ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

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The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes thereto, included elsewhere in this Annual Report
on Form 10-K. In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results may differ materially from those
contained in or implied by any forward-looking statements. See "Cautionary Note
Regarding Forward-Looking Statements." Factors that could cause or contribute to
these differences include those discussed below and elsewhere in this Annual
Report on Form 10-K, particularly in Item 1A. "Risk Factors."



Overview



Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its
subsidiaries (including its operating subsidiary with the same name, Rocky
Mountain Chocolate Factory, Inc., a Colorado corporation ("RMCF") (collectively,
the "Company," "we," "us," or "our") is 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 self-serve
frozen yogurt stores. Our revenues and profitability are derived principally
from our franchised/license system of retail stores that feature chocolate,
frozen yogurt and other confectionary products. We also sell our candy in select
locations outside of our system of retail stores and license the use of our
brand with certain consumer products. We are also party to strategic alliance
and ecommerce agreements with Edible Arrangements®, LLC and its affiliates
("Edible"), whereby we sell our candy in their store locations and through their
ecommerce platform. As of March 31, 2022, there were two Company-owned, 99
licensee-owned and 159 franchised Rocky Mountain Chocolate Factory stores
operating in 37 states, South Korea, Panama, and the Philippines. As of March
31, 2022, U-Swirl operated three Company-owned stores and 63 franchised and
licensed stores located in 22 states and Qatar. U-Swirl operates self-serve
frozen yogurt cafes under the names "U-Swirl," "Yogurtini," "CherryBerry,"
"Yogli Mogli Frozen Yogurt," "Fuzzy Peach Frozen Yogurt," "Let's Yo!" and "Aspen
Leaf Yogurt".



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In FY 2020 and early FY 2021, we entered into a long-term strategic alliance and
ecommerce agreements, respectively, with Edible Arrangements®, LLC and its
affiliates ("Edible"), whereby it is intended that we would become the exclusive
provider of certain branded chocolate products to Edible, its affiliates and its
franchisees. Under the strategic alliance, 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, due to Edible's significant e-commerce expertise and scale, we have
also executed an ecommerce licensing agreement with Edible, whereby Edible 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 FY 2022, 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.  Purchases by Edible during FY 2022 and FY
2021 were approximately $1.7 million and $3.5 million, or 5.3% and 15.1% of the
Company's revenues, respectively. There can be no assurance historical revenue
levels will be indicative of future revenues.



Current Trends and Outlook



As discussed in more detail throughout this Annual Report on Form 10-K for FY
2022 (this "Annual 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 throughout the United States and internationally. During FY 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 were not ordering products for their stores in line
with historical amounts. This trend has negatively impacted, and may continue to
negatively impact, among other things, factory sales, retail sales and royalty
and marketing fees. Although most stores that previously temporarily closed in
early 2020 in response to the COVID-19 pandemic have re-opened, during FY 2021,
approximately 53 stores closed and have not re-opened and the future of these
locations is uncertain. This closure rate is significantly higher than
historical levels. As of the date of this report, most 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. Strong consumer spending and other
macro-economic trends as well as the roll out of vaccines and relaxing of most
local health restrictions have resulted in significant increases in sales at our
franchise stores during FY 2022. Our ability to meet the increase in franchise
store demand has been partially constrained by labor and supply chain
constraints. We are unsure how the emergence of COVID-19 variants, such as Delta
and Omicron, will impact the positive recovery trends.



In addition, as previously announced on May 11, 2020, the Board of Directors
suspended future quarterly dividends until the Board of Directors determines
that resumption of dividend payments is in the best interest of the Company and
our stockholders.



As a result of macro-economic inflationary trends and disruptions to the global
supply chain, we have experienced and expect to continue experiencing higher raw
material, labor, and freight costs. We have seen labor and logistics challenges,
which we believe have contributed to lower factory, retail and e-commerce sales
of our products due to the availability of material, labor and freight. In
addition, we could experience additional lost sale opportunities if our products
are not available for purchase as a result of continued disruptions in our
supply chain relating to an inability to obtain ingredients or packaging, labor
challenges at our logistics providers or our manufacturing facility, or if we or
our franchisees experience delays in stocking our products.



