10-Q

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2020

☐ 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 charter)

Delaware	47-1535633
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)

265 Turner Drive, Durango, CO 81303

(Address of principal executive offices, including zip code)

(970) 259-0554

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

On October 10, 2020, the registrant had outstanding 6,070,925 shares of its common stock, $0.001 par value.

1

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION 3

Item 1. Financial Statements 3

CONSOLIDATED STATEMENTS OF OPERATIONS	3
CONSOLIDATED BALANCE SHEETS	4
CONSOLIDATED STATEMENTS OF CASH FLOWS	5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY	6
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION 30

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

SIGNATURES 32

2

PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended August 31,						Six Months Ended August 31,
	2020			2019			2020			2019
Revenues
Sales	$	3,994,152		$	5,384,040		$	6,316,363		$	11,844,651
Franchise and royalty fees		1,333,250			2,001,230			1,713,476			3,966,618
Total Revenue		5,327,402			7,385,270			8,029,839			15,811,269
Costs and Expenses
Cost of sales		3,053,563			3,738,435			5,936,779			8,353,179
Franchise costs		451,003			441,638			872,248			924,651
Sales and marketing		408,919			434,782			883,009			991,433
General and administrative		788,543			830,451			3,968,018			1,975,182
Retail operating		329,367			469,304			648,578			918,206
Depreciation and amortization, exclusive of depreciation and amortization expense of $158,203, $147,415, $315,712 and $293,114, respectively, included in cost of sales		176,650			225,417			362,255			457,372
Costs associated with Company-owned store closures		-			-			68,558			-
Total costs and expenses		5,208,045			6,140,027			12,739,445			13,620,023
Income (Loss) from Operations		119,357			1,245,243			(4,709,606	)		2,191,246
Other Income (Expense)
Interest Expense		(23,989	)		(3,487	)		(47,551	)		(15,885	)
Interest Income		5,365			6,007			11,165			16,186
Other income (expense), net		(18,624	)		2,520			(36,386	)		301
Income (Loss) Before Income Taxes		100,733			1,247,763			(4,745,992	)		2,191,547
Income Tax Provision (Benefit)		24,601			329,675			(1,154,727	)		561,850
Consolidated Net Income (Loss)	$	76,132		$	918,088		$	(3,591,265	)	$	1,629,697
Basic Earnings (Loss) per Common Share	$	0.01		$	0.15		$	(0.59	)	$	0.27
Diluted Earnings (Loss) per Common Share	$	0.01		$	0.15		$	(0.59	)	$	0.26
Weighted Average Common Shares
Outstanding - Basic		6,066,034			5,977,746			6,062,443			5,970,012
Dilutive Effect of Employee
Stock Awards		219,043			279,584			-			275,935
Weighted Average Common Shares
Outstanding - Diluted		6,285,077			6,257,330			6,062,443			6,245,947

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

3

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	August 31,		February 29,
	2020		2020
	(unaudited)
Assets
Current Assets
Cash and cash equivalents	$	5,923,707	$	4,822,071
Accounts receivable, less allowance for doubtful accounts of $1,812,680 and $638,907, respectively		2,917,061		4,049,959
Notes receivable, current portion, less current portion of the valuation allowance of $50,661 and $0,		111,933		160,700
Refundable income taxes		418,390		418,319
Inventories, net		5,726,426		3,750,978
Other		390,259		409,703
Total current assets		15,487,776		13,611,730
Property and Equipment, Net		5,533,901		5,938,013
Other Assets
Notes receivable, less current portion and valuation allowance of $149,339 and $0, respectively		99,059		289,515
Goodwill, net		729,701		1,046,944
Franchise rights, net		2,783,727		3,047,688
Intangible assets, net		411,040		498,393
Deferred income taxes		1,784,806		630,078
Lease right of use asset		2,301,165		2,698,765
Other		56,264		56,262
Total other assets		8,165,762		8,267,645
Total Assets	$	29,187,439	$	27,817,388
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long term debt	$	847,731	$	-
Line of credit		3,448,165		-
Accounts payable		3,020,604		2,241,506
Accrued salaries and wages		695,695		716,860
Gift card liabilities		575,310		609,842
Other accrued expenses		442,337		316,751
Dividend payable		-		722,344
Contract liabilities		187,269		195,658
Lease liability		777,123		803,861
Total current liabilities		9,994,234		5,606,822
Lease Liability, Less Current Portion		1,557,719		1,894,904
Long-Term Debt, Less Current Portion		694,575		-
Contract Liabilities, Less Current Portion		889,228		960,151
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding		-		-
Series A Junior Participating Preferred Stock, authorized 50,000 shares		-		-
Undesignated series, authorized 200,000 shares		-		-
Common stock, $.001 par value, 46,000,000 shares authorized, 6,067,461 shares and 6,019,532 shares issued and outstanding, respectively		6,068		6,020
Additional paid-in capital		7,747,320		7,459,931
Retained earnings		8,298,295		11,889,560
Total stockholders' equity		16,051,683		19,355,511
Total Liabilities and Stockholders' Equity	$	29,187,439	$	27,817,388

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

4

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended
	August 31,
	2020			2019
Cash Flows From Operating Activities
Net (loss) Income	$	(3,591,265	)	$	1,629,697
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		677,967			750,486
Provision for obsolete inventory		24,729			47,945
Provision for loss on accounts and notes receivable		1,468,815			108,283
Asset impairment and store closure losses		544,060			-
Loss on sale or disposal of property and equipment		7,823			5,796
Expense recorded for stock compensation		287,437			386,670
Deferred income taxes		(1,154,728	)		101,959
Changes in operating assets and liabilities:
Accounts receivable		(141,690	)		(267,491	)
Refundable income taxes		(71	)		145,475
Inventories		(1,808,397	)		212,138
Other current assets		19,445			(147,750	)
Accounts payable		580,966			213,734
Accrued liabilities		103,564			(153,885	)
Contract liabilities		(75,135	)		(130,378	)
Net cash (used in) provided by operating activities		(3,056,480	)		2,902,679
Cash Flows from Investing Activities
Proceeds received on notes receivable		44,995			74,296
Purchase of intangible assets		(99,047	)		-
Purchases of property and equipment		(50,853	)		(480,984	)
(Increase) decrease in other assets		-			312
Net cash used in investing activities		(104,905	)		(406,376	)
Cash Flows from Financing Activities
Payments on long-term debt		-			(696,043	)
Proceeds from long-term debt		1,537,200			-
Proceeds from the line of credit		3,448,165			-
Dividends paid		(722,344	)		(1,431,078	)
Net cash provided by (used in) financing activities		4,263,021			(2,127,121	)
Net Increase (Decrease) in Cash and Cash Equivalents		1,101,636			369,182
Cash and Cash Equivalents, Beginning of Period		4,822,071			5,384,027
Cash and Cash Equivalents, End of Period	$	5,923,707		$	5,753,209

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

5

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

					Additional
	Common Stock				Paid-in			Retained
	Shares		Amount		Capital			Earnings			Total
Balance as of May 31, 2019		5,962,327	$	5,962	$	6,882,114		$	13,728,480		$	20,616,556
Consolidated net (loss) income									918,088			918,088
Issuance of common stock, vesting of restricted stock units and other		28,835		29		(29	)					-
Equity compensation, restricted stock units						155,416						155,416
Cash dividends declared									(719,359	)		(719,359	)
Balance as of August 31, 2019		5,991,162	$	5,991	$	7,037,501		$	13,927,209		$	20,970,701
Balance as of February 28, 2019		5,957,827		5,958	$	6,650,864		$	13,733,010		$	20,389,832
Consolidated net (loss) income									1,629,697			1,629,697
Issuance of common stock, vesting of restricted stock units and other		33,335		33		(33	)					-
Equity compensation, restricted stock units						386,670						386,670
Cash dividends declared									(1,435,498	)		(1,435,498	)
Balance as of August 31, 2019		5,991,162	$	5,991	$	7,037,501		$	13,927,209		$	20,970,701
Balance as of May 31, 2020		6,060,663	$	6,061	$	7,603,608		$	8,222,163		$	15,831,832
Consolidated net (loss) income									76,132			76,132
Issuance of common stock, vesting of restricted stock units and other		6,798		7		(7	)					-
Equity compensation, restricted stock units						143,719						143,719
Cash dividends declared									-			-
Balance as of August 31, 2020		6,067,461	$	6,068	$	7,747,320		$	8,298,295		$	16,051,683
Balance as of February 29, 2020		6,019,532		6,020	$	7,459,931		$	11,889,560		$	19,355,511
Consolidated net (loss) income									(3,591,265	)		(3,591,265	)
Issuance of common stock, vesting of restricted stock units and other		47,929		48		(48	)					-
Equity compensation, restricted stock units						287,437						287,437
Cash dividends declared									-			-
Balance as of August 31, 2020		6,067,461	$	6,068	$	7,747,320		$	8,298,295		$	16,051,683

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

6

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation), Aspen Leaf Yogurt, LLC (“ALY”), and U-Swirl International, Inc. (“U-Swirl”), and its 46%-owned subsidiary, U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).

The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and through ecommerce channels, and licenses the use of its brand with certain consumer products.

U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt.”

The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.

In FY 2020, we entered into a long-term strategic alliance with Edible Arrangements®, LLC and its affiliates (“Edible”) whereby we became the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees (the “Strategic Alliance”). In connection with the Strategic Alliance, the Company entered into a strategic alliance agreement, an exclusive supplier operating agreement and a warrant agreement with Edible. Rocky Mountain Chocolate Factory branded products are available for purchase both on Edible’s website as well as through over 1,000 franchised Edible Arrangement 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 sells a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites. Edible is also responsible for all ecommerce marketing and sales for the broader Rocky Mountain ecommerce ecosystem. In January 2020, the founder and Chief Executive Officer of Edible was elected to the Company’s Board of Directors at the Company’s Annual Meeting of Stockholders.

The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés as of August 31, 2020:

	Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		2		2
Franchise stores - Domestic stores and kiosks		5		162		167
International license stores		1		58		59
Cold Stone Creamery - co-branded		5		98		103
U-Swirl (Including all associated brands)
Company-owned stores - co-branded		-		3		3
Franchise stores - Domestic stores		-		69		69
Franchise stores - Domestic - co-branded		1		7		8
International license stores		-		2		2
Total		12		401		413

7

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and Securities and Exchange Commission (the “SEC”) regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and six months ended August 31, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year, or any other future period.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2020.

The year-end balance sheet data was derived from audited financial statements for the year ended February 29, 2020, but does not include all disclosures required by GAAP.

Subsequent Events

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

As discussed in more detail throughout this Quarterly Report on Form 10-Q for the three and six months ended August 31, 2020 (this “Quarterly Report”), we have experienced significant business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus ("COVID-19"), including the vast mandated self-quarantines of customers and closures of non-essential business throughout the United States and internationally. Nearly all of the Company-owned and franchise stores were directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. As a result, franchisees and licensees are not ordering products for their stores in line with historical amounts. This trend has negatively impacted, and is expected to continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees. Beginning in May 2020 and continuing through August 2020, most stores previously closed for much of March 2020 and April 2020 in response to the COVID-19 pandemic, began to re-open. As of August 31, 2020 approximately 27 stores have not re-opened and the future of these locations is uncertain.  This is a closure rate significantly higher than historical levels. By August 31, 2020, certain stores have met or exceeded pre-COVID-19 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 with reduced operations. It is unclear when or if store operations will return to pre-COVID-19 levels.

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

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

8

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

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

Recent Accounting Pronouncements

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

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2023 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 requires any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. We adopted ASU 2017-04 effective March 1, 2020 (the first quarter of our 2021 fiscal year). The adoption of ASU 2017-04 did not have a material impact on our consolidated financial statements.

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

Related Party Transactions

As described above, in FY 2020, we entered into a long-term strategic alliance whereby we became the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Also in FY 2020, the founder and Chief Executive Officer of Edible was elected to the Company’s Board of Directors at the Company’s Annual Meeting of Stockholders. During the six months ended August 31, 2020, the Company recognized approximately $949,000 of revenue related to purchases from Edible, its affiliates and its franchisees. As of August 31, 2020 the company recognized approximately $718,000 of accounts receivable from Edible its affiliates and its franchisees.

NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION

	Six Months Ended
	August 31,
Cash paid for:	2020		2019
Interest	$	46,441	$	16,677
Income taxes		71		314,417
Non-cash Operating Activities
Accrued Inventory		394,697		237,842
Non-cash Financing Activities
Dividend payable	$	-	$	719,359

9

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 –REVENUE FROM CONTRACTS WITH CUSTOMERS

Effective March 1, 2018, the Company adopted ASC 606, which provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This new standard does not impact the Company's recognition of revenue from sales of confectionary items to the Company’s franchisees and others, or in its Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does not change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement. The Company generally receives a fee associated with the Franchise Agreement or License Agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These Customer Contracts have a term of up to 20 years, however the majority of Customer Contracts have a term of 10 years. During the term of the Customer Contract the Company is obligated to many performance obligations that the Company has not determined are distinct. The resulting treatment of revenue from Customer Contracts is that the revenue is recognized proportionately over the life of the Customer Contract.

Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees

The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018 was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.

The following table summarizes contract liabilities as of August 31, 2020 and August 31, 2019:

	Six Months Ended
	August 31:
	2020			2019
Contract liabilities at the beginning of the year:	$	1,155,809		$	1,352,572
Revenue recognized		(128,636	)		(188,209	)
Contract fees received		53,500			57,833
Amortized gain on the financed sale of equipment		(4,176	)		(6,267	)
Contract liabilities at the end of the period:	$	1,076,497		$	1,215,929

At August 31, 2020, annual revenue expected to be recognized in the future, related to performance obligations that are not yet fully satisfied, are estimated to be the following:

FY 21	$	94,959
FY 22		182,079
FY 23		170,353
FY 24		137,744
FY 25		124,461
Thereafter		366,901
Total	$	1,076,497

Gift Cards

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

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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – DISAGGREGATION OF REVENUE

The following table presents disaggregated revenue by method of recognition and segment:

Three Months Ended August 31, 2020

Revenues recognized over time under ASC 606:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	49,130	$	-	$	-	$	24,490	$	73,620

Revenues recognized at a point in time:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		3,498,752		-		-		3,498,752
Retail sales		-		-		193,702		301,698		495,400
Royalty and marketing fees		991,006		-		-		268,624		1,259,630
Total	$	1,040,136	$	3,498,752	$	193,702	$	594,812	$	5,327,402

Three Months Ended August 31, 2019

Revenues recognized over time under ASC 606:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	65,327	$	-	$	-	$	16,602	$	81,929

Revenues recognized at a point in time:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		4,482,373		-		-		4,482,373
Retail sales		-		-		265,662		636,005		901,667
Royalty and marketing fees		1,449,157		-		-		470,144		1,919,301
Total	$	1,514,484	$	4,482,373	$	265,662	$	1,122,751	$	7,385,270

Six Months Ended August 31, 2020

Revenues recognized over time under ASC 606:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	90,832	$	-	$	-	$	37,804	$	128,636

Revenues recognized at a point in time:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		5,633,367		-		-		5,633,367
Retail sales		-		-		253,683		429,313		682,996
Royalty and marketing fees		1,203,098		-		-		381,742		1,584,840
Total	$	1,293,930	$	5,633,367	$	253,683	$	848,859	$	8,029,839

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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended August 31, 2019

Revenues recognized over time under ASC 606:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	145,346	$	-	$	-	$	42,863	$	188,209

Revenues recognized at a point in time:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		10,088,393		-		-		10,088,393
Retail sales		-		-		498,081		1,258,177		1,756,258
Royalty and marketing fees		2,796,893		-		-		981,516		3,778,409
Total	$	2,942,239	$	10,088,393	$	498,081	$	2,282,556	$	15,811,269

NOTE 5 – INVENTORIES

Inventories consist of the following:

	August 31, 2020			February 29, 2020
Ingredients and supplies	$	2,772,234		$	2,186,652
Finished candy		3,068,858			1,827,767
U-Swirl food and packaging		41,814			56,708
Reserve for slow moving inventory		(156,480	)		(320,149	)
Total inventories	$	5,726,426		$	3,750,978

NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

	August 31, 2020			February 29, 2020
Land	$	513,618		$	513,618
Building		5,031,395			5,031,395
Machinery and equipment		10,037,869			10,664,396
Furniture and fixtures		797,303			852,557
Leasehold improvements		985,407			1,154,396
Transportation equipment		429,789			440,989
		17,795,381			18,657,351
Less accumulated depreciation		(12,261,480	)		(12,719,338	)
Property and equipment, net	$	5,533,901		$	5,938,013

Depreciation expense related to property and equipment totaled $192,049 and $386,606 during the three and six months ended August 31, 2020 compared to $196,288 and $397,398 during the three and six months ended August 31, 2019, respectively.

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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:

				August 31, 2020				February 29, 2020
	Amortization Period (in years)			Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Intangible assets subject to amortization
Store design		10		$	394,826	$	216,403	$	295,779	$	215,653
Packaging licenses	3	-	5		120,830		120,830		120,830		120,830
Packaging design		10			430,973		430,973		430,973		430,973
Trademark/Non-competition agreements	5	-	20		556,339		323,722		715,339		297,072
Franchise rights		20			5,979,637		3,195,910		5,979,637		2,931,949
Total				$	7,482,605	$	4,287,838	$	7,542,558	$	3,996,477
Intangible assets not subject to amortization
Franchising segment-
Company stores goodwill				$	515,065			$	832,308
Franchising goodwill					97,318				97,318
Manufacturing segment-goodwill					97,318				97,318
Trademark					20,000				20,000
Total goodwill					729,701				1,046,944
Total Intangible Assets				$	8,212,306	$	4,287,838	$	8,589,502	$	3,996,477

Amortization expense related to intangible assets totaled $142,804 and $291,361 during the three and six months ended August 31, 2020 compared to $176,544 and $353,088 during the three and six months ended August 31, 2019, respectively.

