash provided by (used in) financing activities | $0 | $4,263,021 | | **Net Increase in Cash** | **$156,346** | **$2,618,852** | | Cash and Cash Equivalents, End of Period | $5,789,625 | $7,440,923 | - Cash flow from operations turned **positive** in Q1 2021, a significant improvement from the cash burn in Q1 2020. The prior year's financing activities included proceeds from long-term debt and a line of credit to manage liquidity during the pandemic[14](index=14&type=chunk) [Notes to Financial Statements](index=9&type=section&id=NOTES%20TO%20INTERIM%20(UNAUDITED)%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) - The company is an international franchisor and confectionery manufacturer with revenues from product sales, franchise fees, and company-owned stores[18](index=18&type=chunk)[19](index=19&type=chunk) - A strategic alliance with Edible Arrangements® is intended to make the company an exclusive provider of certain chocolate products, but disagreements arose in Q1 2021, with the outcome currently undeterminable[20](index=20&type=chunk) - The company initiated legal proceedings against its Canadian operator, Immaculate Confections (IC), for unauthorized use of trademarks. A court order declared the development agreement expired, and the company has removed IC's 48 locations from its store count[21](index=21&type=chunk)[22](index=22&type=chunk)[23](index=23&type=chunk) - Due to the COVID-19 pandemic's impact, the company suspended its quarterly cash dividend in May 2020 to preserve cash[28](index=28&type=chunk)[53](index=53&type=chunk) - In Q1 2020, the company recorded **$545,000** in impairment expenses for goodwill, trademarks, and other long-lived assets due to the significant impact of the COVID-19 pandemic. No such impairment charges were recorded in Q1 2021[45](index=45&type=chunk)[46](index=46&type=chunk)[47](index=47&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes Q1 2021's significant operational improvement to COVID-19 recovery, with revenues up 181% to $7.6 million and a shift to net income [COVID-19 Impact](index=17&type=section&id=COVID-19%20Impact) - The business was significantly disrupted by COVID-19 in the prior year, with most stores experiencing reduced operations or closures. By May 31, 2021, many stores had met or exceeded pre-pandemic sales levels, though some retail environments remain adversely impacted[83](index=83&type=chunk) - In response to the pandemic's impact, the Board of Directors suspended quarterly cash dividends starting in May 2020 to preserve cash and provide financial flexibility[84](index=84&type=chunk) [Results of Operations](index=17&type=section&id=Results%20of%20Operations) Revenue Breakdown (Three Months Ended May 31) | Revenue Source | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $5,040.7 | $2,134.6 | +136.1% | | Retail sales | $789.5 | $187.6 | +320.8% | | Royalty and marketing fees | $1,707.3 | $325.2 | +425.0% | | **Total** | **$7,593.7** | **$2,702.4** | **+181.0%** | - The increase in factory sales was driven by a **281% rise** in product sales to the franchise network as stores reopened. Same-store pounds purchased by domestic franchise locations increased **11.3%** compared to the pre-pandemic period of Q1 2019[87](index=87&type=chunk)[88](index=88&type=chunk) - Royalty and marketing fees surged as most franchise locations resumed normal operations. Same-store sales at domestic franchise locations increased **14.0%** compared to the pre-pandemic period of Q1 2019[90](index=90&type=chunk) Gross Margin Analysis (Three Months Ended May 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Factory gross margin | 14.9% | -30.7% | | Retail gross margin | 67.5% | 50.6% | - Factory gross margin improved significantly due to a **129% increase** in production volume, which allowed fixed costs to be spread over a larger base, unlike the prior year where idle labor costs exceeded revenue[94](index=94&type=chunk) - General and administrative costs decreased by **73.4%** primarily due to lower bad debt expense and the absence of intangible asset impairment charges that were recorded in Q1 2020[99](index=99&type=chunk) [Liquidity and Capital Resources](index=20&type=section&id=Liquidity%20and%20Capital%20Resources) - Management believes cash flows from operations and existing cash reserves will be sufficient to meet liquidity and capital needs for at least the next twelve months, following defensive measures taken in 2020 like suspending dividends and reducing expenses[105](index=105&type=chunk) - Working capital increased by **$700,000** to **$9.7 million** as of May 31, 2021, compared to February 28, 2021, due to improved operating results[106](index=106&type=chunk) - Operating activities provided **$385,811** in cash for Q1 2021, a stark contrast to the **$1,598,042** used in Q1 2020, highlighting the operational