During FY 2022, the Company incurred substantial costs associated with a
stockholder's contested solicitation of proxies in connection with our 2021
annual meeting of stockholders. During FY 2022, the Company incurred
approximately $1.7 million of costs associated with the contested solicitation
of proxies, compared with no comparable costs incurred in FY 2021. These costs
are recognized as general and administrative expense in the Consolidated
Statement of Operations. Additionally, as a result of the contested solicitation
of proxies and the resulting changes to the composition of the Company's Board
of Directors, the Company incurred $2.0 million of accrued severance costs and
accelerated restricted stock unit expense during FY 2022. As previously
announced, Bryan J. Merryman agreed to voluntarily step down as President and
Chief Executive Officer ("CEO") of the Company upon the hiring of a new
President and CEO for the Company. On May 5, 2022 the Company concluded its
search for a new CEO with the announcement that Robert Sarlls will succeed Mr.
Merryman as the Company's CEO beginning on May 9, 2022.



Limited financing alternatives for domestic franchise growth has led us to
pursue a strategy of expansion through co-branding with complimentary concepts
such as ice cream and frozen yogurt, international development, sale of our
products to specialty markets, licensing the Rocky Mountain Chocolate Factory
brand for use with other appropriate consumer products, and selected entry of
Rocky Mountain Chocolate Factory branded products into other wholesale channels,
along with business acquisitions as primary drivers of growth. This is a trend
that continued in FY 2021 and we expect to continue into the foreseeable future.



Going forward in FY 2023, we are taking a conservative view of market conditions
in the United States. We intend to continue to focus on our long-term objectives
while seeking to maintain flexibility to respond to market conditions.



We are subject to seasonal fluctuations in sales because of key holidays and the
location of our franchisees, which have traditionally been located in resort or
tourist locations, and the nature of the products we sell, which are highly
seasonal. As we expanded our geographical diversity to include regional centers
and our franchise offerings to include frozen desserts, we have seen some
moderation to our seasonal sales mix. Seasonal fluctuation in sales causes
fluctuations in quarterly results of operations. Historically, the strongest
sales of our products have occurred during key holidays and summer vacation
seasons. Additionally, 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.



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The most important factors in continued growth in our earnings are macroeconomic
and retail sector post-COVID 19 recovery, ongoing online revenue growth, a shift
in consumer behavior as a result of the COVID-19 pandemic, unit growth,
increased same store sales and increased same store pounds purchased from the
factory.



Our ability to successfully achieve growth as a result of our strategic alliance
with Edible depends on many factors not within our control, including customer
receptiveness to our products, Edible franchisee's receptiveness to our
products, logistical considerations and technological integration. Our ability
to successfully achieve expansion of our franchise systems depends on many
factors not within our control including the availability of suitable sites for
new store establishment and the availability of qualified franchisees to support
such expansion.



Efforts to reverse the decline in same store pounds purchased from the factory
by franchised stores and to increase total factory sales depend on many factors,
including new store openings, competition, the receptivity of our franchise
system to our product introductions and promotional programs. In FY 2021, same
store pounds purchased from the factory by franchised and co-branded licensed
stores was significantly impacted by COVID-19 and the impact it had on store
operations. During FY 2022, same store pounds purchased from the factory by
franchised and co-branded licensed stores increased approximately 325.5% in the
first quarter, increased approximately 63.8% in the second quarter, increased
approximately 20.9% in the third quarter, increased approximately 21.1% in the
fourth quarter, and increased 58.9% overall in FY 2022 as compared to the same
periods in FY 2021.



We have expanded co-branding as a way to offset low franchise growth through a
relationship with Cold Stone Creamery. We have additionally developed co-branded
locations through U-Swirl brands. We believe that if this co-branding strategy
continues to prove financially viable it could represent a significant future
growth opportunity. As of February 28, 2022, Cold Stone licensees operated 97
co-branded locations, our U-Swirl franchisees operated 6 co-branded locations
and we have co-branded 3 of our Company-owned cafés.