At August 31, 2020, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:

2021		274,705
2022		466,554
2023		391,988
2024		329,267
2025		277,022
Thereafter		1,281,184
Total	$	3,020,720

During FY 2020, the Company initiated a store design project.  The initiative is expected to add approximately $250,000 of intangible assets, of which, $174,000 was recorded as of August 31, 2020.  This amount will be subject to amortization upon conclusion of the project.

NOTE 8 – IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS

We assess the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances indicate the carrying value of the assets or asset group may not be recoverable. Due to the significant impact of the COVID-19 pandemic on our operations, we determined it was necessary to perform an interim test of our long-lived assets during the three months ended May 31, 2020. Based on the results of these assessments, we recorded $545,000 of goodwill impairment expense. This expense is presented within general and administrative expense on the Consolidated Statements of Operations. No additional tests for impairment were determined to be necessary during the three months ended August 31, 2020.

The assessment of our goodwill, trademark and long-lived asset fair values includes many assumptions that are subject to risk and uncertainties. The primary assumptions, which are all Level 3 inputs of the fair value hierarchy (inputs to the valuation methodology that are unobservable and significant to the fair value measurement), used in our impairment testing consist of:

● Expected future cash flows from operation of our Company-owned units.

● Forecasted future royalty revenue, marketing revenue and associated expenses.

● Projected rate of royalty savings on trademarks.

● Our cost of capital.

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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

As of August 31, 2020, costs associated with the impairment of long-lived and intangible assets consist of the following:

Company store goodwill impairment	$	317,243
Trademark intangible asset impairment		159,000
Company-owned store impairment of long-lived assets and inventory		68,558
Total	$	544,801

Certain interim tests did not indicate a need for impairment. Franchise rights, store design, manufacturing segment goodwill and franchising goodwill tests succeeded during the interim period. We believe we have made reasonable estimates and judgements, however, further COVID-19-related impacts could cause interim testing to be performed in future periods and further impairments recorded if testing of impairments are not successful in future periods.

NOTE 9 – LINE OF CREDIT AND LONG-TERM DEBT

The Company has a $5.0 million credit line for general corporate and working capital purposes. On March 16, 2020, as a precautionary measure, in light of the COVID-19 pandemic and the related economic impacts, the Company drew the maximum amount available on the credit line in an amount equal to $3.4 million (the full amount of $5.0 million under the credit line, subject to the borrowing base of 50% of eligible accounts receivable plus 50% of eligible inventories). The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (2.4% at August 31, 2020). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At August 31, 2020, the Company was not compliant with a covenant of the line of credit that requires the Company to have $1.5 million of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the trailing twelve months ended August 31, 2020. As a result of COVID-19, the Company failed to meet the amount of EBITDA required by this covenant. On June 26, 2020 and on October 5, 2020 Wells Fargo Bank, NA (“Wells Fargo”) delivered to the Company Reservation of Rights Letters (“Bank Letters”). The Bank Letters reserved all rights available to Wells Fargo under the Credit Agreement dated October 30, 2015 including, but not limited to, the right of Wells Fargo to demand immediate payment of all amounts outstanding under the Credit Agreement. The Bank Letters also placed restrictions on the Company’s ability to draw any further funds on the line of credit. The Company intends to work with Wells Fargo to amend the associated covenants as the trends related to COVID-19 begin to become clear. There is no assurance that Wells Fargo will agree to any proposed amendment. The credit line is subject to renewal in September 2021 and the Company believes it is likely to be renewed on terms similar to the current terms, subject to the Company’s recovery from the impacts of COVID-19.

The Company’s long-term debt is comprised of promissory notes pursuant to the PPP, under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA Loans”). The Company received total proceeds of $1.5 million from the SBA Loans. The SBA Loans are scheduled to mature in April 2022 and have a 1.00% interest rate, and are subject to the terms and conditions applicable to loans administered by the CARES Act. The SBA Loans may be prepaid by the Company at any time prior to maturity with no prepayment penalties. As of August 31, 2020, the Company is in compliance with all provisions related to the SBA Loans.

The SBA Loans contain customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the SBA Loans may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by the Company during the period after the loan origination for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that, among other things, at least 60-75% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at a certain level. In accordance with the requirements of the CARES Act and the PPP, the Company believes it has used the proceeds from the SBA Loans for qualifying expenses. No assurance can be given that the Company will be granted forgiveness of the SBA Loans in whole or in part. As of August 31, 2020, the Company had recorded approximately $5,855 of interest expense payable related to the SBA Loans.

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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

As of August 31, 2020 and February 29, 2020, notes payable consisted of the following:

	August 31, 2020			February 29, 2020
Paycheck protection program note payable in monthly installments of principal and interest at 1.0% per annum through April 2022	$	1,542,306		$	-
Less: current maturities		(847,731	)		-
Long-term obligations	$	694,575		$	-

NOTE 10 – STOCKHOLDERS’ EQUITY

Cash Dividend

The Company paid a quarterly cash dividend of $0.12 per common share on March 15, 2019 to stockholders of record on March 5, 2019. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 14, 2019 to stockholders of record on June 4, 2019. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 13, 2019 to stockholders of record on September 4, 2019. The Company paid a quarterly cash dividend of $0.12 per share of common stock on December 6, 2019 to stockholders of record on November 22, 2019. The Company paid a quarterly cash dividend of $0.12 per share of common stock on March 13, 2020 to stockholders of record on February 28, 2020.

Future declarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long-term interest of the Company’s stockholders.

As previously announced in May 2020, the Board of Directors suspended the Company’s first quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment as a result of the economic impact of COVID-19. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and global economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of the Company and its stockholders.

Stock Repurchases

On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. The Company did not repurchase any shares during the three and six months ended August 31, 2020. As of August 31, 2020, approximately $638,000 remains available under the repurchase plan for further stock repurchases.

Warrants

In consideration of Edible entering into the exclusive supplier agreement and the performance of its obligations therein, on December 20, 2019, the Company issued Edible a warrant (the “Warrant”) to purchase up to 960,677 shares of the Company’s common stock (the “Warrant Shares”) at an exercise price of $8.76 per share. The Warrant Shares vest in annual tranches in varying amounts following each contract year under the exclusive supplier agreement, subject to, and only upon, Edible’s achievement of certain revenue thresholds on an annual or cumulative five-year basis in connection with its performance under the exclusive supplier agreement. The Warrant expires six months after the final and conclusive determination of revenue thresholds for the fifth contract year and the cumulative revenue determination in accordance with the terms of the Warrant.

The Company determined that the grant date fair value of the warrants was de minimis and did not record any amount in consideration of the warrants. The Company utilized a Monte Carlo model for purposes of determining the grant date fair value.

Stock-Based Compensation

Under the Company’s 2007 Equity Incentive Plan (as amended and restated) (the “2007 Plan”), the Company may authorize and grant stock awards to employees, non-employee directors and certain other eligible participants, including stock options, restricted stock and restricted stock units. On September 17, 2020, the Company’s stockholders approved an amendment and restatement of the 2007 Plan to (1) increase the number of authorized shares under the 2007 Plan by 300,000 shares and (2) to extend the term of the 2007 Plan to September 17, 2030. As of the filing date of this report, there were 319,324 shares available for issuance as awards under the 2007 Plan.

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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

The Company recognized $143,719 and $287,437 of stock-based compensation expense during the three- and six-month periods ended August 31, 2020, respectively, compared to $155,416 and $386,670 during the three- and six-month periods ended August 31, 2019, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.

The following table summarizes restricted stock unit activity during the six months ended August 31, 2020 and 2019:

	Six Months Ended
	August 31,
	2020			2019
Outstanding non-vested restricted stock units as of February 28 or 29:		265,555			25,002
Granted		-			270,000
Vested		(47,929	)		(28,502	)
Cancelled/forfeited		-			-
Outstanding non-vested restricted stock units as of August 31:		217,626			266,500
Weighted average grant date fair value	$	9.40		$	9.40
Weighted average remaining vesting period (in years)		4.15			5.14

The Company did not issue any unrestricted shares of stock to non-employee directors during the six months ended August 31, 2020 compared to an aggregate of 4,833 shares issued during the six months ended August 31, 2019. In connection with these non-employee director stock issuances, the Company recognized $0 and $45,652 of stock-based compensation expense during the six months ended August 31, 2020 and 2019, respectively.

During the three- and six-month periods ended August 31, 2020, the Company recognized $143,719 and $287,437, respectively, of stock-based compensation expense related to restricted stock unit grants. The restricted stock unit grants generally vest in equal annual or quarterly installments over a period of five to six years. During the six-month periods ended August 31, 2020 and 2019, 47,929 and 28,502 restricted stock units vested and were issued as common stock, respectively. Total unrecognized compensation expense of non-vested, non-forfeited restricted stock units granted as of August 31, 2020 was $1,850,943, which is expected to be recognized over the weighted-average period of 4.15 years.

The Company has no outstanding stock options as of August 31, 2020.

NOTE 11 – EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through the settlement of restricted stock units. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.

The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include outstanding common shares issuable if their effect would be anti-dilutive. During the six months ended August 31, 2020, 960,677 shares of common stock warrants and 222,634 shares of issuable common stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

NOTE 12 – LEASING ARRANGEMENTS

The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels. 

The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing locations are leased by the franchisee directly. Currently, there are not indications that the Company will be required to make any payments on behalf of franchisees.

In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.

16

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

The Company also leases trucking equipment and warehouse space in support of its manufacturing operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.

ASU 2016-02 allows, as a practical expedient, the retention of the classification of existing leases as operating or financing. All of the Company’s leases are classified as operating leases and that classification has been retained upon adoption. The Company does not believe the utilization of this practical expedient has a material impact on lease classifications.

The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. During the six months ended August 31, 2020 and 2019, lease expense recognized in the Consolidated Statements of Income was $440,121 and $478,707, respectively.

The amount of the Right of Use Asset and Lease Liability recorded upon the adoption of ASU 2016-02 was $3.3 million. The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the life of its leases. This includes known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the sales performance of the location remains strong. Therefore, the Right of Use Asset and Lease Liability include an assumption on renewal options that have not yet been exercised by the Company, and are not currently a future obligation. The Company has separated non-lease components from lease components in the recognition of the Asset and Liability except in instances where such costs were not practical to separate. To the extent that occupancy costs, such as site maintenance, are included in the Asset and Liability, the impact is immaterial. For franchised locations, the related occupancy costs including property taxes, insurance and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee under non-store related leases such as storage facilities and trucking equipment. For leases where the implicit rate is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease. The weighted average discount rate used for operating leases was 3.4% as of August 31, 2020. The total estimated future minimum lease payments is $2.6 million.

As of August 31, 2020, maturities of lease liabilities for the Company’s operating leases were as follows:

FY 21	$	411,447
FY 22		694,755
FY 23		437,445
FY 24		315,962
FY 25		164,223
Thereafter		552,818
Total	$	2,576,650
Less: imputed interest		(241,808	)
Present value of lease liabilities:	$	2,334,842
Weighted average lease term (in years)	6.7

During the three months ended August 31, 2019, the Company entered into a lease amendment to extend the term of a lease for a Company-owned location. This lease amendment resulted in the Company recognizing a present value of future lease liability of $476,611 based upon a total lease liability of $532,811.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Purchase contracts

The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of August 31, 2020, the Company was contracted for approximately $100,000 of raw materials under such agreements. The Company has designated these contracts as normal under the normal purchase and sale exception under the accounting standards for derivatives. These contracts are not entered into for speculative purposes.

17

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – FTD LOSS CONTINGENCY

In June 2019, the Company’s largest customer at the time, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11 bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including the divisions that the Company has historically sold product to, were sold through an auction to multiple buyers.

The Company historically conducted business with FTD under a Gourmet Foods Supplier Agreement (the “FTD Supplier Agreement”), that among other provisions, provided assurance that custom inventory purchased by the Company and developed specifically for FTD would be purchased by FTD upon termination of the FTD Supplier Agreement. In September 2019, the Company received notice that the bankruptcy court had approved FTD to reject and not enforce the FTD Supplier Agreement as part of the proceedings.

As a result of FTD’s bankruptcy, the sale of certain assets, and the court’s approval to reject and not enforce the terms of the FTD Supplier Agreement, the Company is uncertain if accounts receivable and inventory balances associated with FTD at August 31, 2020 will be realized at their full value, or if any revenue will be received from FTD in the future.

As of August 31, 2020, the Company had recorded inventory and receivables related to FTD of approximately $226,000 and $80,000, respectively. The Company had also established reserves of approximately $146,000 for expected losses on FTD inventory and receivables upon the conclusion of the bankruptcy proceedings.

NOTE 15 – INCOME TAXES

Under the recently enacted CARES Act a net operating loss (“NOL”) arising during the Company’s fiscal year 2021 can be carried back for five years to offset the Company’s taxable income for fiscal years 2016-2020. This five-year period spans Federal effective tax rates for the Company ranging from 21% to 34%, the result of the Tax Cuts and Jobs Act enacted during the Company’s fiscal year ended February 28, 2018.

The Company’s deferred tax assets are valued at the current federally enacted rate of 21%. If the Company were to continue to realize NOLs in future periods, or incur a NOL for all of fiscal year 2021 the loss carryback provisions of the CARES Act may enable the Company to offset taxable income from prior years when federally enacted tax rates were higher than 21%. Under such a scenario, the Company would incur a gain associated with the revaluation of the Company’s deferred tax assets to the extent that prior taxable income during periods of higher enacted federal tax rates could be offset by current NOLs.

As of August 31, 2020, the Company is in the process of analyzing the different aspects of the CARES Act to quantify the impact of these provisions on the Company’s income taxes.

NOTE 16 – OPERATING SEGMENTS

The Company classifies its business interests into five reportable segments: Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements and Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2020. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:

18

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended August 31, 2020	Franchising			Manufacturing			Retail		U-Swirl		Other			Total
Total revenues	$	1,040,863		$	3,768,416		$	193,702	$	594,812	$	-		$	5,597,793
Intersegment revenues		(727	)		(269,664	)		-		-		-			(270,391	)
Revenue from external customers		1,040,136			3,498,752			193,702		594,812		-			5,327,402
Segment profit (loss)		366,535			489,668			21,924		11,903		(789,297	)		100,733
Total assets		1,387,005			12,241,965			618,323		5,526,772		9,413,374			29,187,439
Capital expenditures		150			11,343			72		-		16,799			28,364
Total depreciation & amortization	$	10,095		$	162,523		$	1,391	$	140,823	$	20,021		$	334,853

Three Months Ended August 31, 2019	Franchising			Manufacturing			Retail		U-Swirl		Other			Total
Total revenues	$	1,515,805		$	4,714,682		$	265,662	$	1,122,751	$	-		$	7,618,900
Intersegment revenues		(1,321	)		(232,309	)		-		-		-			(233,630	)
Revenue from external customers		1,514,484			4,482,373			265,662		1,122,751		-			7,385,270
Segment profit (loss)		828,978			955,360			7,979		296,880		(841,434	)		1,247,763
Total assets		1,445,041			11,838,237			1,005,356		5,620,012		9,377,697			29,286,343
Capital expenditures		(2,040	)		162,127			23,106		1,673		12,570			197,436
Total depreciation & amortization	$	10,353		$	151,848		$	2,533	$	185,208	$	22,891		$	372,833

Six Months Ended August 31, 2020	Franchising			Manufacturing			Retail			U-Swirl			Other			Total
Total revenues	$	1,295,339		$	6,061,508		$	253,683		$	848,859		$	-		$	8,459,389
Intersegment revenues		(1,409	)		(428,141	)		-			-			-			(429,550	)
Revenue from external customers		1,293,930			5,633,367			253,683			848,859			-			8,029,839
Segment profit (loss)		(84,784	)		(293,801	)		(455,902	)		(445,815	)		(3,465,690	)		(4,745,992	)
Total assets		1,387,005			12,241,965			618,323			5,526,772			9,413,374			29,187,439
Capital expenditures		150			25,197			72			1,712			23,722			50,853
Total depreciation & amortization	$	20,233		$	324,353		$	4,794		$	287,772		$	40,815		$	677,967

Six Months Ended August 31, 2019	Franchising			Manufacturing			Retail			U-Swirl		Other			Total
Total revenues	$	2,944,846		$	10,581,154		$	498,081		$	2,282,556	$	-		$	16,306,637
Intersegment revenues		(2,607	)		(492,761	)		-			-		-			(495,368	)
Revenue from external customers		2,942,239			10,088,393			498,081			2,282,556		-			15,811,269
Segment profit (loss)		1,446,888			2,124,047			(7,033	)		576,043		(1,948,398	)		2,191,547
Total assets		1,445,041			11,838,237			1,005,356			5,620,012		9,377,697			29,286,343
Capital expenditures		8,500			385,679			32,624			1,673		52,508			480,984
Total depreciation & amortization	$	21,183		$	301,980		$	5,143		$	375,977	$	46,203		$	750,486

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements involve various risks and uncertainties. The nature of our operations and the environment in which we operate subject us to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect," "anticipate," "should," "plan," "estimate," "potential," or similar expressions. Factors which could cause results to differ include, but are not limited to: the impact of the novel coronavirus ("COVID-19") on our business, including, among other things, online sales, factory sales, retail sales and royalty and marketing fees, our liquidity, our cost cutting and capital preservation measures, achievement of the anticipated potential benefits of the strategic alliance with Edible (as defined herein), our ability to provide products to Edible under the strategic alliance, the ability to increase our online sales through the agreements with Edible, changes in the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding strategy, the success of international expansion efforts and the effect of government regulations. Government regulations which we and our franchisees and licensees either are, or may be, subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, licensing, employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see the section entitled “Risk Factors” contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 29, 2020. Additional factors that might cause such differences include, but are not limited to: the length and severity of the current COVID-19 pandemic and its effect on among other things, factory sales, retail sales, royalty and marketing fees and operations, the effect of any governmental action or mandated employer-paid benefits in response to the COVID-19 pandemic, our ability to manage costs and reduce expenditures in the current economic environment and the availability of additional financing if and when required. These forward-looking statements apply only as of the date of this Quarterly Report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, we undertake no obligation to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this Quarterly Report or those that might reflect the occurrence of unanticipated events.