recovery[108](index=108&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=21&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[115](index=115&type=chunk) [Controls and Procedures](index=21&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including CEO and CFO, concluded disclosure controls were effective as of May 31, 2021, with no material changes to internal control over financial reporting - Based on an evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of May 31, 2021[118](index=118&type=chunk) - There were no changes in internal control over financial reporting during the quarter ended May 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[119](index=119&type=chunk) [PART II. OTHER INFORMATION](index=22&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=22&type=section&id=Item%201.%20Legal%20Proceedings) Management believes the resolution of various legal proceedings will not materially adversely affect the company's financial condition or results - Management believes that the resolution of various legal proceedings arising in the ordinary course of business will not have a material adverse effect on the Company's financial position, results of operations or cash flows[121](index=121&type=chunk) [Risk Factors](index=22&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended February 28, 2021 - There have been no material changes in the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended February 28, 2021[122](index=122&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=22&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or issuer purchases of equity securities during the period - There were no issuer purchases of equity securities during the reporting period[123](index=123&type=chunk) [Exhibits](index=23&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed with this report include Sarbanes-Oxley Act certifications (31.1, 32.1) and XBRL Interactive Data Files[128](index=128&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 001-36865 Rocky Mountain Chocolate Factory, Inc. (Exact name of registrant as specified in its c ...

PART I. FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201%2E%20Financial%20Statements) The company's financial statements for the nine months ended November 30, 2020, reflect a **35.7% revenue decline** and a **$3.1 million net loss** due to COVID-19, despite increased cash from financing activities Consolidated Statements of Operations Highlights | Metric | Three Months Ended Nov 30, 2020 ($) | Three Months Ended Nov 30, 2019 ($) | Nine Months Ended Nov 30, 2020 ($) | Nine Months Ended Nov 30, 2019 ($) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $7,228,867 | $7,913,252 | $15,258,706 | $23,724,521 | | **Income (Loss) from Operations** | $398,564 | $(98,174) | $(4,311,042) | $2,093,072 | | **Consolidated Net Income (Loss)** | $523,695 | $(71,637) | $(3,067,570) | $1,558,060 | | **Diluted Earnings (Loss) per Share** | $0.08 | $(0.01) | $(0.51) | $0.25 | Consolidated Balance Sheets Highlights | Metric | November 30, 2020 ($) | February 29, 2020 ($) | | :--- | :--- | :--- | | **Cash and cash equivalents** | $7,270,921 | $4,822,071 | | **Total current assets** | $15,334,665 | $13,611,730 | | **Total Assets** | $28,281,014 | $27,817,388 | | **Line of credit** | $3,448,165 | $- | | **Total current liabilities** | $8,755,568 | $5,606,822 | | **Total stockholders' equity** | $16,687,577 | $19,355,511 | Consolidated Statements of Cash Flows Highlights (Nine Months Ended) | Metric | November 30, 2020 ($) | November 30, 2019 ($) | | :--- | :--- | :--- | | **Net cash (used in) provided by operating activities** | $(2,012,609) | $4,031,992 | | **Net cash used in investing activities** | $198,438 | $(753,952) | | **Net cash provided by (used in) financing activities** | $4,263,021 | $(3,199,389) | | **Net Increase (Decrease) in Cash** | $2,448,850 | $78,651 | - The COVID-19 pandemic has caused significant business disruptions, including store closures and reduced operations, negatively impacting factory sales, retail sales, and royalty fees. As of November 30, 2020, approximately **43 stores had not re-opened**[26](index=26&type=chunk) - In response to the pandemic's financial impact, the Board of Directors suspended quarterly cash dividends in May 2020 to preserve cash[27](index=27&type=chunk)[59](index=59&type=chunk) - Due to the financial strain on its franchisees from COVID-19, the company significantly increased its allowance for potentially uncollectible accounts and notes receivable to **$1.88 million** at November 30, 2020, up from **$0.64 million** at February 29, 2020[134](index=134&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202%2E%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the **35.7% nine-month revenue decline** and **$3.1 million net loss** to COVID-19 disruptions, with liquidity managed through credit line