Results of Operations


Fiscal 2022 vs. Fiscal 2021


Results Summary



Basic earnings per share increased from a net loss of $(0.15) per share in FY
2021 to a net loss of $(0.06) per share in FY 2022. Revenues increased 37.7%
from $23.5 million for FY 2021 to $32.3 million for FY 2022. Operating loss
decreased from an operating loss of $(3.5) million in FY 2021 to an operating
loss of $(484,000) in FY 2022. Net loss decreased from a net loss of $(900,000)
in FY 2021 to a net loss of $(342,000) in FY 2022. The increase in revenue was
due primarily to the impacts from the COVID-19 pandemic during FY 2021,
including its impact on our operation and the operations of our franchised,
licensed and Company-owned locations. During FY 2022, many of the disruptions
experienced as a result of the COVID-19 pandemic were no longer impacting our
network of franchised and licensed retail stores and many of our locations had
returned to, or exceeded, pre-pandemic levels. These increases were partially
offset by the costs associated with the contested solicitation of proxies
incurred during FY 2022 with no comparable costs in FY 2021. The decrease in
loss from operations and net loss was due primarily to recovery from the
COVID-19 pandemic and the associated impact on revenue FY 2021 partially offset
by the costs associated with the contested solicitation of proxies and the
associated accrued severance and stock compensation costs during FY 2022.



REVENUES



                                For the Year Ended
($'s in thousands)                 February 28,                $            %
                                2022           2021         Change       Change
Factory sales                $ 22,374.2     $ 17,321.0     $ 5,053.2        29.2 %
Retail sales                    2,853.3        1,858.5         994.8        53.5 %
Franchise fees                    213.9          226.7         (12.8 )      (5.6 )%
Royalty and marketing fees      6,901.2        4,074.5       2,826.7        69.4 %
Total                        $ 32,342.6     $ 23,480.7     $ 8,861.9        37.7 %




Factory Sales



The increase in factory sales for FY 2022 compared FY 2021 was primarily due to
an 70.0% increase in sales of product to our network of franchised and licensed
retail stores partially offset by a 40.7% decrease in shipments of product to
customers outside our network of franchised retail stores. Purchases by the
Company's largest customer, Edible, during FY 2022 were approximately $1.7
million, or 5.3% of the Company's revenues, compared to $3.5 million, or 15.1%
of the Company's revenues during FY 2021. The 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
FY 2021, which significantly reduced traffic in our stores. During FY 2022 most
of the disruptions experienced as a result of the COVID-19 pandemic were no
longer impacting our network of franchised and licensed retail stores and many
of our locations had returned to, or exceeded, pre-pandemic levels. During FY
2022, 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. Same store
pounds purchased by domestic franchise and licensed locations increased 11.7%
during FY 2022 when compared to FY 2020 (the most recent comparable period prior
to the business disruptions of COVID-19).



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Retail Sales



The increase in retail sales for FY 2022 compared to FY 2021 was primarily due
to all of our Company-owned stores being open during FY 2022 compared to the
closure or limited operations of all of our Company-owned stores for much of FY
2021. The closure or limited operations 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 FY 2021. As of February 28, 2022 most
Company-owned stores had resumed full operations following COVID-19 related
closure.



Royalties, marketing fees and franchise fees



The increase in royalty and marketing fees during FY 2022 compared to FY 2021
was primarily due to the majority of our franchise locations having resumed
normal operations during FY 2022, due to the relaxing of restrictions related to
the COVID-19 pandemic and the associated public health measures in place during
FY 2021 as well as the rollout of vaccines at the beginning of FY 2022. Nearly
all of our franchised locations experienced reduced operations and periods of
full closure during FY 2021. Same store sales at domestic franchise locations
increased 18.9% in FY 2022 when compared to FY 2020 (the most recent comparable
period prior to the business disruptions of COVID-19).



The decrease in franchise fee revenue during FY 2022 compared to FY 2021 was the
result of a decrease in revenue resulting from the closure of franchise
locations and the associated recognition of revenue in FY 2021, with fewer
comparable closures during FY 2022 and fewer franchise stores in operation and
the associated recognition of revenue over the term of the various franchise
agreements.