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

Overview

We are an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates soft-serve frozen yogurt cafés. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products. We also sell our candy outside of our system of retail stores and license the use of our brand with certain consumer products. As of August 31, 2020, there were two Company-owned, 98 licensee-owned and 220 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, Canada, South Korea, Panama, and the Philippines. As of August 31, 2020, U-Swirl operated three Company-owned cafés and 78 franchised cafés located in 24 states and Qatar. U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.

Strategic Alliance with Edible Arrangements

In December 2019, the Company entered into a strategic alliance (the “Strategic Alliance”) with Edible Arrangements, LLC and its affiliates (collectively, “Edible”), pursuant to which, among other things, the Company will become the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. In connection with the Strategic Alliance, the Company entered into a strategic alliance agreement, an exclusive supplier operating agreement and a warrant agreement with Edible. In addition, in March 2020, the Company entered into an ecommerce licensing agreement with Edible, whereby Edible sells a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites.

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Bankruptcy of FTD Companies

In June 2019, the Company’s largest customer at the time, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11 bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including the divisions that the Company has historically sold product to, were sold through the auction to multiple buyers. The Company is uncertain if accounts receivable and inventory balances associated with FTD at August 31, 2020 will be realized at their full value, or if any revenue will be received from FTD in the future. See Note 14 to the consolidated financial statements contained herein for additional information about the FTD bankruptcy.

COVID-19

As discussed in more detail throughout this Quarterly Report on Form 10-Q for the three and six months ended August 31, 2020 (this “Quarterly Report”), we have experienced significant business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus ("COVID-19"), including the vast mandated self-quarantines of customers and closures of non-essential business throughout the United States and internationally. Nearly all of the Company-owned and franchise stores were directly and negatively impacted by public health measures taken in response to COVID-19, with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. As a result, franchisees and licensees are not ordering products for their stores in line with historical amounts. This trend has negatively impacted, and is expected to continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees. Beginning in May 2020 and continuing through August 2020, most stores previously closed for much of March 2020 and April 2020 in response to the COVID-19 pandemic, began to re-open. As of August 31, 2020 approximately 27 stores have not re-opened and the future of these locations is uncertain.  This is a closure rate significantly higher than historical levels. By August 31, 2020, certain stores have met or exceeded pre-COVID-19 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 with reduced operations. It is unclear when or if store operations will return to pre-COVID-19 levels.

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

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

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

Results of Operations

Three Months Ended August 31, 2020 Compared to the Three Months Ended August 31, 2019

Results Summary

Basic earnings per share decreased 93.3% from $0.15 per share in the three months ended August 31, 2019 to $0.01 per share in the three months ended August 31, 2020. Revenues decreased 27.9% from $7.4 million in the three months ended August 31, 2019 to $5.3 million in the three months ended August 31, 2020. Operating income decreased 90.4% from $1.2 million in the three months ended August 31, 2019 to $119,000 in the three months ended August 31, 2020. Net income decreased 91.7% from $918,000 in the three months ended August 31, 2019 to $76,000 in the three months ended August 31, 2020. The decrease in revenue, operating income and net income was due primarily to the continued impacts from the COVID-19 pandemic, including its impact on our operation and the operations of our franchised, licensed and Company-owned locations.

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Revenues

	Three Months Ended
	August 31,				$			%
($'s in thousands)	2020		2019		Change			Change
Factory sales	$	3,498.8	$	4,482.4	$	(983.6	)		(21.9	)%
Retail sales		495.4		901.7		(406.3	)		(45.1	)%
Franchise fees		73.6		81.9		(8.3	)		(10.1	)%
Royalty and marketing fees		1,259.6		1,919.3		(659.7	)		(34.4	)%
Total	$	5,327.4	$	7,385.3	$	(2,057.9	)		(27.9	)%

Factory Sales

The decrease in factory sales for the three months ended August 31, 2020 compared to the three months ended August 31, 2019 was primarily due to a 34.5% decrease in sales of product to our network of franchised and licensed retail stores, partially offset by a $416,000 increase in shipments of product to customers outside our network of franchised retail stores. The decrease in sales of product to our network of franchised and licensed retail stores was primarily the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended August 31, 2020, which significantly reduced traffic in our stores. The increase in shipments of product to customers outside our network of franchise and licensed retail stores was primarily the result of sales associated with our strategic alliance with Edible.

Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 27.7% in the three months ended August 31, 2020, compared with the three months ended August 31, 2019 as result of store closures, reduced operations and reduced demand in stores as a result of the impacts of the COVID-19 pandemic.

Retail Sales

The decrease in retail sales for the three months ended August 31, 2020 compared to the three months ended August 31, 2019 was primarily the result of limited operations and limited foot traffic during the three months ended August 31, 2020. The limited operations at our Company-owned stores was the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended August 31, 2020. As of August 31, 2020, all Company-owned stores had resumed limited operations following COVID-19 related closure. Same store sales at all Company-owned stores and cafés decreased 39% in the three months ended August 31, 2020 compared to the three months ended August 31, 2019.

Royalties, Marketing Fees and Franchise Fees

The decrease in royalties and marketing fees from the three months ended August 31, 2019 to the three months ended August 31, 2020 was primarily due to the COVID-19 pandemic and the associated public health measures in place during the three months ended August 31, 2020 and a decrease in domestic franchise units in operation. Nearly all of our franchised locations experienced reduced operations during the three months ended August 31, 2020. The average number of total domestic franchise stores in operation decreased 4.8% from 272 in the three months ended August 31, 2019 to 259 during the three months ended August 31, 2020. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at total franchise stores and cafés in operation decreased 29% during the three months ended August 31, 2020 compared to the three months ended August 31, 2019.

The decrease in franchise fee revenue for the three months ended August 31, 2020 compared to the three months ended August 31, 2019 was the result of a decrease in revenue resulting from fewer franchise stores in operation and the associated recognition of revenue over the term of the franchise agreement.

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Costs and Expenses

Cost of Sales

	Three Months Ended
	August 31,				$			%
($'s in thousands)	2020		2019		Change			Change
Cost of sales - factory	$	2,907.8	$	3,435.3	$	(527.5	)		(15.4	)%
Cost of sales - retail		145.8		303.1		(157.3	)		(51.9	)%
Franchise costs		451.0		441.6		9.4			2.1	%
Sales and marketing		408.9		434.8		(25.9	)		(6.0	)%
General and administrative		788.5		830.5		(42.0	)		(5.1	)%
Retail operating		329.4		469.3		(139.9	)		(29.8	)%
Total	$	5,031.4	$	5,914.6	$	(883.2	)		(14.9	)%

Gross Margin

	Three Months Ended
	August 31,				$			%
($'s in thousands)	2020		2019		Change			Change
Factory gross margin	$	591.0	$	1,047.1	$	(456.1	)		(43.6	)%
Retail gross margin		349.6		598.6		(249.0	)		(41.6	)%
Total	$	940.6	$	1,645.7	$	(705.1	)		(42.8	)%

	Three Months Ended
	August 31,						%			%
	2020			2019			Change			Change
(Percent)
Factory gross margin		16.9	%		23.4	%		(6.5	)%		(27.7	)%
Retail gross margin		70.6	%		66.4	%		4.2	%		6.3	%
Total		23.5	%		30.6	%		(7.0	)%		(23.0	)%

Adjusted Gross Margin

	Three Months Ended
	August 31,						$			%
($'s in thousands)	2020			2019			Change			Change
Factory gross margin	$	591.0		$	1,047.1		$	(456.1	)		(43.6	)%
Plus: depreciation and amortization		158.2			147.4			10.8			7.3	%
Factory adjusted gross margin		749.2			1,194.5			(445.3	)		(37.3	)%
Retail gross margin		349.6			598.6			(249.0	)		(41.6	)%
Total Adjusted Gross Margin	$	1,098.8		$	1,793.1		$	(694.3	)		(38.7	)%
Factory adjusted gross margin		21.4	%		26.6	%		(5.2	)%		(19.6	)%
Retail gross margin		70.6	%		66.4	%		4.2	%		6.3	%
Total Adjusted Gross Margin		27.5	%		33.3	%		(5.8	)%		(17.4	)%

Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.

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Cost of Sales and Gross Margin

Factory margins decreased 650 basis points in the three months ended August 31, 2020 compared to the three months ended August 31, 2019 due primarily to lower production volume in the three months ended August 31, 2020 compared to the three months ended August 31, 2019. During the three months ended August 31, 2020, production volume decreased 11.0% in response to a 21.9% decrease in factory sales, primarily due to the impacts of the COVID-19 pandemic.

Retail gross margins increased from 66.4% during the three months ended August 31, 2019 to 70.6% during the three months ended August 31, 2020.

Franchise Costs

The increase in franchise costs in the three months ended August 31, 2020 compared to the three months ended August 31, 2019 is due primarily to an increase in professional fees, mostly offset by lower travel costs, the result of COVID-19 related travel restrictions. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 33.8% in the three months ended August 31, 2020 from 22.1% in the three months ended August 31, 2019. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of lower royalty revenues.

Sales and Marketing

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

General and Administrative

The decrease in general and administrative costs for the three months ended August 31, 2020 compared to the three months ended August 31, 2019 is primarily due to lower professional fees, lower bad debt expense, and lower equity compensation expense. As a percentage of total revenues, general and administrative expenses increased to 14.8% in the three months ended August 31, 2020 compared to 11.2% in the three months ended August 31, 2019.

Retail Operating Expenses

The decrease in retail operating expenses for the three months ended August 31, 2020 compared to the three months ended August 31, 2019 was due primarily to reduced operations as a result of the COVID-19 pandemic. Retail operating expenses, as a percentage of retail sales, increased from 52.0% in the three months ended August 31, 2019 to 66.5% in the three months ended August 31, 2020. This increase is primarily the result of lower retail sales.

Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $177,000 in the three months ended August 31, 2020, a decrease of 21.6% from $225,000 in the three months ended August 31, 2019. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the consolidated financial statements for a summary of annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 7.3% from $147,000 in the three months ended August 31, 2019 to $158,000 in the three months ended August 31, 2020. This increase was the result of an increase in production assets in service primarily resulting from the replacement of obsolete equipment or equipment at the end of its operating life.

Other Income (Expense)

Net interest expense was $19,000 in the three months ended August 31, 2020 compared to net interest income of $3,000 incurred in the three months ended August 31, 2019. 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 the three months ended May 31, 2020, the Company borrowed $3.4 million from its line of credit and borrowed $1.5 million of loans under the Paycheck Protection Program.

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Income Tax Expense

Our effective income tax rate for the three months ended August 31, 2020 was 24.4%, compared to 26.4% for the three months ended August 31, 2019. The decrease in the effective income tax rate is primarily the result of lower state income taxes.

Six Months Ended August 31, 2020 Compared to the Six Months Ended August 31, 2019

Results Summary

Basic earnings per share decreased from $0.27 per share for the six months ended August 31, 2019 to a net loss of $(0.59) per share for the six months ended August 31, 2020. Revenues decreased 49.2% from $15.8 million for the six months ended August 31, 2019 to $8.0 million for the six months ended August 31, 2020. Operating income decreased from $2.2 million for the six months ended August 31, 2019 to an operating loss of $(4.7) million for the six months ended August 31, 2020. Net income decreased from $1.6 million for the six months ended August 31, 2019 to a net loss of $(3.6) million for the six months ended August 31, 2020. The decrease in revenue, operating income and net income was due primarily to the impacts from the COVID-19 pandemic, including its impact on our operation and the operations of our franchised, licensed and Company-owned locations.

Revenues

	Six Months Ended
	August 31,				$			%
($'s in thousands)	2020		2019		Change			Change
Factory sales	$	5,633.4	$	10,088.4	$	(4,455.0	)		(44.2	)%
Retail sales		683.0		1,756.3		(1,073.3	)		(61.1	)%
Franchise fees		128.6		188.2		(59.6	)		(31.7	)%
Royalty and marketing fees		1,584.8		3,778.4		(2,193.6	)		(58.1	)%
Total	$	8,029.8	$	15,811.3	$	(7,781.5	)		(49.2	)%

Factory Sales

The decrease in factory sales for the six months ended August 31, 2020 compared to the six months ended August 31, 2019 was primarily due to a 53.7% decrease in sales of product to our network of franchised and licensed retail stores and a 5.9% decrease in shipments of product to customers outside our network of franchised retail stores. Purchases by the Company’s largest customer, FTD, were approximately $199,000, or 2.5%, of the Company’s revenues during the six months ended August 31, 2020, compared to $1.5 million, or 9.3% of the Company’s revenues during the six months ended August 31, 2019. As discussed above, FTD declared Chapter 11 bankruptcy in June 2019. Until the bankruptcy proceedings are complete, it is unclear whether the Company will realize any revenue from FTD in the future, and if so, whether such revenues will return to historic levels. The decrease in sales of product to our network of franchised and licensed retail stores was primarily the result of the COVID-19 pandemic and the associated public health measures in place during the six months ended August 31, 2020, which significantly reduced traffic in our stores. These decreases were partially offset by increases in factory sales associated with our strategic alliance with Edible and by an increase in revenue from online sales of our products directly to consumers. Beginning in May 2020, most stores previously closed for much of March 2020 and April 2020, in response to COVID-19, began to re-open. Most stores re-opened subject to various local health restrictions and with reduced operations. It is unclear when or if store operations will return to pre COVID-19 levels.

Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 50.5% in the six months ended August 31, 2020, compared with the six months ended August 31, 2019.

Retail Sales

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

25

Royalties, Marketing Fees and Franchise Fees

The decrease in royalties and marketing fees from the six months ended August 31, 2019 to the six months ended August 31, 2020 was primarily due to the COVID-19 pandemic and the associated public health measures in place during the six months ended August 31, 2020. Nearly all of our franchised locations experienced reduced operations and periods of full closure during the six months ended August 31, 2020.

The decrease in franchise fee revenue for the six months ended August 31, 2020 compared to the six months ended August 31, 2019 was the result of a decrease in revenue resulting from fewer franchise stores in operation and the associated recognition of revenue over the term of the franchise agreement.

Costs and Expenses

Cost of Sales

	Six Months Ended
	August 31,				$			%
($'s in thousands)	2020		2019		Change			Change
Cost of sales - factory	$	5,698.3	$	7,761.8	$	(2,063.5	)		(26.6	)%
Cost of sales - retail		238.4		591.3		(352.9	)		(59.7	)%
Franchise costs		872.3		924.7		(52.4	)		(5.7	)%
Sales and marketing		883.0		991.4		(108.4	)		(10.9	)%
General and administrative		3,968.0		1,975.2		1,992.8			100.9	%
Retail operating		648.6		918.2		(269.6	)		(29.4	)%
Total	$	12,308.6	$	13,162.6	$	(854.0	)		(6.5	)%

Gross Margin

	Six Months Ended
	August 31,					$			%
	2020			2019		Change			Change
Factory gross margin	$	(64.9	)	$	2,326.6	$	(2,391.5	)		(102.8	)%
Retail gross margin		444.6			1,165.0		(720.4	)		(61.8	)%
Total	$	379.7		$	3,491.6	$	(3,111.9	)		(89.1	)%

	Six Months Ended
	August 31,						%			%
	2020			2019			Change			Change
Factory gross margin		-1.2	%		23.1	%		(24.2	)%		(105.0	)%
Retail gross margin		65.1	%		66.3	%		(1.2	)%		(1.9	)%
Total		6.0	%		29.5	%		(23.5	)%		(79.6	)%

Adjusted Gross Margin

	Six Months Ended
	August 31,						$			%
($'s in thousands)	2020			2019			Change			Change
Factory gross margin	$	(64.9	)	$	2,326.6		$	(2,391.5	)		(102.8	)%
Plus: depreciation and amortization		315.7			293.1			22.6			7.7	%
Factory adjusted gross margin		250.8			2,619.7			(2,368.9	)		(90.4	)%
Retail gross margin		444.6			1,165.0			(720.4	)		(61.8	)%
Total Adjusted Gross Margin	$	695.4		$	3,784.7		$	(3,089.3	)		(81.6	)%
Factory adjusted gross margin		4.5	%		26.0	%		(21.5	)%		(82.9	)%
Retail gross margin		65.1	%		66.3	%		(1.2	)%		(1.9	)%
Total Adjusted Gross Margin		11.0	%		32.0	%		(20.9	)%		(65.5	)%

26

Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.