draws, PPP loans, and a resolved covenant breach - The company experienced significant business disruptions from COVID-19, leading to reduced operations at nearly all Company-owned and franchise stores. As of November 30, 2020, about **43 stores remained closed**[94](index=94&type=chunk) - To maximize liquidity during the pandemic, management took actions including drawing down its line of credit, obtaining PPP loans, reducing operating expenses, and eliminating non-essential spending[97](index=97&type=chunk) Revenue Comparison (Three Months Ended Nov 30) | Revenue Source | 2020 ($ thousands) | 2019 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $5,570.4 | $5,786.3 | (3.7)% | | Retail sales | $531.4 | $704.3 | (24.5)% | | Royalty and marketing fees | $1,081.0 | $1,340.4 | (19.4)% | | **Total** | **$7,228.9** | **$7,913.3** | **(8.6)%** | Revenue Comparison (Nine Months Ended Nov 30) | Revenue Source | 2020 ($ thousands) | 2019 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Factory sales | $11,203.7 | $15,874.7 | (29.4)% | | Retail sales | $1,214.4 | $2,460.5 | (50.6)% | | Royalty and marketing fees | $2,665.9 | $5,118.8 | (47.9)% | | **Total** | **$15,258.7** | **$23,724.5** | **(35.7)%** | - For the nine months ended Nov 30, 2020, the strategic alliance with Edible Arrangements contributed approximately **$2.1 million in revenue**, partially offsetting declines from franchisee sales and the loss of FTD as a customer[121](index=121&type=chunk) - The company drew the maximum available amount of **$3.4 million** from its credit line in March 2020. It was not in compliance with an EBITDA covenant as of November 30, 2020, but executed an amendment on December 22, 2020, to become compliant[146](index=146&type=chunk) - The company received **$1.5 million** in PPP loans under the CARES Act. In November 2020, a loan of **$108,000** was fully forgiven[147](index=147&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203%2E%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the registrant is not required to provide the information for this item - The company is a smaller reporting company and is not required to provide the information required by this Item[155](index=155&type=chunk) [Controls and Procedures](index=30&type=section&id=Item%204%2E%20Controls%20and%20Procedures) Management concluded the company's disclosure controls and procedures were effective as of November 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management's evaluation concluded that the company's disclosure controls and procedures were effective as of November 30, 2020[157](index=157&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended November 30, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls[158](index=158&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=30&type=section&id=Item%201%2E%20Legal%20Proceedings) The company is involved in various ordinary course legal proceedings, which management does not expect to materially adversely affect its financial condition or operations - The Company is party to various legal proceedings arising in the ordinary course of business, which management believes will not have a material adverse effect on its financial position, operations, or cash flows[159](index=159&type=chunk) [Risk Factors](index=31&type=section&id=Item%201A%2E%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended February 29, 2020 - There have been no material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the fiscal year ended February 29, 2020[160](index=160&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202%2E%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no issuer purchases of equity securities during the period - There were no issuer purchases of equity securities during the reporting period[161](index=161&type=chunk) [Defaults Upon Senior Securities](index=31&type=section&id=Item%203%2E%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[162](index=162&type=chunk) [Mine Safety Disclosures](index=31&type=section&id=Item%204%2E%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[163](index=163&type=chunk) [Other Information](index=31&type=section&id=Item%205%2E%20Other%20Information) The company reported no other information for this item - None[164](index=164&type=chunk) [Exhibits](index=32&type=section&id=Item%206%2E%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications pursuant to the Sarbanes-Oxley Act and XBRL data files - The report includes exhibits such as the Amended and Restated Certificate of Incorporation, the 2007 Equity Incentive Plan, Sarbanes-Oxley Act certifications, and XBRL data files[168](index=168&type=chunk) Signatures - The report was signed on January 13, 2021, by Bryan J. Merryman, serving as Chief Executive Officer, Chief Financial Officer, Treasurer, and Chairman of the Board of Directors[172](index=172&type=chunk)