COSTS AND EXPENSES



Cost of Sales



                                For the Year Ended
                                   February 28,                $            %
($'s in thousands)              2022           2021         Change       Change

Cost of sales - factory      $ 18,153.8     $ 15,473.8     $ 2,680.0        17.3 %
Cost of sales - retail          1,013.9          644.8         369.1        57.2 %
Franchise costs                 2,183.7        1,715.6         468.1        27.3 %
Sales and marketing             1,610.7        1,712.8        (102.1 )      (6.0 )%
General and administrative      7,551.0        5,258.0       2,293.0        43.6 %
Retail operating                1,727.7        1,381.8         345.9        25.0 %
Total                        $ 32,240.8     $ 26,186.8     $ 6,054.0        23.1 %






Gross Margin             For the Year Ended
                            February 28,               $            %
($'s in thousands)       2022          2021         Change       Change

Factory gross margin   $ 4,220.4     $ 1,847.2     $ 2,373.2       128.5 %
Retail gross margin      1,839.4       1,213.7         625.7        51.6 %
Total                  $ 6,059.8     $ 3,060.9     $ 2,998.9        98.0 %




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Gross Margin             For the Year Ended
                            February 28,              %            %
                         2022           2021       Change       Change
(Percent)
Factory gross margin        18.9 %        10.7 %       8.2 %       76.6 %
Retail gross margin         64.5 %        65.3 %      (0.8 )%      (1.2 )%
Total                       24.0 %        16.0 %       8.0 %       50.0 %






Adjusted Gross Margin                   For the Year Ended
(a non-GAAP measure)                       February 28,               $             %
($'s in thousands)                      2022          2021         Change        Change

Factory gross margin                  $ 4,220.4     $ 1,847.2     $ 2,373.2        128.5 %
Plus: depreciation and amortization       620.8         625.5          (4.7 )       (0.8 )%
Factory adjusted gross margin           4,841.2       2,472.7       2,368.5         95.8 %
Retail gross margin                     1,839.4       1,213.7         625.7         51.6 %
Total Adjusted Gross Margin           $ 6,680.6     $ 3,686.4     $ 2,994.2         81.2 %

Factory adjusted gross margin              21.6 %        14.3 %         7.3 %       51.0 %
Retail gross margin                        64.5 %        65.3 %        (0.8 )%      (1.2 )%
Total Adjusted Gross Margin                26.5 %        19.2 %         7.3 %       38.0 %




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 increased to 18.9% in FY 2022 compared to a gross margin
of 10.7% during FY 2021, due primarily to a 27.4% increase in production volume,
higher average sell prices, and the impacts of Employee Retention Credits in FY
2022 compared to FY 2021, partially offset by increased costs of materials and
labor. The increase in production volume was in response to a 29.2% increase in
factory sales, primarily due to a resumption of normal factory operations during
FY 2022 compared to significantly reduced operations during FY 2021. Operations
during FY 2021 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, did not decrease proportionate to factory
revenue during FY 2021. During FY 2021 the Company 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 decreased from 65.3% in fiscal 2021 to 64.5% in fiscal 2022. The decline in retail gross margins was primarily due to higher costs.



Franchise Costs



The increase in franchise costs in FY 2022 compared to FY 2021 was due primarily
to an increase in professional fees, the result of litigation with IC, our
licensee in Canada. As a percentage of total royalty and marketing fees and
franchise fee revenue, franchise costs decreased to 30.7% in FY 2022 from 39.9%
in FY 2021. This decrease as a percentage of royalty, marketing and franchise
fees is primarily a result of higher royalty fees partially offset by higher
costs.



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Sales and Marketing


The decrease in sales and marketing expenses in fiscal 2022 compared to fiscal 2021 is mainly due to lower online advertising expenses.


General and Administrative



The increase in general and administrative costs during FY 2022 compared to FY
2021 is primarily due to costs associated with a stockholder's contested
solicitation of proxies in connection with our 2021 annual meeting of
stockholders and the compensation costs associated with the letter agreement
between the Company and Mr. Merryman. These increases were partially offset by a
decrease in bad debt expense during FY 2022 compared to FY 2021 and an absence
of impairment expense related to certain intangible assets during FY 2022
compared with impairment expense of $533,000 incurred during FY 2021. During FY
2022, the Company incurred approximately $1.7 million of costs associated with
the contested solicitation of proxies and $2.0 million in change in control
severance expense, compared with no comparable costs incurred in FY 2021. As a
percentage of total revenues, general and administrative expenses increased to
23.3% in FY 2022 compared to 22.4% in FY 2021.