Cost of Sales and Gross Margin

Factory gross margins decreased to a negative gross margin of (1.2)% in the six months ended August 31, 2020 compared to a positive gross margin of 23.1% during the six months ended August 31, 2019, due primarily to lower production volume in the six months ended August 31, 2020 compared to the six months ended August 31, 2019. During the six months ended August 31, 2020, production volume decreased 34.0% in response to a 44.2% decrease in factory sales, primarily due to the impacts of the COVID-19 pandemic. As a result of the decrease in production volume, factory fixed costs, including idle labor, exceeded revenue during the six months ended August 31, 2020. During the six months ended August 31, 2020, 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 66.3% during the six months ended August 31, 2019 to 65.1% during the six months ended August 31, 2020. The decrease in retail gross margins was primarily the result of the temporary closure of all of our Company-owned stores for much of the three months ended May 31, 2020 due to the COVID-19 pandemic, and the associated impact on perishable inventory.

Franchise Costs

The decrease in franchise costs in the six months ended August 31, 2020 compared to the six months ended August 31, 2019 is due primarily to lower travel costs, the result of COVID-19 related travel restrictions. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 50.9% in the six months ended August 31, 2020 from 23.3% in the six months ended August 31, 2019. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of lower franchise and royalty fees.

Sales and Marketing

The decrease in sales and marketing costs for the six months ended August 31, 2020 compared to the six months ended August 31, 2019 was primarily due to lower advertising and promotion costs, partially offset by an increase in online advertising cost.

General and Administrative

The increase in general and administrative costs for the six months ended August 31, 2020 compared to the six months ended August 31, 2019 was due primarily to an increase in bad debt expense, the impairment of certain intangible assets and higher professional fees. As a percentage of total revenues, general and administrative expenses increased to 49.4% in the six months ended August 31, 2020 compared to 12.5% in the six months ended August 31, 2019. Bad debt expense was primarily the result of management’s assessment of the likelihood of collecting accounts and notes receivable. As a result of this assessment total allowances for potentially uncollectable accounts and notes receivable increased to $2,012,680 at August 31, 2020, compared to $638,907 at February 29, 2020. This cost was a direct result of public health measures in place due to responses to COVID-19 and the financial burden experienced by the majority of our network of franchised and licensed locations. See Note 8 to the financial statements for a summary of costs associated with the impairment of certain intangible assets.

Retail Operating Expenses

The decrease in retail operating expenses for the six months ended August 31, 2020 compared to the six months ended August 31, 2019 was due to the temporary closure of all of our Company-owned stores for much of the three months ended May 31, 2020. The closure of our Company-owned stores was the result of COVID-19 and the associated public health measures in place. Retail operating expenses, as a percentage of retail sales, increased from 52.3% in the six months ended August 31, 2019 to 95.0% in the six months ended August 31, 2020. This increase is primarily the result of lower retail sales.

27

Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $362,000 in the six months ended August 31, 2020, a decrease of 20.8% from $457,000 in the six months ended August 31, 2019. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 8 to the financial statements for a summary of annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 7.8% from $293,000 in the six months ended August 31, 2019 to $316,000 in the six months ended August 31, 2020. This increase was the result of an increase in production assets in service primarily resulting from the replacement of obsolete equipment or equipment at the end of its operating life.

Other Income (Expense)

Net interest expense was $36,400 in the six months ended August 31, 2020 compared to net interest income of $300 during the six months ended August 31, 2019. This change was primarily the result of the Company’s increased debt as a result of measures taken during the six months ended August 31, 2020 to ensure adequate liquidity during the COVID-19 pandemic. During the six months ended August 31, 2020, the Company borrowed $3.4 million from its line of credit and borrowed $1.5 million of loans under the Paycheck Protection Program.

Income Tax Expense

Our effective income tax rate for the six months ended August 31, 2020 was 24.3%, compared to 25.6% for the six months ended August 31, 2019. The decrease in the effective income tax rate is primarily the result of lower state income taxes.

Liquidity 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 August 31, 2020 working capital was $5.5 million, compared to $8.0 million as of February 29, 2020, a decrease of $2.5 million. The decrease in working capital was primarily due to an increase in current liabilities, the result of the Company’s response to COVID-19 and measures taken to ensure sufficient short-term liquidity.

Cash and cash equivalent balances increased approximately $1.1 million to $5.9 million as of August 31, 2020 compared to $4.8 million as of February 29, 2020, primarily as a result of the use of the line of credit and receipt of loans under the Paycheck Protection Program, as described below. Our current ratio was 1.5 to 1 at August 31, 2020 compared to 2.4 to 1 at February 29, 2020. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

During the six months ended August 31, 2020, we had a net loss of $(3,591,265). Operating activities used cash of $3,056,480, with the principal adjustment to reconcile the net income to net cash used by operating activities being the provision for loss on accounts and notes receivable of $1,468,815, asset impairment and store closure losses of $544,060, depreciation and amortization of $677,967, an increase in accounts payable of $580,966 and expense related to stock-based compensation of $287,437. During the comparable 2019 period, we had net income of $1,629,697, and operating activities provided cash of $2,902,679. The principal adjustment to reconcile the net income to net cash provided by operating activities was depreciation and amortization of $750,486 and the expense recorded for stock compensation of $386,670.

During the six months ended August 31, 2020, investing activities used cash of $104,905, primarily due to the purchases of intangible assets of $99,047. In comparison, investing activities used cash of $406,376 during the six months ended August 31, 2019 primarily due to the purchase of property and equipment of $480,984.

Financing activities provided cash of $4,263,021 for the six months ended August 31, 2020 primarily as a as a result of the use of the line of credit and receipt of loans under the Paycheck Protection Program, as described below. In comparison, financing activities used cash of $2,127,121 during the prior year period primarily due to payments on long-term debt and declared dividends.

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Revolving Credit Line

The Company has a $5.0 million credit line for general corporate and working capital purposes. On March 16, 2020, as a precautionary measure in light of the COVID-19 pandemic and the related economic impacts, the Company drew the maximum amount available on the credit line in an amount equal to $3.4 million (the full amount of $5.0 million under the credit line, subject to the borrowing base of 50% of eligible accounts receivable plus 50% of eligible inventories). The credit line is secured by substantially all of the Company’s assets, except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (2.4% at August 31, 2020). Additionally, the line of credit is subject to various financial ratio and leverage covenants. At August 31, 2020, the Company was not compliant with a covenant of the line of credit that requires the Company to have $1.5 million of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the trailing twelve months ended August 31, 2020. As a result of COVID-19, the Company failed to meet the amount of EBITDA required by this covenant. On June 26, 2020 and on October 5, 2020 Wells Fargo Bank, NA (“Wells Fargo”) delivered to the Company Reservation of Rights Letters (“Bank Letters”). The Bank Letters reserved all rights available to Wells Fargo under the Credit Agreement dated October 30, 2015 including, but not limited to, the right of Wells Fargo to demand immediate payment of all amounts outstanding under the Credit Agreement. The Bank Letters also placed restrictions on the Company’s ability to draw any further funds on the Line of Credit. The Company intends to work with Wells Fargo to amend the associated covenants as the trends related to COVID-19 begin to become clear. There is no assurance that Wells Fargo will agree to any proposed amendment. The credit line is subject to renewal in September 2021 and the Company believes it is likely to be renewed on terms similar to the current terms, subject to the Company’s recovery from the impacts of COVID-19

PPP Loan

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

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

Off-Balance Sheet Arrangements

As of August 31, 2020, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.

Purchase obligations: As of August 31, 2020, we had purchase obligations of approximately $100,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.

Impact of Inflation

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

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

Seasonality

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

29

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.     Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that material information relating to us is made known to the officers who certify as to our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of our principal executive and financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our principal executive and financial officer concluded that our disclosure controls and procedures are effective as of August 31, 2020.

Changes in Internal Control over Financial Reporting

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

PART II.     OTHER INFORMATION

Item 1.     Legal Proceedings

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

Item 1A.     Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020.

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

Issuer Purchases of Equity Securities

None.

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     Mine Safety Disclosures

Not Applicable.

Item 5.     Other Information

None.

30

Item 6.     Exhibits

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

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

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

31.1* Certification Filed Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1** Certification Furnished Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

101.INS *XBRL Instance Document.

101.SCH *XBRL Taxonomy Extension Schema Document.

101.CAL *XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF *XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB *XBRL Taxonomy Extension Label Linkbase Document.

101.PRE *XBRL Taxonomy Extension Presentation Linkbase Document.

____________________________

* Filed herewith

** Furnished herewith. 

31

Signatures

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

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

(Registrant)

Date: October 15, 2020	/s/ Bryan J. Merryman
	Bryan J. Merryman, Chief Executive Officer,
	Chief Financial Officer, Treasurer and Chairman of the Board of Directors

32

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Bryan J. Merryman, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Rocky Mountain Chocolate Factory, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 15, 2020	/s/ Bryan J. Merryman
	Bryan J. Merryman, Chief Executive Officer, Chief Financial Officer,
	Treasurer and Chairman of the Board of Directors
	(Principal Executive and Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of Rocky Mountain Chocolate Factory, Inc. (the "Company") on Form 10-Q for the quarterly period ended August 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officer of the Company certifies, in his capacity as such, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: October 15, 2020	By:	/s/ Bryan J. Merryman
		Bryan J. Merryman, Chief Executive Officer, Chief Financial Officer,
		Treasurer and Chairman of the Board of Directors
		(Principal Executive and Financial Officer)

XML

Document And Entity Information - shares	6 Months Ended
	Aug. 31, 2020	Oct. 10, 2020
Document Information [Line Items]
Entity Registrant Name	Rocky Mountain Chocolate Factory, Inc.
Entity Central Index Key	0001616262
Trading Symbol	rmcf
Current Fiscal Year End Date	--02-28
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		6,070,925
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Aug. 31, 2020
Document Fiscal Year Focus	2021
Document Fiscal Period Focus	Q2
Amendment Flag	false
Title of 12(b) Security	Common Stock, $0.001 par value per share; Preferred Stock Purchase Rights

XML

Consolidated Statements of Operations (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019	Aug. 31, 2020	Aug. 31, 2019
Revenues
Total revenues	$ 5,327,402	$ 7,385,270	$ 8,029,839	$ 15,811,269
Costs and Expenses
Cost of sales	3,053,563	3,738,435	5,936,779	8,353,179
Sales and marketing	408,919	434,782	883,009	991,433
General and administrative	788,543	830,451	3,968,018	1,975,182
Depreciation and amortization, exclusive of depreciation and amortization expense of $158,203, $147,415, $315,712 and $293,114, respectively, included in cost of sales	176,650	225,417	362,255	457,372
Costs associated with Company-owned store closures			68,558
Total costs and expenses	5,208,045	6,140,027	12,739,445	13,620,023
Income (Loss) from Operations	119,357	1,245,243	(4,709,606)	2,191,246
Other Income (Expense)
Interest Expense	(23,989)	(3,487)	(47,551)	(15,885)
Interest Income	5,365	6,007	11,165	16,186
Other income (expense), net	(18,624)	2,520	(36,386)	301
Income (Loss) Before Income Taxes	100,733	1,247,763	(4,745,992)	2,191,547
Income Tax Provision (Benefit)	24,601	329,675	(1,154,727)	561,850
Consolidated Net Income (Loss)	$ 76,132	$ 918,088	$ (3,591,265)	$ 1,629,697
Basic Earnings (Loss) per Common Share (in dollars per share)	$ 0.01	$ 0.15	$ (0.59)	$ 0.27
Diluted Earnings (Loss) per Common Share (in dollars per share)	$ 0.01	$ 0.15	$ (0.59)	$ 0.26
Weighted Average Common Shares Outstanding - Basic (in shares)	6,066,034	5,977,746	6,062,443	5,970,012
Dilutive Effect of Employee Stock Awards (in shares)	219,043	279,584		275,935
Weighted Average Common Shares Outstanding - Diluted (in shares)	6,285,077	6,257,330	6,062,443	6,245,947
Product [Member]
Revenues
Total revenues	$ 3,994,152	$ 5,384,040	$ 6,316,363	$ 11,844,651
Franchise and Royalty Fees [Member]
Revenues
Total revenues	1,333,250	2,001,230	1,713,476	3,966,618
Franchise [Member]
Costs and Expenses
Costs	451,003	441,638	872,248	924,651
Retail [Member]
Costs and Expenses
Costs	$ 329,367	$ 469,304	$ 648,578	$ 918,206

XML

Consolidated Statements of Operations (Unaudited) (Parentheticals) - USD ($)	3 Months Ended		6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019	Aug. 31, 2020	Aug. 31, 2019
Amortization expense included in cost of goods sold	$ 158,203	$ 147,415	$ 315,712	$ 293,114

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Aug. 31, 2020	Feb. 29, 2020
Current Assets
Cash and cash equivalents	$ 5,923,707	$ 4,822,071
Accounts receivable, less allowance for doubtful accounts of $1,812,680 and $638,907, respectively	2,917,061	4,049,959
Notes receivable, current portion, less current portion of the valuation allowance of $50,661 and $0,	111,933	160,700
Refundable income taxes	418,390	418,319
Inventories, net	5,726,426	3,750,978
Other	390,259	409,703
Total current assets	15,487,776	13,611,730
Property and Equipment, Net	5,533,901	5,938,013
Other Assets
Notes receivable, less current portion and valuation allowance of $149,339 and $0, respectively	99,059	289,515
Goodwill, net	729,701	1,046,944
Franchise rights, net	2,783,727	3,047,688
Intangible assets, net	411,040	498,393
Deferred income taxes	1,784,806	630,078
Lease right of use asset	2,301,165	2,698,765
Other	56,264	56,262
Total other assets	8,165,762	8,267,645
Total Assets	29,187,439	27,817,388
Current Liabilities
Current maturities of long term debt	847,731
Line of credit	3,448,165
Accounts payable	3,020,604	2,241,506
Accrued salaries and wages	695,695	716,860
Gift card liabilities	575,310	609,842
Other accrued expenses	442,337	316,751
Dividend payable		722,344
Contract liabilities	187,269	195,658
Lease liability	777,123	803,861
Total current liabilities	9,994,234	5,606,822
Lease Liability, Less Current Portion	1,557,719	1,894,904
Long-Term Debt, Less Current Portion	694,575
Contract Liabilities, Less Current Portion	889,228	960,151
Commitments and Contingencies
Stockholders' Equity
Preferred stock
Common stock, $.001 par value, 46,000,000 shares authorized, 6,067,461 shares and 6,019,532 shares issued and outstanding, respectively	6,068	6,020
Additional paid-in capital	7,747,320	7,459,931
Retained earnings	8,298,295	11,889,560
Total stockholders' equity	16,051,683	19,355,511
Total Liabilities and Stockholders' Equity	29,187,439	27,817,388
Series A Preferred Stock [Member]
Stockholders' Equity
Preferred stock
Undesignated Series [Member]
Stockholders' Equity
Preferred stock

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($)	Aug. 31, 2020	Feb. 29, 2020
Accounts receivable, allowance for doubtful accounts	$ 1,812,680	$ 638,907
Notes receivable, current portion of the valuation allowance	50,661	0
Notes receivable, noncurrent portion of valuation allowance	$ 149,339	$ 0
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	250,000	250,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	46,000,000	46,000,000
Common stock, shares issued (in shares)	6,067,461	6,019,532
Common stock, shares outstanding (in shares)	6,067,461	6,019,532
Series A Preferred Stock [Member]
Preferred stock, shares authorized (in shares)	50,000	50,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Undesignated Series [Member]
Preferred stock, shares authorized (in shares)	200,000	200,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019
Cash Flows From Operating Activities
Net (loss) Income	$ (3,591,265)	$ 1,629,697
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	677,967	750,486
Provision for obsolete inventory	24,729	47,945
Provision for loss on accounts and notes receivable	1,468,815	108,283
Asset impairment and store closure losses	544,060
Loss on sale or disposal of property and equipment	7,823	5,796
Expense recorded for stock compensation	287,437	386,670
Deferred income taxes	(1,154,728)	101,959
Changes in operating assets and liabilities:
Accounts receivable	(141,690)	(267,491)
Refundable income taxes	(71)	145,475
Inventories	(1,808,397)	212,138
Other current assets	19,445	(147,750)
Accounts payable	580,966	213,734
Accrued liabilities	103,564	(153,885)
Contract liabilities	(75,135)	(130,378)
Net cash (used in) provided by operating activities	(3,056,480)	2,902,679
Cash Flows from Investing Activities
Proceeds received on notes receivable	44,995	74,296
Purchase of intangible assets	(99,047)
Purchases of property and equipment	(50,853)	(480,984)
(Increase) decrease in other assets		312
Net cash used in investing activities	(104,905)	(406,376)
Cash Flows from Financing Activities
Payments on long-term debt		(696,043)
Proceeds from long-term debt	1,537,200
Proceeds from the line of credit	3,448,165
Dividends paid	(722,344)	(1,431,078)
Net cash provided by (used in) financing activities	4,263,021	(2,127,121)
Net Increase (Decrease) in Cash and Cash Equivalents	1,101,636	369,182
Cash and Cash Equivalents, Beginning of Period	4,822,071	5,384,027
Cash and Cash Equivalents, End of Period	$ 5,923,707	$ 5,753,209