Retail Operating Expenses



The increase in retail operating expenses during FY 2022 compared to FY 2021 was
a result of the re-opening of all of our Company-owned stores so that all stores
were open during FY 2022 compared to the closure or limited operation of all of
our Company-owned stores for much of FY 2021. The closure or limited operation
of our Company-owned stores was the result of COVID-19 and the associated public
health measures in place during the FY 2021. Retail operating expenses, as a
percentage of retail sales, decreased from 74.4% during FY 2021 to 60.6% in FY
2022. This decrease is primarily the result of higher retail sales partially
offset by higher retail operating expenses.



Depreciation and amortization



Depreciation and amortization, exclusive of depreciation and amortization
included in cost of sales, was $586,000 during FY 2022, a decrease of 17.5% from
$711,000 incurred during FY 2021. This decrease was the result of a decrease in
frozen yogurt cafés in operation and lower amortization of the associated
franchise rights. 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
decreased 0.8% from $626,000 during FY 2021 to $621,000 during FY 2022. This
decrease was the result of certain assets becoming fully depreciated, partially
offset by depreciation related to new assets acquired.



Other Income (Expense)



Other income decreased to $178,000 during FY 2022 compared to other income of
$1.7 million during FY 2021. This change was primarily the result of debt
forgiveness income during FY 2021 with no comparable amounts realized during FY
2022. Net interest income was $11,000 in FY 2022 compared to net interest
expense of $77,000 during FY 2021. This change was primarily the result of 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 FY 2021, the Company borrowed $3.4 million from its line of credit and
borrowed $1.5 million of loans under the Paycheck Protection Program. The line
of credit was paid in full and Paycheck Protection Program loans were fully
forgiven during FY 2021.



The Company recognized a gain on insurance recovery of $167,100 during FY 2022,
compared with $210,500 recognized during FY 2021. The Company recognized
forgiveness of debt of $1.5 million during FY 2021, with no comparable amount
recognized during FY 2022.



Income Tax Expense



We incurred $35,400 of income tax expense in FY 2022 on a loss before income
taxes of $306,000, compared to an income tax benefit of $891,900 realized in FY
2021 on a loss before income taxes of $1.8 million. The income tax benefit in FY
2021 was primarily the result of debt forgiveness income being realized in FY
2021 with no associated income tax expense and the revaluation of a portion of
deferred tax assets as a result of the Company realizing a taxable loss during
FY 2021 that can be carried back to prior periods with a higher effective income
tax rate. The income tax expense in FY 2022 was primarily the result of
differences in the valuation of restricted stock awards and the realization of
$155,000 of employee retention credits that reduced the loss that could be
carried back to prior periods.



Fiscal 2021 vs. Fiscal 2020

A discussion of our results of operations for fiscal year 2021 compared to fiscal year 2020 has been omitted from this annual report, but can be found in item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2021 filed with the SECOND on June 1, 2021as amended by our

  Annual Report on Form 10-K/A for the fiscal year ended February 28, 2021  ,
filed with the SEC on June 28, 2021, which are available free of charge on the
SEC's website at www.sec.gov and our corporate website (www.rmcf.com).



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Cash and capital resources



As discussed below, we have taken 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. 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.



As of February 28, 2022, working capital was $9.7 million compared with $9.0
million as of February 28, 2021. The increase in working capital was due
primarily to our efforts to preserve liquidity during the COVID-19 pandemic,
including the receipt of PPP funds and the suspension of our quarterly dividend.
We have historically generated excess operating cash flow. We review our working
capital needs and projections and when we believe that we have greater working
capital than necessary we have historically utilized that excess working capital
to repurchase common stock and pay dividends to our stockholders.



Cash and cash equivalent balances increased from $5.6 million as of February 28,
2021 to $7.6 million as of February 28, 2022 as a result of cash flows generated
by financing activities. Our current ratio was 2.8 to 1.0 at February 28, 2022
compared to 3.4 to 1.0 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 FY 2022, we had a net loss of $342,000. Operating activities provided
cash of $2.9 million, with the principal adjustment to reconcile net income to
net cash provided by operating activities being an increase in accrued
liabilities of $1.3 million, depreciation and amortization of $1.2 million and
stock compensation expense of $1.1 million. During FY 2021, we had a net loss of
$900,000. Operating activities provided cash of $67,000, with the principal
adjustment to reconcile net income to net cash provided by operating activities
being depreciation and amortization of $1.3 million and stock compensation
expense of $512,000.



During FY 2022, investing activities used cash of $605,000, primarily due to the
purchases of property and equipment of $950,000, partially offset by proceeds
received from an insurance recovery of $206,000. In comparison, investing
activities used cash of $71,000 during FY 2021 primarily due to the purchases of
property and equipment, intangible assets and deposits on future asset purchases
of $461,000 partially offset by proceeds received from an insurance recovery of
$305,000.



Financing activities used cash of $299,000 during FY 2022 and provided cash of
$815,000 during the prior year. The change in cash used in financing activities
was primarily due to the receipt of PPP proceeds in FY 2021.



Revolving Credit Line



The Company has a $5.0 million credit line for general corporate and working
capital purposes, of which $5.0 million was available for borrowing (subject to
certain borrowing base limitations) as of February 28, 2022. In March 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). In February 2021, the Company repaid the credit
line in full as a result of improving economic conditions and the full
forgiveness of PPP loans. The credit line is secured by substantially all of the
Company's assets, except retail store assets. Interest on borrowings is at SOFR
plus 2.37% (2.42% at February 28, 2022). Additionally, the line of credit is
subject to various financial ratio and leverage covenants. At February 28, 2022,
the Company was in compliance with all such covenants. The credit line is
subject to renewal in September 2022 and the Company believes it is likely to be
renewed on terms similar to the current terms.



PPP Loan



In April 2020, the Company entered into a 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. These loans were forgiven during FY 2021.



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  Table of Contents



Contractual Obligations



The table below presents significant contractual obligations of the Company at
February 28, 2022.

(Amounts in thousands)



                                              Less than 1                                         More Than
  Contractual Obligations       Total            year           2-3 Years        4-5 years         5 years
Operating leases              $    1,859     $         579     $        630     $        211     $        439
Purchase contracts                    45                45                -                -                -
Other long-term obligations          127                28               57               42                -
Total                         $    2,031     $         652     $        687     $        253     $        439




The Company made an average of $695,000 per year in capital expenditures during
FY 2020 to FY 2022. For FY 2023 the Company anticipates making approximately
$1.7 million of capital expenditures. The planned increase is the result of
expected investment in machinery and equipment to replace equipment that has
reached the end of its useful life.



Impact of Inflation



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



Depreciation expense is based on the historical cost to the Company of its 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.



Critical accounting estimates



Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of our consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures. Estimates and
assumptions include, but are not limited to, the carrying value of accounts and
notes receivable from franchisees, inventories, the useful lives of fixed
assets, goodwill, and other intangible assets, income taxes, contingencies and
litigation. We base our estimates on analyses, of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.


We believe that the following represent our most critical estimates and assumptions used in the preparation of our consolidated financial statements, although they are not exhaustive.



Accounts and Notes Receivable - In the normal course of business, we extend
credit to customers, primarily franchisees, that satisfy pre-defined credit
criteria. We believe that we have a limited concentration of credit risk
primarily because our receivables are secured by the assets of the franchisees
to which we ordinarily extend credit, including, but not limited to, their
franchise rights and inventories. An allowance for doubtful accounts is
determined through analysis of the aging of accounts receivable, assessments of
collectability based on historical trends, and an evaluation of the impact of
current and projected economic conditions. The process by which we perform our
analysis is conducted on a customer by customer, or franchisee by franchisee,
basis and takes into account, among other relevant factors, sales history,
outstanding receivables, customer financial strength, as well as customer
specific and geographic market factors relevant to projected performance. The
Company monitors the collectability of its accounts receivable on an ongoing
basis by assessing the credit worthiness of its customers and evaluating the
impact of reasonably likely changes in economic conditions that may impact
credit risks. Estimates with regard to the collectability of accounts receivable
are reasonably likely to change in the future. We may experience the failure of
our wholesale customers, including our franchisees, to whom we extend credit to
pay amounts owed to us on time, or at all, particularly if such customers are
significantly impacted by COVID-19.