XML

Consolidated Statement of Changes in Stockholders' Equity (Unaudited) - USD ($)	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balance (in shares) at Feb. 28, 2019	5,957,827
Balance at Feb. 28, 2019	$ 5,958	$ 6,650,864	$ 13,733,010	$ 20,389,832
Consolidated net (loss) income			1,629,697	1,629,697
Issuance of common stock, vesting of restricted stock units and other (in shares)	33,335
Issuance of common stock, vesting of restricted stock units and other	$ 33	(33)
Equity compensation, restricted stock units		386,670		386,670
Cash dividends declared			(1,435,498)	(1,435,498)
Consolidated net (loss) income			1,629,697	1,629,697
Balance (in shares) at Aug. 31, 2019	5,991,162
Balance at Aug. 31, 2019	$ 5,991	7,037,501	13,927,209	20,970,701
Balance (in shares) at May. 31, 2019	5,962,327
Balance at May. 31, 2019	$ 5,962	6,882,114	13,728,480	20,616,556
Consolidated net (loss) income			918,088	918,088
Issuance of common stock, vesting of restricted stock units and other (in shares)	28,835
Issuance of common stock, vesting of restricted stock units and other	$ 29	(29)
Equity compensation, restricted stock units		155,416		155,416
Cash dividends declared			(719,359)	(719,359)
Consolidated net (loss) income			918,088	918,088
Balance (in shares) at Aug. 31, 2019	5,991,162
Balance at Aug. 31, 2019	$ 5,991	7,037,501	13,927,209	20,970,701
Balance (in shares) at Feb. 29, 2020	6,019,532
Balance at Feb. 29, 2020	$ 6,020	7,459,931	11,889,560	19,355,511
Consolidated net (loss) income			(3,591,265)	(3,591,265)
Issuance of common stock, vesting of restricted stock units and other (in shares)	47,929
Issuance of common stock, vesting of restricted stock units and other	$ 48	(48)
Equity compensation, restricted stock units		287,437		287,437
Cash dividends declared
Consolidated net (loss) income			(3,591,265)	(3,591,265)
Balance (in shares) at Aug. 31, 2020	6,067,461
Balance at Aug. 31, 2020	$ 6,068	7,747,320	8,298,295	16,051,683
Balance (in shares) at May. 31, 2020	6,060,663
Balance at May. 31, 2020	$ 6,061	7,603,608	8,222,163	15,831,832
Consolidated net (loss) income			76,132	76,132
Issuance of common stock, vesting of restricted stock units and other (in shares)	6,798
Issuance of common stock, vesting of restricted stock units and other	$ 7	(7)
Equity compensation, restricted stock units		143,719		143,719
Cash dividends declared
Consolidated net (loss) income			76,132	76,132
Balance (in shares) at Aug. 31, 2020	6,067,461
Balance at Aug. 31, 2020	$ 6,068	$ 7,747,320	$ 8,298,295	$ 16,051,683

XML

Note 1 - Nature of Operations and Basis of Presentation

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Business Description and Accounting Policies [Text Block]

NOTE

1

– NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc. (a Colorado corporation), Aspen Leaf Yogurt, LLC (“ALY”), and U-Swirl International, Inc. (“U-Swirl”), and its

46%

-owned subsidiary, U-Swirl, Inc. (“SWRL”) (collectively, the “Company”).

The Company is an international franchisor, confectionery manufacturer and retail operator. Founded in

1981,

the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and through ecommerce channels, and licenses the use of its brand with certain consumer products.

U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let's Yo!” and “Aspen Leaf Yogurt.”

The Company's revenues are currently derived from

three

principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees' sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.

In FY

2020,

we entered into a long-term strategic alliance with Edible Arrangements®, LLC and its affiliates (“Edible”) whereby we became the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees (the “Strategic Alliance”). In connection with the Strategic Alliance, the Company entered into a strategic alliance agreement, an exclusive supplier operating agreement and a warrant agreement with Edible. Rocky Mountain Chocolate Factory branded products are available for purchase both on Edible's website as well as through over

1,000

franchised Edible Arrangement 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 sells a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible's websites. Edible is also responsible for all ecommerce marketing and sales for the broader Rocky Mountain ecommerce ecosystem. In

January 2020,

the founder and Chief Executive Officer of Edible was elected to the Company's Board of Directors at the Company's Annual Meeting of Stockholders.

The following table summarizes the number of stores operating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés as of

August 31, 2020:

	Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		2		2
Franchise stores - Domestic stores and kiosks		5		162		167
International license stores		1		58		59
Cold Stone Creamery - co-branded		5		98		103
U-Swirl (Including all associated brands)
Company-owned stores - co-branded		-		3		3
Franchise stores - Domestic stores		-		69		69
Franchise stores - Domestic - co-branded		1		7		8
International license stores		-		2		2
Total		12		401		413

Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and Securities and Exchange Commission (the “SEC”) regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the

three

and

six

months ended

August 31, 2020

are

not

necessarily indicative of the results to be expected for the entire fiscal year, or any other future period.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form

10

-K for the fiscal year ended

February

29,

2020.

The year-end balance sheet data was derived from audited financial statements for the year ended

February

29,

2020,

but does

not

include all disclosures required by GAAP.

Subsequent Events

Management evaluated all activity of the Company through the issue date of the financial statements and concluded that

no

subsequent events have occurred that would require recognition or disclosure in the financial statements. 

As discussed in more detail throughout this Quarterly Report on Form

10

-Q for the

three

and

six

months ended

August 31, 2020 (

this “Quarterly Report”), we have experienced significant business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus ("COVID-

19"

), including the vast mandated self-quarantines of customers and closures of non-essential business throughout the United States and internationally. Nearly all of the Company-owned and franchise stores were directly and negatively impacted by public health measures taken in response to COVID-

19,

with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. As a result, franchisees and licensees are

not

ordering products for their stores in line with historical amounts. This trend has negatively impacted, and is expected to continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees. Beginning in

May 2020

and continuing through

August 2020,

most stores previously closed for much of

March 2020

and

April 2020

in response to the COVID-

19

pandemic, began to re-open. As of

August 31, 2020

approximately

27

stores have

not

re-opened and the future of these locations is uncertain.  This is a closure rate significantly higher than historical levels. By

August 31, 2020,

certain stores have met or exceeded pre-COVID-

19

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 with reduced operations. It is unclear when or if store operations will return to pre-COVID-

19

levels.

In addition, as previously announced in

May 2020,

the Board of Directors suspended the Company's

first

quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-

19

pandemic. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of the Company and its stockholders.

During this challenging time, the Company's foremost priority is the safety and well-being of our employees, customers, franchisees and communities. In addition to the already stringent practices for the quality and safety of the Company's confections, the Company is diligently following health and safety guidance issued by the World Health Organization, the Centers for Disease Control and state and local governmental agencies. The COVID-

19

pandemic has had an unprecedented impact on the retail industry as containment measures continue to impact the Company's operations and the retail industry. Numerous countries, states and local governments have effected ordinances to protect the public through social distancing, which has caused, and we expect will continue to cause, a significant decrease in, among other things, retail traffic and as a result, factory sales, retail sales and royalty and marketing fees. With that said, Rocky Mountain Chocolate Factory products remain available for sale online. The Company's current focus is on supporting its franchisees and licensees during this challenging time and driving growth in online sales, especially in light of the ecommerce licensing agreement with Edible, as discussed below, while also sensibly managing costs. The number of Company-owned and franchise stores remaining open

may

change frequently and significantly due to the ever-changing nature of the COVID-

19

outbreak.

In these challenging and unprecedented times, management is taking all necessary and appropriate action to maximize liquidity as the Company navigates the current landscape. These actions include significantly reducing operating expenses and production volume to reflect reduced sales volumes as well as the elimination of all non-essential spending and capital expenditures. Further, in an abundance of caution and to maintain ample financial flexibility, the Company drew down the full amount under our line of credit and the Company received loans under the Paycheck Protection Program (the “PPP”). See Note

9

for additional information regarding our debt obligations. The receipt of funds under our debt obligations has allowed the Company to temporarily avoid workforce reduction measures amidst a steep decline in revenue and production volume. While the Company believes it has sufficient liquidity with its current cash position, the Company will continue to monitor and evaluate all financing alternatives as necessary as these unprecedented events evolve. For more information, please see Item

1A

“Risk Factors—The Novel Coronavirus (COVID-

19

) Pandemic Has, and

May

Continue to, Materially and Adversely Affect our Sales, Earnings, Financial Condition and Liquidity” in our Annual Report on Form

10

-K as filed on

May 29, 2020

with the United States Securities and Exchange Commission

Recent Accounting Pronouncements

Except for the recent accounting pronouncements described below, other recent accounting pronouncements are

not

expected to have a material impact on our consolidated financial statements.

In

June 2016,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

2016

-

13,

Financial Instruments - Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments. ASU

2016

-

13

significantly changes the impairment model for most financial assets and certain other instruments. ASU

2016

-

13

will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU

2016

-

13

is effective for the Company's fiscal year beginning

March 1, 2023

and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU

2016

-

13

will have on the Company's consolidated financial statements.

In

January 2017,

the FASB issued ASU

2017

-

04,

Intangibles—Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment. ASU

2017

-

04

simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step

2

from the goodwill impairment test. Under the amendments in ASU

2017

-

04,

an entity should (

1

) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (

2

) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, with the understanding that the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU

2017

-

04

requires any reporting unit with a

zero

or negative carrying amount to perform Step

2

of the goodwill impairment test. We adopted ASU

2017

-

04

effective

March 1, 2020 (

the

first

quarter of our

2021

fiscal year). The adoption of ASU

2017

-

04

did

not

have a material impact on our consolidated financial statements.

In

December 2019,

the FASB issued ASU

2019

-

12,

Income Taxes (Topic

740

): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2020

on a prospective basis, with early adoption permitted. We will adopt ASU

2019

-

12

effective

March 1, 2021

and do

not

expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Related Party Transactions

As described above, in FY

2020,

we entered into a long-term strategic alliance whereby we became the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Also in FY

2020,

the founder and Chief Executive Officer of Edible was elected to the Company's Board of Directors at the Company's Annual Meeting of Stockholders. During the

six

months ended

August 31, 2020,

the Company recognized approximately

$949,000

of revenue related to purchases from Edible, its affiliates and its franchisees. As of

August 31, 2020

the company recognized approximately

$718,000

of accounts receivable from Edible its affiliates and its franchisees.

XML

Note 2 - Supplemental Cash Flow Information

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Cash Flow, Supplemental Disclosures [Text Block]

NOTE

2

– SUPPLEMENTAL CASH FLOW INFORMATION

	Six Months Ended
	August 31,
Cash paid for:	2020		2019
Interest	$	46,441	$	16,677
Income taxes		71		314,417
Non-cash Operating Activities
Accrued Inventory		394,697		237,842
Non-cash Financing Activities
Dividend payable	$	-	$	719,359

XML

Note 3 - Revenue From Contracts With Customers

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

NOTE

3

–REVENUE FROM CONTRACTS WITH CUSTOMERS

Effective

March 1, 2018,

the Company adopted ASC

606,

which provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This new standard does

not

impact the Company's recognition of revenue from sales of confectionary items to the Company's franchisees and others, or in its Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does

not

change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement. The Company generally receives a fee associated with the Franchise Agreement or License Agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These Customer Contracts have a term of up to

20

years, however the majority of Customer Contracts have a term of

10

years. During the term of the Customer Contract the Company is obligated to many performance obligations that the Company has

not

determined are distinct. The resulting treatment of revenue from Customer Contracts is that the revenue is recognized proportionately over the life of the Customer Contract.

Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees

The Company's policy for recognizing initial franchise and renewal fees through

February 28, 2018

was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are

not

distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning

March 1, 2018,

initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally

10

-

15

years.

The following table summarizes contract liabilities as of

August 31, 2020

and

August 31, 2019:

	Six Months Ended
	August 31:
	2020			2019
Contract liabilities at the beginning of the year:	$	1,155,809		$	1,352,572
Revenue recognized		(128,636	)		(188,209	)
Contract fees received		53,500			57,833
Amortized gain on the financed sale of equipment		(4,176	)		(6,267	)
Contract liabilities at the end of the period:	$	1,076,497		$	1,215,929

At

August 31, 2020,

annual revenue expected to be recognized in the future, related to performance obligations that are

not

yet fully satisfied, are estimated to be the following:

FY 21	$	94,959
FY 22		182,079
FY 23		170,353
FY 24		137,744
FY 25		124,461
Thereafter		366,901
Total	$	1,076,497

Gift Cards

The Company's franchisees sell gift cards, which do

not

have expiration dates or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. The Company has historically accumulated gift card liabilities and has

not

recognized breakage associated with the gift card liability. The adoption of ASC

606

requires the use of the “proportionate” method for recognizing breakage, which the Company has

not

historically utilized. Upon adoption of ASC

606

the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

XML

Note 4 - Disaggregation of Revenue

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Disaggregation of Revenue [Text Block]

NOTE

4

– DISAGGREGATION OF REVENUE

The following table presents disaggregated revenue by method of recognition and segment:

Three Months Ended

August 31, 2020

Revenues recognized over time under ASC

606:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	49,130	$	-	$	-	$	24,490	$	73,620

Revenues recognized at a point in time:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		3,498,752		-		-		3,498,752
Retail sales		-		-		193,702		301,698		495,400
Royalty and marketing fees		991,006		-		-		268,624		1,259,630
Total	$	1,040,136	$	3,498,752	$	193,702	$	594,812	$	5,327,402

Three Months Ended

August 31, 2019

Revenues recognized over time under ASC

606:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	65,327	$	-	$	-	$	16,602	$	81,929

Revenues recognized at a point in time:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		4,482,373		-		-		4,482,373
Retail sales		-		-		265,662		636,005		901,667
Royalty and marketing fees		1,449,157		-		-		470,144		1,919,301
Total	$	1,514,484	$	4,482,373	$	265,662	$	1,122,751	$	7,385,270

Six Months Ended

August 31, 2020

Revenues recognized over time under ASC

606:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	90,832	$	-	$	-	$	37,804	$	128,636

Revenues recognized at a point in time:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		5,633,367		-		-		5,633,367
Retail sales		-		-		253,683		429,313		682,996
Royalty and marketing fees		1,203,098		-		-		381,742		1,584,840
Total	$	1,293,930	$	5,633,367	$	253,683	$	848,859	$	8,029,839

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended

August 31, 2019

Revenues recognized over time under ASC

606:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	145,346	$	-	$	-	$	42,863	$	188,209

Revenues recognized at a point in time:

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		10,088,393		-		-		10,088,393
Retail sales		-		-		498,081		1,258,177		1,756,258
Royalty and marketing fees		2,796,893		-		-		981,516		3,778,409
Total	$	2,942,239	$	10,088,393	$	498,081	$	2,282,556	$	15,811,269

XML

Note 5 - Inventories

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Inventory Disclosure [Text Block]

NOTE

5

– INVENTORIES

Inventories consist of the following:

	August 31, 2020			February 29, 2020
Ingredients and supplies	$	2,772,234		$	2,186,652
Finished candy		3,068,858			1,827,767
U-Swirl food and packaging		41,814			56,708
Reserve for slow moving inventory		(156,480	)		(320,149	)
Total inventories	$	5,726,426		$	3,750,978

XML

Note 6 - Property and Equipment, Net

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

NOTE

6

– PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

	August 31, 2020			February 29, 2020
Land	$	513,618		$	513,618
Building		5,031,395			5,031,395
Machinery and equipment		10,037,869			10,664,396
Furniture and fixtures		797,303			852,557
Leasehold improvements		985,407			1,154,396
Transportation equipment		429,789			440,989
		17,795,381			18,657,351
Less accumulated depreciation		(12,261,480	)		(12,719,338	)
Property and equipment, net	$	5,533,901		$	5,938,013

Depreciation expense related to property and equipment totaled

$192,049

and

$386,606

during the

three

and

six

months ended

August 31, 2020

compared to

$196,288

and

$397,398

during the

three

and

six

months ended

August 31, 2019,

respectively.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

XML

Note 7 - Goodwill and Intangible Assets

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

NOTE

7

– GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:

				August 31, 2020				February 29, 2020
	Amortization Period (in years)			Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Intangible assets subject to amortization
Store design		10		$	394,826	$	216,403	$	295,779	$	215,653
Packaging licenses	3	-	5		120,830		120,830		120,830		120,830
Packaging design		10			430,973		430,973		430,973		430,973
Trademark/Non-competition agreements	5	-	20		556,339		323,722		715,339		297,072
Franchise rights		20			5,979,637		3,195,910		5,979,637		2,931,949
Total				$	7,482,605	$	4,287,838	$	7,542,558	$	3,996,477
Intangible assets not subject to amortization
Franchising segment-
Company stores goodwill				$	515,065			$	832,308
Franchising goodwill					97,318				97,318
Manufacturing segment-goodwill					97,318				97,318
Trademark					20,000				20,000
Total goodwill					729,701				1,046,944
Total Intangible Assets				$	8,212,306	$	4,287,838	$	8,589,502	$	3,996,477

Amortization expense related to intangible assets totaled

$142,804

and

$291,361

during the

three

and

six

months ended

August 31, 2020

compared to

$176,544

and

$353,088

during the

three

and

six

months ended

August 31, 2019,

respectively.

At

August 31, 2020,

annual amortization of intangible assets, based upon the Company's existing intangible assets and current useful lives, is estimated to be the following:

2021		274,705
2022		466,554
2023		391,988
2024		329,267
2025		277,022
Thereafter		1,281,184
Total	$	3,020,720

During FY

2020,

the Company initiated a store design project.  The initiative is expected to add approximately

$250,000

of intangible assets, of which,

$174,000

was recorded as of

August 31, 2020. 