We recorded an average expense of approximately $485,000 per year for potential
uncollectible accounts over the three fiscal years ended February 28, 2022.
Write-offs of uncollectible accounts net of recoveries averaged approximately
$358,000 over the same period. The provision for uncollectible accounts is
recognized as general and administrative expense in the Statements of Income.
Over the past three fiscal years, the allowances for doubtful notes and accounts
have ranged from 13.6% to 44.25% of gross receivables. As a result of COVID-19
and the associated impact on the liquidity of our customers, we recorded higher
expense for potentially uncollectable accounts and a higher allowance as a
percentage of gross receivables during FY 2021.



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Contents



Revenue Recognition - We recognize revenue on sales of products to franchisees
and other customers at the time of delivery. Beginning in FY 2019, upon adoption
of ASC 606, the Company began recognizing franchise fees and license fees over
the term of the associated agreement, which is generally a period of 10-15
years. Prior to FY 2019, franchise fee revenue was recognized upon opening of
the franchise store, or upon execution of an international license agreement. We
recognize a marketing and promotion fee of one percent (1%) of the Rocky
Mountain Chocolate Factory and U-Swirl franchised stores' gross retail sales and
a royalty fee based on gross retail sales. The Company recognizes no royalty on
franchised stores' retail sales of products purchased from the Company and
recognizes a ten percent (10%) royalty on all other sales of product sold at
franchise locations. Royalty fees for U-Swirl cafés are based on the rate
defined in the acquired contracts for the franchise rights and range from 2.5%
to 6% of gross retail sales. Rebates received from purveyors that supply
products to our franchisees are included in franchise royalties and fees.
Product rebates are recognized in the period in which they are earned. Rebates
related to Company-owned locations are offset against operating costs.



Inventories - Our inventories are stated at the lower of cost or net realizable
value and are reduced for slow-moving, excess, discontinued and shelf-life
expired inventories. Our estimate for such reduction is based on our review of
inventories on hand compared to estimated future usage and demand for our
products. Such review encompasses not only potentially perishable inventories
but also specialty packaging, much of it specific to certain holiday seasons. If
actual future usage and demand for our products are less favorable than those
projected by our review, further inventory adjustments may be required. We
closely monitor our inventory, both perishable and non-perishable, and related
shelf and product lives. Historically we have experienced low levels of obsolete
inventory or returns of products that have exceeded their shelf life. Over the
three fiscal years ended February 28, 2022, the Company recorded expense
averaging $313,000 per year for potential inventory losses, or approximately
1.8% of total cost of sales for that period.



Goodwill - Goodwill consists of the excess of purchase price over the fair
market value of acquired assets and liabilities. Effective March 1, 2002, under
ASC Topic 350, all goodwill with indefinite lives is no longer subject to
amortization. ASC Topic 350 requires that an impairment test be conducted
annually or in the event of an impairment indicator. Our testing and impairment
is described in Note 7 to the financial statements. We may be required to revise
certain accounting estimates and judgments related to Goodwill as a result of
the COVID-19 pandemic and its impact on economic conditions.



Franchise Fees – Franchise fees include the purchase price paid for certain rights associated with franchise agreements. These franchise agreements provide for the future payment to the franchisor of royalties and marketing expenses. We consider franchise rights to have a lifespan of 20 years.



Other accounting estimates inherent in the preparation of our consolidated
financial statements include estimates associated with its evaluation of the
recoverability of deferred tax assets, as well as those used in the
determination of liabilities related to litigation and taxation. Various
assumptions and other factors underlie the determination of these significant
estimates. The process of determining significant estimates is fact specific and
takes into account factors such as historical experience, current and expected
economic conditions, and product mix. The Company constantly re-evaluates these
significant factors and makes adjustments where facts and circumstances dictate.
Historically, actual results have not significantly deviated from those
determined using the estimates described above.

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