This amount will be subject to amortization upon conclusion of the project.

XML

Note 8 - Impairment of Long-lived and Intangible Assets

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Asset Impairment Charges [Text Block]

NOTE

8

– IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS

We assess the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances indicate the carrying value of the assets or asset group

may

not

be recoverable. Due to the significant impact of the COVID-

19

pandemic on our operations, we determined it was necessary to perform an interim test of our long-lived assets during the

three

months ended

May 31, 2020.

Based on the results of these assessments, we recorded

$545,000

of goodwill impairment expense. This expense is presented within general and administrative expense on the Consolidated Statements of Operations.

No

additional tests for impairment were determined to be necessary during the

three

months ended

August 31, 2020.

The assessment of our goodwill, trademark and long-lived asset fair values includes many assumptions that are subject to risk and uncertainties. The primary assumptions, which are all Level

3

inputs of the fair value hierarchy (inputs to the valuation methodology that are unobservable and significant to the fair value measurement), used in our impairment testing consist of:

● Expected future cash flows from operation of our Company-owned units.

● Forecasted future royalty revenue, marketing revenue and associated expenses.

● Projected rate of royalty savings on trademarks.

● Our cost of capital.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

As of

August 31, 2020,

costs associated with the impairment of long-lived and intangible assets consist of the following:

Company store goodwill impairment	$	317,243
Trademark intangible asset impairment		159,000
Company-owned store impairment of long-lived assets and inventory		68,558
Total	$	544,801

Certain interim tests did

not

indicate a need for impairment. Franchise rights, store design, manufacturing segment goodwill and franchising goodwill tests succeeded during the interim period. We believe we have made reasonable estimates and judgements, however, further COVID-

19

-related impacts could cause interim testing to be performed in future periods and further impairments recorded if testing of impairments are

not

successful in future periods.

XML

Note 9 - Line of Credit and Long-term Debt

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Long-term Debt [Text Block]

NOTE

9

– LINE OF CREDIT AND LONG-TERM DEBT

The Company has a

$5.0

million credit line for general corporate and working capital purposes. On

March 16, 2020,

as a precautionary measure, in light of the COVID-

19

pandemic and the related economic impacts, the Company drew the maximum amount available on the credit line in an amount equal to

$3.4

million (the full amount of

$5.0

million under the credit line, subject to the borrowing base of

50%

of eligible accounts receivable plus

50%

of eligible inventories). The credit line is secured by substantially all of the Company's assets, except retail store assets. Interest on borrowings is at LIBOR plus

2.25%

(

2.4%

at

August 31, 2020).

Additionally, the line of credit is subject to various financial ratio and leverage covenants. At

August 31, 2020,

the Company was

not

compliant with a covenant of the line of credit that requires the Company to have

$1.5

million of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the trailing

twelve

months ended

August 31, 2020.

As a result of COVID-

19,

the Company failed to meet the amount of EBITDA required by this covenant. On

June 26, 2020

and on

October 5, 2020

Wells Fargo Bank, NA (“Wells Fargo”) delivered to the Company Reservation of Rights Letters (“Bank Letters”). The Bank Letters reserved all rights available to Wells Fargo under the Credit Agreement dated

October 30, 2015

including, but

not

limited to, the right of Wells Fargo to demand immediate payment of all amounts outstanding under the Credit Agreement. The Bank Letters also placed restrictions on the Company's ability to draw any further funds on the line of credit. The Company intends to work with Wells Fargo to amend the associated covenants as the trends related to COVID-

19

begin to become clear. There is

no

assurance that Wells Fargo will agree to any proposed amendment. The credit line is subject to renewal in

September 2021

and the Company believes it is likely to be renewed on terms similar to the current terms, subject to the Company's recovery from the impacts of COVID-

19.

The Company's long-term debt is comprised of promissory notes pursuant to the PPP, under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA Loans”). The Company received total proceeds of

$1.5

million from the SBA Loans. The SBA Loans are scheduled to mature in

April 2022

and have a

1.00%

interest rate, and are subject to the terms and conditions applicable to loans administered by the CARES Act. The SBA Loans

may

be prepaid by the Company at any time prior to maturity with

no

prepayment penalties. As of

August 31, 2020,

the Company is in compliance with all provisions related to the SBA Loans.

The SBA Loans contain customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the SBA Loans

may

be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by the Company during the period after the loan origination for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that, among other things, at least

60

-

75%

of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at a certain level. In accordance with the requirements of the CARES Act and the PPP, the Company believes it has used the proceeds from the SBA Loans for qualifying expenses.

No

assurance can be given that the Company will be granted forgiveness of the SBA Loans in whole or in part. As of

August 31, 2020,

the Company had recorded approximately

$5,855

of interest expense payable related to the SBA Loans.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

As of

August 31, 2020

and

February

29,

2020,

notes payable consisted of the following:

	August 31, 2020			February 29, 2020
Paycheck protection program note payable in monthly installments of principal and interest at 1.0% per annum through April 2022	$	1,542,306		$	-
Less: current maturities		(847,731	)		-
Long-term obligations	$	694,575		$	-

XML

Note 10 - Stockholders' Equity

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

NOTE

10

– STOCKHOLDERS' EQUITY

Cash Dividend

The Company paid a quarterly cash dividend of

$0.12

per common share on

March 15, 2019

to stockholders of record on

March 5, 2019.

The Company paid a quarterly cash dividend of

$0.12

per share of common stock on

June 14, 2019

to stockholders of record on

June 4, 2019.

The Company paid a quarterly cash dividend of

$0.12

per share of common stock on

September 13, 2019

to stockholders of record on

September 4, 2019.

The Company paid a quarterly cash dividend of

$0.12

per share of common stock on

December 6, 2019

to stockholders of record on

November 22, 2019.

The Company paid a quarterly cash dividend of

$0.12

per share of common stock on

March 13, 2020

to stockholders of record on

February 28, 2020.

Future declarations of dividends will depend on, among other things, the Company's results of operations, financial condition, capital requirements, and on such other factors as the Company's Board of Directors

may

in its discretion consider relevant and in the best long-term interest of the Company's stockholders.

As previously announced in

May 2020,

the Board of Directors suspended the Company's

first

quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment as a result of the economic impact of COVID-

19.

Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and global economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of the Company and its stockholders.

Stock Repurchases

On

July 15, 2014,

the Company publicly announced a plan to repurchase up to

$3.0

million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On

January 13, 2015,

the Company announced a plan to purchase up to an additional

$2,058,000

of its common stock under the repurchase plan, and on

May 21, 2015,

the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional

$2,090,000

of its common stock under the repurchase plan. The Company did

not

repurchase any shares during the

three

and

six

months ended

August 31, 2020.

As of

August 31, 2020,

approximately

$638,000

remains available under the repurchase plan for further stock repurchases.

Warrants

In consideration of Edible entering into the exclusive supplier agreement and the performance of its obligations therein, on

December 20, 2019,

the Company issued Edible a warrant (the “Warrant”) to purchase up to

960,677

shares of the Company's common stock (the “Warrant Shares”) at an exercise price of

$8.76

per share. The Warrant Shares vest in annual tranches in varying amounts following each contract year under the exclusive supplier agreement, subject to, and only upon, Edible's achievement of certain revenue thresholds on an annual or cumulative

five

-year basis in connection with its performance under the exclusive supplier agreement. The Warrant expires

six

months after the final and conclusive determination of revenue thresholds for the

fifth

contract year and the cumulative revenue determination in accordance with the terms of the Warrant.

The Company determined that the grant date fair value of the warrants was de minimis and did

not

record any amount in consideration of the warrants. The Company utilized a Monte Carlo model for purposes of determining the grant date fair value.

Stock-Based Compensation

Under the Company's

2007

Equity Incentive Plan (as amended and restated) (the

“2007

Plan”), the Company

may

authorize and grant stock awards to employees, non-employee directors and certain other eligible participants, including stock options, restricted stock and restricted stock units. On

September 17, 2020,

the Company's stockholders approved an amendment and restatement of the

2007

Plan to (

1

) increase the number of authorized shares under the

2007

Plan by

300,000

shares and (

2

) to extend the term of the

2007

Plan to

September 17, 2030.

As of the filing date of this report, there were

319,324

shares available for issuance as awards under the

2007

Plan.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

The Company recognized

$143,719

and

$287,437

of stock-based compensation expense during the

three

- and

six

-month periods ended

August 31, 2020,

respectively, compared to

$155,416

and

$386,670

during the

three

- and

six

-month periods ended

August 31, 2019,

respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.

The following table summarizes restricted stock unit activity during the

six

months ended

August 31, 2020

and

2019:

	Six Months Ended
	August 31,
	2020			2019
Outstanding non-vested restricted stock units as of February 28 or 29:		265,555			25,002
Granted		-			270,000
Vested		(47,929	)		(28,502	)
Cancelled/forfeited		-			-
Outstanding non-vested restricted stock units as of August 31:		217,626			266,500
Weighted average grant date fair value	$	9.40		$	9.40
Weighted average remaining vesting period (in years)		4.15			5.14

The Company did

not

issue any unrestricted shares of stock to non-employee directors during the

six

months ended

August 31, 2020

compared to an aggregate of

4,833

shares issued during the

six

months ended

August 31, 2019.

In connection with these non-employee director stock issuances, the Company recognized

$0

and

$45,652

of stock-based compensation expense during the

six

months ended

August 31, 2020

and

2019,

respectively.

During the

three

- and

six

-month periods ended

August 31, 2020,

the Company recognized

$143,719

and

$287,437,

respectively, of stock-based compensation expense related to restricted stock unit grants. The restricted stock unit grants generally vest in equal annual or quarterly installments over a period of

five

to

six

years. During the

six

-month periods ended

August 31, 2020

and

2019,

47,929

and

28,502

restricted stock units vested and were issued as common stock, respectively. Total unrecognized compensation expense of non-vested, non-forfeited restricted stock units granted as of

August 31, 2020

was

$1,850,943,

which is expected to be recognized over the weighted-average period of

4.15

years.

The Company has

no

outstanding stock options as of

August 31, 2020.

XML

Note 11 - Earnings Per Share

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Earnings Per Share [Text Block]

NOTE

11

– EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through the settlement of restricted stock units. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.

The weighted-average number of shares outstanding used in the computation of diluted earnings per share does

not

include outstanding common shares issuable if their effect would be anti-dilutive. During the

six

months ended

August 31, 2020,

960,677

shares of common stock warrants and

222,634

shares of issuable common stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

XML

Note 12 - Leasing Arrangements

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

NOTE

12

– LEASING ARRANGEMENTS

The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to

ten

years. Certain leases contain renewal options for between

five

and

ten

additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels. 

The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing locations are leased by the franchisee directly. Currently, there are

not

indications that the Company will be required to make any payments on behalf of franchisees.

In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

The Company also leases trucking equipment and warehouse space in support of its manufacturing operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.

ASU

2016

-

02

allows, as a practical expedient, the retention of the classification of existing leases as operating or financing. All of the Company's leases are classified as operating leases and that classification has been retained upon adoption. The Company does

not

believe the utilization of this practical expedient has a material impact on lease classifications.

The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. During the

six

months ended

August 31, 2020

and

2019,

lease expense recognized in the Consolidated Statements of Income was

$440,121

and

$478,707,

respectively.

The amount of the Right of Use Asset and Lease Liability recorded upon the adoption of ASU

2016

-

02

was

$3.3

million. The lease liability reflects the present value of the Company's estimated future minimum lease payments over the life of its leases. This includes known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the sales performance of the location remains strong. Therefore, the Right of Use Asset and Lease Liability include an assumption on renewal options that have

not

yet been exercised by the Company, and are

not

currently a future obligation. The Company has separated non-lease components from lease components in the recognition of the Asset and Liability except in instances where such costs were

not

practical to separate. To the extent that occupancy costs, such as site maintenance, are included in the Asset and Liability, the impact is immaterial. For franchised locations, the related occupancy costs including property taxes, insurance and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee under non-store related leases such as storage facilities and trucking equipment. For leases where the implicit rate is

not

readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease. The weighted average discount rate used for operating leases was

3.4%

as of

August 31, 2020.

The total estimated future minimum lease payments is

$2.6

million.

As of

August 31, 2020,

maturities of lease liabilities for the Company's operating leases were as follows:

FY 21	$	411,447
FY 22		694,755
FY 23		437,445
FY 24		315,962
FY 25		164,223
Thereafter		552,818
Total	$	2,576,650
Less: imputed interest		(241,808	)
Present value of lease liabilities:	$	2,334,842
Weighted average lease term (in years)	6.7

During the

three

months ended

August 31, 2019,

the Company entered into a lease amendment to extend the term of a lease for a Company-owned location. This lease amendment resulted in the Company recognizing a present value of future lease liability of

$476,611

based upon a total lease liability of

$532,811.

XML

Note 13 - Commitments and Contingencies

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

NOTE

13

– COMMITMENTS AND CONTINGENCIES

Purchase contracts

The Company frequently enters into purchase contracts of between

six

to

eighteen

months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products

may

fluctuate, the Company

may

benefit if prices rise during the terms of these contracts, but it

may

be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of

August 31, 2020,

the Company was contracted for approximately

$100,000

of raw materials under such agreements. The Company has designated these contracts as normal under the normal purchase and sale exception under the accounting standards for derivatives. These contracts are

not

entered into for speculative purposes.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

XML

Note 14 - FTD Loss Contingency

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Contingencies Disclosure [Text Block]

NOTE

14

– FTD LOSS CONTINGENCY

In

June 2019,

the Company's largest customer at the time, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter

11

bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD's business and certain related assets, including the divisions that the Company has historically sold product to, were sold through an auction to multiple buyers.

The Company historically conducted business with FTD under a Gourmet Foods Supplier Agreement (the “FTD Supplier Agreement”), that among other provisions, provided assurance that custom inventory purchased by the Company and developed specifically for FTD would be purchased by FTD upon termination of the FTD Supplier Agreement. In

September 2019,

the Company received notice that the bankruptcy court had approved FTD to reject and

not

enforce the FTD Supplier Agreement as part of the proceedings.

As a result of FTD's bankruptcy, the sale of certain assets, and the court's approval to reject and

not

enforce the terms of the FTD Supplier Agreement, the Company is uncertain if accounts receivable and inventory balances associated with FTD at

August 31, 2020

will be realized at their full value, or if any revenue will be received from FTD in the future.

As of

August 31, 2020,

the Company had recorded inventory and receivables related to FTD of approximately

$226,000

and

$80,000,

respectively. The Company had also established reserves of approximately

$146,000

for expected losses on FTD inventory and receivables upon the conclusion of the bankruptcy proceedings.

XML

Note 15 - Income Taxes

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

15

– INCOME TAXES

Under the recently enacted CARES Act a net operating loss (“NOL”) arising during the Company's fiscal year

2021

can be carried back for

five

years to offset the Company's taxable income for fiscal years

2016

-

2020.

This

five

-year period spans Federal effective tax rates for the Company ranging from

21%

to

34%,

the result of the Tax Cuts and Jobs Act enacted during the Company's fiscal year ended

February 28, 2018.

The Company's deferred tax assets are valued at the current federally enacted rate of

21%.

If the Company were to continue to realize NOLs in future periods, or incur a NOL for all of fiscal year

2021

the loss carryback provisions of the CARES Act

may

enable the Company to offset taxable income from prior years when federally enacted tax rates were higher than

21%.

Under such a scenario, the Company would incur a gain associated with the revaluation of the Company's deferred tax assets to the extent that prior taxable income during periods of higher enacted federal tax rates could be offset by current NOLs.

As of

August 31, 2020,

the Company is in the process of analyzing the different aspects of the CARES Act to quantify the impact of these provisions on the Company's income taxes.

XML

Note 16 - Operating Segments

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

NOTE

16

– OPERATING SEGMENTS

The Company classifies its business interests into

five

reportable segments: Franchising, Manufacturing, Retail Stores, U-Swirl operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note

1

to these consolidated financial statements and Note

1

to the Company's consolidated financial statements included in the Company's Annual Report on Form

10

-K for the fiscal year ended

February

29,

2020.

The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocatedcorporate general and administrative costs and income tax expense or benefit. The Company's reportable segments are strategic businesses that utilize common merchandising, distribution and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended August 31, 2020	Franchising			Manufacturing			Retail		U-Swirl		Other			Total
Total revenues	$	1,040,863		$	3,768,416		$	193,702	$	594,812	$	-		$	5,597,793
Intersegment revenues		(727	)		(269,664	)		-		-		-			(270,391	)
Revenue from external customers		1,040,136			3,498,752			193,702		594,812		-			5,327,402
Segment profit (loss)		366,535			489,668			21,924		11,903		(789,297	)		100,733
Total assets		1,387,005			12,241,965			618,323		5,526,772		9,413,374			29,187,439
Capital expenditures		150			11,343			72		-		16,799			28,364
Total depreciation & amortization	$	10,095		$	162,523		$	1,391	$	140,823	$	20,021		$	334,853

Three Months Ended August 31, 2019	Franchising			Manufacturing			Retail		U-Swirl		Other			Total
Total revenues	$	1,515,805		$	4,714,682		$	265,662	$	1,122,751	$	-		$	7,618,900
Intersegment revenues		(1,321	)		(232,309	)		-		-		-			(233,630	)
Revenue from external customers		1,514,484			4,482,373			265,662		1,122,751		-			7,385,270
Segment profit (loss)		828,978			955,360			7,979		296,880		(841,434	)		1,247,763
Total assets		1,445,041			11,838,237			1,005,356		5,620,012		9,377,697			29,286,343
Capital expenditures		(2,040	)		162,127			23,106		1,673		12,570			197,436
Total depreciation & amortization	$	10,353		$	151,848		$	2,533	$	185,208	$	22,891		$	372,833

Six Months Ended August 31, 2020	Franchising			Manufacturing			Retail			U-Swirl			Other			Total
Total revenues	$	1,295,339		$	6,061,508		$	253,683		$	848,859		$	-		$	8,459,389
Intersegment revenues		(1,409	)		(428,141	)		-			-			-			(429,550	)
Revenue from external customers		1,293,930			5,633,367			253,683			848,859			-			8,029,839
Segment profit (loss)		(84,784	)		(293,801	)		(455,902	)		(445,815	)		(3,465,690	)		(4,745,992	)
Total assets		1,387,005			12,241,965			618,323			5,526,772			9,413,374			29,187,439
Capital expenditures		150			25,197			72			1,712			23,722			50,853
Total depreciation & amortization	$	20,233		$	324,353		$	4,794		$	287,772		$	40,815		$	677,967

Six Months Ended August 31, 2019	Franchising			Manufacturing			Retail			U-Swirl		Other			Total
Total revenues	$	2,944,846		$	10,581,154		$	498,081		$	2,282,556	$	-		$	16,306,637
Intersegment revenues		(2,607	)		(492,761	)		-			-		-			(495,368	)
Revenue from external customers		2,942,239			10,088,393			498,081			2,282,556		-			15,811,269
Segment profit (loss)		1,446,888			2,124,047			(7,033	)		576,043		(1,948,398	)		2,191,547
Total assets		1,445,041			11,838,237			1,005,356			5,620,012		9,377,697			29,286,343
Capital expenditures		8,500			385,679			32,624			1,673		52,508			480,984
Total depreciation & amortization	$	21,183		$	301,980		$	5,143		$	375,977	$	46,203		$	750,486

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Significant Accounting Policies (Policies)

6 Months Ended

Aug. 31, 2020

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and Securities and Exchange Commission (the “SEC”) regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the

three

and

six

months ended

August 31, 2020

are

not

necessarily indicative of the results to be expected for the entire fiscal year, or any other future period.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form

10

-K for the fiscal year ended

February

29,

2020.

The year-end balance sheet data was derived from audited financial statements for the year ended

February

29,

2020,

but does

not

include all disclosures required by GAAP.

Subsequent Events, Policy [Policy Text Block]

Subsequent Events

Management evaluated all activity of the Company through the issue date of the financial statements and concluded that

no

subsequent events have occurred that would require recognition or disclosure in the financial statements. 

COVID-19 Update [Policy Text Block]

As discussed in more detail throughout this Quarterly Report on Form

10

-Q for the

three

and

six

months ended

August 31, 2020 (

this “Quarterly Report”), we have experienced significant business disruptions resulting from efforts to contain the rapid spread of the novel coronavirus ("COVID-

19"

), including the vast mandated self-quarantines of customers and closures of non-essential business throughout the United States and internationally. Nearly all of the Company-owned and franchise stores were directly and negatively impacted by public health measures taken in response to COVID-

19,

with nearly all locations experiencing reduced operations as a result of, among other things, modified business hours and store and mall closures. As a result, franchisees and licensees are

not

ordering products for their stores in line with historical amounts. This trend has negatively impacted, and is expected to continue to negatively impact, among other things, factory sales, retail sales and royalty and marketing fees. Beginning in

May 2020

and continuing through

August 2020,

most stores previously closed for much of

March 2020

and

April 2020

in response to the COVID-

19

pandemic, began to re-open. As of

August 31, 2020

approximately

27

stores have

not

re-opened and the future of these locations is uncertain.  This is a closure rate significantly higher than historical levels. By

August 31, 2020,

certain stores have met or exceeded pre-COVID-

19

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 with reduced operations. It is unclear when or if store operations will return to pre-COVID-

19

levels.

In addition, as previously announced in

May 2020,

the Board of Directors suspended the Company's

first

quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-

19

pandemic. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of the Company and its stockholders.

During this challenging time, the Company's foremost priority is the safety and well-being of our employees, customers, franchisees and communities. In addition to the already stringent practices for the quality and safety of the Company's confections, the Company is diligently following health and safety guidance issued by the World Health Organization, the Centers for Disease Control and state and local governmental agencies. The COVID-

19

pandemic has had an unprecedented impact on the retail industry as containment measures continue to impact the Company's operations and the retail industry. Numerous countries, states and local governments have effected ordinances to protect the public through social distancing, which has caused, and we expect will continue to cause, a significant decrease in, among other things, retail traffic and as a result, factory sales, retail sales and royalty and marketing fees. With that said, Rocky Mountain Chocolate Factory products remain available for sale online. The Company's current focus is on supporting its franchisees and licensees during this challenging time and driving growth in online sales, especially in light of the ecommerce licensing agreement with Edible, as discussed below, while also sensibly managing costs. The number of Company-owned and franchise stores remaining open

may

change frequently and significantly due to the ever-changing nature of the COVID-

19

outbreak.

In these challenging and unprecedented times, management is taking all necessary and appropriate action to maximize liquidity as the Company navigates the current landscape. These actions include significantly reducing operating expenses and production volume to reflect reduced sales volumes as well as the elimination of all non-essential spending and capital expenditures. Further, in an abundance of caution and to maintain ample financial flexibility, the Company drew down the full amount under our line of credit and the Company received loans under the Paycheck Protection Program (the “PPP”). See Note

9

for additional information regarding our debt obligations. The receipt of funds under our debt obligations has allowed the Company to temporarily avoid workforce reduction measures amidst a steep decline in revenue and production volume. While the Company believes it has sufficient liquidity with its current cash position, the Company will continue to monitor and evaluate all financing alternatives as necessary as these unprecedented events evolve. For more information, please see Item

1A

“Risk Factors—The Novel Coronavirus (COVID-

19

) Pandemic Has, and

May

Continue to, Materially and Adversely Affect our Sales, Earnings, Financial Condition and Liquidity” in our Annual Report on Form

10

-K as filed on

May 29, 2020

with the United States Securities and Exchange Commission

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

Except for the recent accounting pronouncements described below, other recent accounting pronouncements are

not

expected to have a material impact on our consolidated financial statements.

In

June 2016,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

2016

-

13,

Financial Instruments - Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments. ASU

2016

-

13

significantly changes the impairment model for most financial assets and certain other instruments. ASU

2016

-

13

will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU

2016

-

13

is effective for the Company's fiscal year beginning

March 1, 2023

and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU

2016

-

13

will have on the Company's consolidated financial statements.

In

January 2017,

the FASB issued ASU

2017

-

04,

Intangibles—Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment. ASU

2017

-

04

simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step

2

from the goodwill impairment test. Under the amendments in ASU

2017

-

04,

an entity should (

1

) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (

2

) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, with the understanding that the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU

2017

-

04

requires any reporting unit with a

zero

or negative carrying amount to perform Step

2

of the goodwill impairment test. We adopted ASU

2017

-

04

effective

March 1, 2020 (

the

first

quarter of our

2021

fiscal year). The adoption of ASU

2017

-

04

did

not

have a material impact on our consolidated financial statements.

In

December 2019,

the FASB issued ASU

2019

-

12,

Income Taxes (Topic

740

): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2020

on a prospective basis, with early adoption permitted. We will adopt ASU

2019

-

12

effective

March 1, 2021

and do

not

expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Related Party Transactions, Policy [Policy Text Block]

Related Party Transactions

As described above, in FY

2020,

we entered into a long-term strategic alliance whereby we became the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. Also in FY

2020,

the founder and Chief Executive Officer of Edible was elected to the Company's Board of Directors at the Company's Annual Meeting of Stockholders. During the

six

months ended

August 31, 2020,

the Company recognized approximately

$949,000

of revenue related to purchases from Edible, its affiliates and its franchisees. As of

August 31, 2020

the company recognized approximately

$718,000

of accounts receivable from Edible its affiliates and its franchisees.

XML

Note 1 - Nature of Operations and Basis of Presentation (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Number of Stores [Table Text Block]

	Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		2		2
Franchise stores - Domestic stores and kiosks		5		162		167
International license stores		1		58		59
Cold Stone Creamery - co-branded		5		98		103
U-Swirl (Including all associated brands)
Company-owned stores - co-branded		-		3		3
Franchise stores - Domestic stores		-		69		69
Franchise stores - Domestic - co-branded		1		7		8
International license stores		-		2		2
Total		12		401		413

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Note 2 - Supplemental Cash Flow Information (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Schedule of Cash Flow, Supplemental Disclosures [Table Text Block]

	Six Months Ended
	August 31,
Cash paid for:	2020		2019
Interest	$	46,441	$	16,677
Income taxes		71		314,417
Non-cash Operating Activities
Accrued Inventory		394,697		237,842
Non-cash Financing Activities
Dividend payable	$	-	$	719,359

XML

Note 3 - Revenue From Contracts With Customers (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Contract with Customer, Contract Asset, Contract Liability, and Receivable [Table Text Block]

	Six Months Ended
	August 31:
	2020			2019
Contract liabilities at the beginning of the year:	$	1,155,809		$	1,352,572
Revenue recognized		(128,636	)		(188,209	)
Contract fees received		53,500			57,833
Amortized gain on the financed sale of equipment		(4,176	)		(6,267	)
Contract liabilities at the end of the period:	$	1,076,497		$	1,215,929

Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Table Text Block]

FY 21	$	94,959
FY 22		182,079
FY 23		170,353
FY 24		137,744
FY 25		124,461
Thereafter		366,901
Total	$	1,076,497

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Note 4 - Disaggregation of Revenue (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Disaggregation of Revenue [Table Text Block]

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	49,130	$	-	$	-	$	24,490	$	73,620

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		3,498,752		-		-		3,498,752
Retail sales		-		-		193,702		301,698		495,400
Royalty and marketing fees		991,006		-		-		268,624		1,259,630
Total	$	1,040,136	$	3,498,752	$	193,702	$	594,812	$	5,327,402

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	65,327	$	-	$	-	$	16,602	$	81,929

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		4,482,373		-		-		4,482,373
Retail sales		-		-		265,662		636,005		901,667
Royalty and marketing fees		1,449,157		-		-		470,144		1,919,301
Total	$	1,514,484	$	4,482,373	$	265,662	$	1,122,751	$	7,385,270

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	90,832	$	-	$	-	$	37,804	$	128,636

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		5,633,367		-		-		5,633,367
Retail sales		-		-		253,683		429,313		682,996
Royalty and marketing fees		1,203,098		-		-		381,742		1,584,840
Total	$	1,293,930	$	5,633,367	$	253,683	$	848,859	$	8,029,839

	Franchising		Manufacturing		Retail		U-Swirl		Total
Franchise fees	$	145,346	$	-	$	-	$	42,863	$	188,209

	Franchising		Manufacturing		Retail		U-Swirl		Total
Factory sales		-		10,088,393		-		-		10,088,393
Retail sales		-		-		498,081		1,258,177		1,756,258
Royalty and marketing fees		2,796,893		-		-		981,516		3,778,409
Total	$	2,942,239	$	10,088,393	$	498,081	$	2,282,556	$	15,811,269

XML

Note 5 - Inventories (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	August 31, 2020			February 29, 2020
Ingredients and supplies	$	2,772,234		$	2,186,652
Finished candy		3,068,858			1,827,767
U-Swirl food and packaging		41,814			56,708
Reserve for slow moving inventory		(156,480	)		(320,149	)
Total inventories	$	5,726,426		$	3,750,978

XML

Note 6 - Property and Equipment, Net (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Property, Plant and Equipment [Table Text Block]

	August 31, 2020			February 29, 2020
Land	$	513,618		$	513,618
Building		5,031,395			5,031,395
Machinery and equipment		10,037,869			10,664,396
Furniture and fixtures		797,303			852,557
Leasehold improvements		985,407			1,154,396
Transportation equipment		429,789			440,989
		17,795,381			18,657,351
Less accumulated depreciation		(12,261,480	)		(12,719,338	)
Property and equipment, net	$	5,533,901		$	5,938,013

XML

Note 7 - Goodwill and Intangible Assets (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Schedule of Intangible Assets and Goodwill [Table Text Block]

				August 31, 2020				February 29, 2020
	Amortization Period (in years)			Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Intangible assets subject to amortization
Store design		10		$	394,826	$	216,403	$	295,779	$	215,653
Packaging licenses	3	-	5		120,830		120,830		120,830		120,830
Packaging design		10			430,973		430,973		430,973		430,973
Trademark/Non-competition agreements	5	-	20		556,339		323,722		715,339		297,072
Franchise rights		20			5,979,637		3,195,910		5,979,637		2,931,949
Total				$	7,482,605	$	4,287,838	$	7,542,558	$	3,996,477
Intangible assets not subject to amortization
Franchising segment-
Company stores goodwill				$	515,065			$	832,308
Franchising goodwill					97,318				97,318
Manufacturing segment-goodwill					97,318				97,318
Trademark					20,000				20,000
Total goodwill					729,701				1,046,944
Total Intangible Assets				$	8,212,306	$	4,287,838	$	8,589,502	$	3,996,477

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

2021		274,705
2022		466,554
2023		391,988
2024		329,267
2025		277,022
Thereafter		1,281,184
Total	$	3,020,720

XML

Note 8 - Impairment of Long-lived and Intangible Assets (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Details of Impairment of Long-Lived Assets Held and Used by Asset [Table Text Block]

Company store goodwill impairment	$	317,243
Trademark intangible asset impairment		159,000
Company-owned store impairment of long-lived assets and inventory		68,558
Total	$	544,801

XML

Note 9 - Line of Credit and Long-term Debt (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Schedule of Long-term Debt Instruments [Table Text Block]

	August 31, 2020			February 29, 2020
Paycheck protection program note payable in monthly installments of principal and interest at 1.0% per annum through April 2022	$	1,542,306		$	-
Less: current maturities		(847,731	)		-
Long-term obligations	$	694,575		$	-

XML

Note 10 - Stockholders' Equity (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Share-based Payment Arrangement, Restricted Stock Unit, Activity [Table Text Block]

	Six Months Ended
	August 31,
	2020			2019
Outstanding non-vested restricted stock units as of February 28 or 29:		265,555			25,002
Granted		-			270,000
Vested		(47,929	)		(28,502	)
Cancelled/forfeited		-			-
Outstanding non-vested restricted stock units as of August 31:		217,626			266,500
Weighted average grant date fair value	$	9.40		$	9.40
Weighted average remaining vesting period (in years)		4.15			5.14

XML

Note 12 - Leasing Arrangements (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

FY 21	$	411,447
FY 22		694,755
FY 23		437,445
FY 24		315,962
FY 25		164,223
Thereafter		552,818
Total	$	2,576,650
Less: imputed interest		(241,808	)
Present value of lease liabilities:	$	2,334,842
Weighted average lease term (in years)	6.7

XML

Note 16 - Operating Segments (Tables)

6 Months Ended

Aug. 31, 2020

Notes Tables

Schedule of Segment Reporting Information, by Segment [Table Text Block]

Three Months Ended August 31, 2020	Franchising			Manufacturing			Retail		U-Swirl		Other			Total
Total revenues	$	1,040,863		$	3,768,416		$	193,702	$	594,812	$	-		$	5,597,793
Intersegment revenues		(727	)		(269,664	)		-		-		-			(270,391	)
Revenue from external customers		1,040,136			3,498,752			193,702		594,812		-			5,327,402
Segment profit (loss)		366,535			489,668			21,924		11,903		(789,297	)		100,733
Total assets		1,387,005			12,241,965			618,323		5,526,772		9,413,374			29,187,439
Capital expenditures		150			11,343			72		-		16,799			28,364
Total depreciation & amortization	$	10,095		$	162,523		$	1,391	$	140,823	$	20,021		$	334,853

Three Months Ended August 31, 2019	Franchising			Manufacturing			Retail		U-Swirl		Other			Total
Total revenues	$	1,515,805		$	4,714,682		$	265,662	$	1,122,751	$	-		$	7,618,900
Intersegment revenues		(1,321	)		(232,309	)		-		-		-			(233,630	)
Revenue from external customers		1,514,484			4,482,373			265,662		1,122,751		-			7,385,270
Segment profit (loss)		828,978			955,360			7,979		296,880		(841,434	)		1,247,763
Total assets		1,445,041			11,838,237			1,005,356		5,620,012		9,377,697			29,286,343
Capital expenditures		(2,040	)		162,127			23,106		1,673		12,570			197,436
Total depreciation & amortization	$	10,353		$	151,848		$	2,533	$	185,208	$	22,891		$	372,833

Six Months Ended August 31, 2020	Franchising			Manufacturing			Retail			U-Swirl			Other			Total
Total revenues	$	1,295,339		$	6,061,508		$	253,683		$	848,859		$	-		$	8,459,389
Intersegment revenues		(1,409	)		(428,141	)		-			-			-			(429,550	)
Revenue from external customers		1,293,930			5,633,367			253,683			848,859			-			8,029,839
Segment profit (loss)		(84,784	)		(293,801	)		(455,902	)		(445,815	)		(3,465,690	)		(4,745,992	)
Total assets		1,387,005			12,241,965			618,323			5,526,772			9,413,374			29,187,439
Capital expenditures		150			25,197			72			1,712			23,722			50,853
Total depreciation & amortization	$	20,233		$	324,353		$	4,794		$	287,772		$	40,815		$	677,967

Six Months Ended August 31, 2019	Franchising			Manufacturing			Retail			U-Swirl		Other			Total
Total revenues	$	2,944,846		$	10,581,154		$	498,081		$	2,282,556	$	-		$	16,306,637
Intersegment revenues		(2,607	)		(492,761	)		-			-		-			(495,368	)
Revenue from external customers		2,942,239			10,088,393			498,081			2,282,556		-			15,811,269
Segment profit (loss)		1,446,888			2,124,047			(7,033	)		576,043		(1,948,398	)		2,191,547
Total assets		1,445,041			11,838,237			1,005,356			5,620,012		9,377,697			29,286,343
Capital expenditures		8,500			385,679			32,624			1,673		52,508			480,984
Total depreciation & amortization	$	21,183		$	301,980		$	5,143		$	375,977	$	46,203		$	750,486

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Note 1 - Nature of Operations and Basis of Presentation (Details Textual)	6 Months Ended
	Aug. 31, 2020 USD ($)	May 31, 2020
Edible [Member]
Revenue from Related Parties	$ 949,000
Accounts Receivable, Related Parties, Current	$ 718,000
COVID-19 Pandemic [Member]
Number of Stores Not Reopened	27
USwirl Inc [Member]
Noncontrolling Interest, Ownership Percentage by Parent		46.00%

XML

Note 1 - Nature of Operations and Basis of Presentation - Number of Stores (Details)	Aug. 31, 2020
Number of stores	413
Sold Not Yet Open [Member]
Number of stores	12
Open [Member]
Number of stores	401
Company Owned Stores [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	2
Company Owned Stores [Member] | Sold Not Yet Open [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	0
Company Owned Stores [Member] | Open [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	2
Franchise Stores - Domestic Stores and Kiosks [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	167
Franchise Stores - Domestic Stores and Kiosks [Member] | Sold Not Yet Open [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	5
Franchise Stores - Domestic Stores and Kiosks [Member] | Open [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	162
International License Stores [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	59
International License Stores [Member] | USwirl Inc [Member]
Number of stores	2
International License Stores [Member] | Sold Not Yet Open [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	1
International License Stores [Member] | Sold Not Yet Open [Member] | USwirl Inc [Member]
Number of stores	0
International License Stores [Member] | Open [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	58
International License Stores [Member] | Open [Member] | USwirl Inc [Member]
Number of stores	2
Cold Stone Creamery - Co-Branded [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	103
Cold Stone Creamery - Co-Branded [Member] | Sold Not Yet Open [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	5
Cold Stone Creamery - Co-Branded [Member] | Open [Member] | Rocky Mountain Chocolate Factory [Member]
Number of stores	98
Company Owned Stores Co-branded [Member] | USwirl Inc [Member]
Number of stores	3
Company Owned Stores Co-branded [Member] | Sold Not Yet Open [Member] | USwirl Inc [Member]
Number of stores	0
Company Owned Stores Co-branded [Member] | Open [Member] | USwirl Inc [Member]
Number of stores	3
Franchise Stores - Domestic Stores [Member] | USwirl Inc [Member]
Number of stores	69
Franchise Stores - Domestic Stores [Member] | Sold Not Yet Open [Member] | USwirl Inc [Member]
Number of stores
Franchise Stores - Domestic Stores [Member] | Open [Member] | USwirl Inc [Member]
Number of stores	69
Franchise Stores - Domestic Stores - Co-Branded [Member] | USwirl Inc [Member]
Number of stores	8
Franchise Stores - Domestic Stores - Co-Branded [Member] | Sold Not Yet Open [Member] | USwirl Inc [Member]
Number of stores	1
Franchise Stores - Domestic Stores - Co-Branded [Member] | Open [Member] | USwirl Inc [Member]
Number of stores	7

XML

Note 2 - Supplemental Cash Flow Information - Supplemental Cash Flow Information (Details) - USD ($)	6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019
Interest	$ 46,441	$ 16,677
Income taxes	71	314,417
Accrued Inventory	394,697	237,842
Dividend payable		$ 719,359

XML

Note 3 - Revenue From Contracts With Customers (Details Textual)	6 Months Ended
	Aug. 31, 2020
Customers Contracts, Term (Year)	10 years
Maximum [Member]
Customers Contracts, Term (Year)	20 years
Franchise Agreement, Term (Year)	15 years
Minimum [Member]
Franchise Agreement, Term (Year)	10 years

XML

Note 3 - Revenue From Contracts With Customers - Contract Liabilities (Details) - USD ($)	6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019
Contract liabilities at the beginning of the year:	$ 1,155,809	$ 1,352,572
Revenue recognized	(128,636)	(188,209)
Contract fees received	53,500	57,833
Amortized gain on the financed sale of equipment	(4,176)	(6,267)
Contract liabilities at the end of the period:	$ 1,076,497	$ 1,215,929

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Note 3 - Revenue From Contracts With Customers - Remaining Performance Obligation (Details)	Aug. 31, 2020 USD ($)
Revenue, remaining performance obligation, amount	$ 1,076,497

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Note 3 - Revenue From Contracts With Customers - Remaining Performance Obligation 2 (Details)	Aug. 31, 2020 USD ($)
Revenue, remaining performance obligation, amount	$ 1,076,497
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-09-01
Revenue, remaining performance obligation, period (Year)	182 days
Revenue, remaining performance obligation, amount	$ 94,959
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2021-03-01
Revenue, remaining performance obligation, period (Year)	1 year
Revenue, remaining performance obligation, amount	$ 182,079
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-03-01
Revenue, remaining performance obligation, period (Year)	1 year
Revenue, remaining performance obligation, amount	$ 170,353
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-03-01
Revenue, remaining performance obligation, period (Year)	1 year
Revenue, remaining performance obligation, amount	$ 137,744
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-03-01
Revenue, remaining performance obligation, period (Year)	1 year
Revenue, remaining performance obligation, amount	$ 124,461
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2025-03-01
Revenue, remaining performance obligation, period (Year)	1 year
Revenue, remaining performance obligation, amount	$ 366,901

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Note 4 - Disaggregation of Revenue - Disaggregation of Revenue (Details) - USD ($)	3 Months Ended		6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019	Aug. 31, 2020	Aug. 31, 2019
Revenues	$ 5,327,402	$ 7,385,270	$ 8,029,839	$ 15,811,269
Franchising [Member]
Revenues	1,040,136	1,514,484	1,293,930	2,942,239
Manufacturing [Member]
Revenues	3,498,752	4,482,373	5,633,367	10,088,393
Retail Segment [Member]
Revenues	193,702	265,662	253,683	498,081
USwirl Inc [Member]
Revenues	594,812	1,122,751	848,859	2,282,556
Franchise Fees [Member] | Transferred over Time [Member]
Revenues	73,620	81,929	128,636	188,209
Franchise Fees [Member] | Transferred over Time [Member] | Franchising [Member]
Revenues	49,130	65,327	90,832	145,346
Franchise Fees [Member] | Transferred over Time [Member] | Manufacturing [Member]
Revenues
Franchise Fees [Member] | Transferred over Time [Member] | Retail Segment [Member]
Revenues
Franchise Fees [Member] | Transferred over Time [Member] | USwirl Inc [Member]
Revenues	24,490	16,602	37,804	42,863
Factory Sales [Member] | Transferred at Point in Time [Member]
Revenues	3,498,752	4,482,373	5,633,367	10,088,393
Factory Sales [Member] | Transferred at Point in Time [Member] | Franchising [Member]
Revenues
Factory Sales [Member] | Transferred at Point in Time [Member] | Manufacturing [Member]
Revenues	3,498,752	4,482,373	5,633,367	10,088,393
Factory Sales [Member] | Transferred at Point in Time [Member] | Retail Segment [Member]
Revenues
Factory Sales [Member] | Transferred at Point in Time [Member] | USwirl Inc [Member]
Revenues
Retail [Member] | Transferred at Point in Time [Member]
Revenues	495,400	901,667	682,996	1,756,258
Retail [Member] | Transferred at Point in Time [Member] | Franchising [Member]
Revenues
Retail [Member] | Transferred at Point in Time [Member] | Manufacturing [Member]
Revenues
Retail [Member] | Transferred at Point in Time [Member] | Retail Segment [Member]
Revenues	193,702	265,662	253,683	498,081
Retail [Member] | Transferred at Point in Time [Member] | USwirl Inc [Member]
Revenues	301,698	636,005	429,313	1,258,177
Royalty and Marketing Fees [Member] | Transferred at Point in Time [Member]
Revenues	1,259,630	1,919,301	1,584,840	3,778,409
Royalty and Marketing Fees [Member] | Transferred at Point in Time [Member] | Franchising [Member]
Revenues	991,006	1,449,157	1,203,098	2,796,893
Royalty and Marketing Fees [Member] | Transferred at Point in Time [Member] | Manufacturing [Member]
Revenues
Royalty and Marketing Fees [Member] | Transferred at Point in Time [Member] | Retail Segment [Member]
Revenues
Royalty and Marketing Fees [Member] | Transferred at Point in Time [Member] | USwirl Inc [Member]
Revenues	$ 268,624	$ 470,144	$ 381,742	$ 981,516

XML

Note 5 - Inventories - Inventories (Details) - USD ($)	Aug. 31, 2020	Feb. 29, 2020
Ingredients and supplies	$ 2,772,234	$ 2,186,652
Finished candy	3,068,858	1,827,767
U-Swirl food and packaging	41,814	56,708
Reserve for slow moving inventory	(156,480)	(320,149)
Total inventories	$ 5,726,426	$ 3,750,978

XML

Note 6 - Property and Equipment, Net (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019	Aug. 31, 2020	Aug. 31, 2019
Depreciation, Total	$ 192,049	$ 196,288	$ 386,606	$ 397,398

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Note 6 - Property and Equipment, Net - Property and Equipment (Details) - USD ($)	Aug. 31, 2020	Feb. 29, 2020
Property, plant and equipment, gross	$ 17,795,381	$ 18,657,351
Less accumulated depreciation	(12,261,480)	(12,719,338)
Property and equipment, net	5,533,901	5,938,013
Land [Member]
Property, plant and equipment, gross	513,618	513,618
Building [Member]
Property, plant and equipment, gross	5,031,395	5,031,395
Machinery and Equipment [Member]
Property, plant and equipment, gross	10,037,869	10,664,396
Furniture and Fixtures [Member]
Property, plant and equipment, gross	797,303	852,557
Leasehold Improvements [Member]
Property, plant and equipment, gross	985,407	1,154,396
Transportation Equipment [Member]
Property, plant and equipment, gross	$ 429,789	$ 440,989

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Note 7 - Goodwill and Intangible Assets (Details Textual) - USD ($)	3 Months Ended		6 Months Ended		12 Months Ended	17 Months Ended
	Aug. 31, 2020	Aug. 31, 2019	Aug. 31, 2020	Aug. 31, 2019	Feb. 29, 2020	Aug. 31, 2020
Amortization of Intangible Assets, Total	$ 142,804	$ 176,544	$ 291,361	$ 353,088
Store Design [Member]
Intangible Assets, Expected Additions					$ 250,000
Finite-Lived Intangible Assets, Period Increase (Decrease), Total						$ 174,000

XML

Note 7 - Goodwill and Intangible Assets - Indefinite-lived Intangible Assets (Details) - USD ($)	6 Months Ended
	Aug. 31, 2020	Feb. 29, 2020
Intangible assets subject to amortization, gross carrying value	$ 7,482,605	$ 7,542,558
Intangible assets subject to amortization, accumulated amortization	4,287,838	3,996,477
Intangible assets not subject to amortization, gross carrying value	729,701	1,046,944
Total Intangible Assets	8,212,306	8,589,502
Intangible assets not subject to amortization, accumulated goodwill impairment	4,287,838	3,996,477
Company Stores Goodwill [Member]
Intangible assets not subject to amortization, gross carrying value	515,065	832,308
Franchising Goodwill [Member]
Intangible assets not subject to amortization, gross carrying value	97,318	97,318
Manufacturing Segment Goodwill [Member]
Intangible assets not subject to amortization, gross carrying value	97,318	97,318
Trademarks [Member]
Intangible assets not subject to amortization, gross carrying value	$ 20,000	20,000
Store Design [Member]
Amortization Period (Year)	10 years
Intangible assets subject to amortization, gross carrying value	$ 394,826	295,779
Intangible assets subject to amortization, accumulated amortization	216,403	215,653
Packaging Licenses [Member]
Intangible assets subject to amortization, gross carrying value	120,830	120,830
Intangible assets subject to amortization, accumulated amortization	$ 120,830	120,830
Packaging Licenses [Member] | Minimum [Member]
Amortization Period (Year)	3 years
Packaging Licenses [Member] | Maximum [Member]
Amortization Period (Year)	5 years
Packaging Design [Member]
Amortization Period (Year)	10 years
Intangible assets subject to amortization, gross carrying value	$ 430,973	430,973
Intangible assets subject to amortization, accumulated amortization	430,973	430,973
Trademarks and Non Competition Agreement [Member]
Intangible assets subject to amortization, gross carrying value	556,339	715,339
Intangible assets subject to amortization, accumulated amortization	$ 323,722	297,072
Trademarks and Non Competition Agreement [Member] | Minimum [Member]
Amortization Period (Year)	5 years
Trademarks and Non Competition Agreement [Member] | Maximum [Member]
Amortization Period (Year)	20 years
Franchise Rights [Member]
Amortization Period (Year)	20 years
Intangible assets subject to amortization, gross carrying value	$ 5,979,637	5,979,637
Intangible assets subject to amortization, accumulated amortization	$ 3,195,910	$ 2,931,949

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Note 7 - Goodwill and Intangible Assets - Estimated Future Amortization Expense (Details)	Aug. 31, 2020 USD ($)
2021	$ 274,705
2022	466,554
2023	391,988
2024	329,267
2025	277,022
Thereafter	1,281,184
Total	$ 3,020,720

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Note 8 - Impairment of Long-lived and Intangible Assets (Details Textual) - USD ($)	3 Months Ended	6 Months Ended
	May 31, 2020	Aug. 31, 2020
Asset Impairment Charges, Total		$ 544,801
General and Administrative Expense [Member] | COVID-19 Pandemic [Member]
Asset Impairment Charges, Total	$ 545,000

XML

Note 8 - Impairment of Long-lived and Intangible Assets - Costs Associated with Impairment of Long-lived and Intangible Assets (Details)	6 Months Ended
	Aug. 31, 2020 USD ($)
Company store goodwill impairment	$ 317,243
Trademark intangible asset impairment	159,000
Company-owned store impairment of long-lived assets and inventory	68,558
Total	$ 544,801

XML

Note 9 - Line of Credit and Long-term Debt (Details Textual) - USD ($)		6 Months Ended
	Mar. 16, 2020	Aug. 31, 2020	Aug. 31, 2019
Proceeds from Notes Payable, Total		$ 1,537,200
SBA Loans [Member]
Debt Instrument, Interest Rate, Stated Percentage		1.00%
Proceeds from Notes Payable, Total	$ 1,500,000
Interest Expense, Debt, Total		$ 5,855
Eligible Accounts Receivable [Member]
Maximum Draws Allowed	50.00%
Eligible Inventories [Member]
Maximum Draws Allowed	50.00%
Line of Credit [Member] | Wells Fargo Bank [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 5,000,000	$ 5,000,000
Proceeds from Lines of Credit, Total	$ 3,400,000
Debt Instrument, Interest Rate, Stated Percentage		2.40%
Debt Instrument, Covenant, Adjusted EBITDA		$ 1,500,000
Line of Credit [Member] | Wells Fargo Bank [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate	2.25%

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Note 9 - Line of Credit and Long-term Debt - Long-term Note Payable (Details) - USD ($)	Aug. 31, 2020	Feb. 29, 2020
Less: current maturities	$ (847,731)
Long-term obligations	694,575
SBA Loans [Member]
Paycheck protection program note payable in monthly installments of principal and interest at 1.0% per annum through April 2022	$ 1,542,306

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Note 9 - Line of Credit and Long-term Debt - Long-term Note Payable (Details) (Parentheticals)	Aug. 31, 2020
SBA Loans [Member]
Paycheck protection program note payable interest	1.00%

XML

Note 10 - Stockholders' Equity (Details Textual) - USD ($)								3 Months Ended			6 Months Ended
	Oct. 15, 2020	Mar. 13, 2020	Dec. 20, 2019	Dec. 06, 2019	Sep. 13, 2019	Jun. 14, 2019	Mar. 15, 2019	Aug. 31, 2020	May 31, 2020	Aug. 31, 2019	Aug. 31, 2020	Aug. 31, 2019	May 21, 2015	Jan. 13, 2015	Jul. 15, 2014
Common Stock, Dividends, Per Share, Cash Paid (in dollars per share)		$ 0.12		$ 0.12	$ 0.12	$ 0.12	$ 0.12
Stock Repurchase Program, Authorized Amount															$ 3,000,000
Stock Repurchase Program, Additional Authorized Amount													$ 2,090,000	$ 2,058,000
Treasury Stock, Shares, Acquired (in shares)								0		0
Stock Repurchase Program, Remaining Authorized Repurchase Amount								$ 638,000			$ 638,000
Share-based Payment Arrangement, Expense								143,719		$ 155,416	$ 287,437	$ 386,670
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance (in shares)									0
Restricted Stock [Member]
Shares Issued, Shares, Share-based Payment Arrangement, after Forfeiture, Total (in shares)											0	4,833
Unrestricted Shares of Stock [Member]
Share-based Payment Arrangement, Expense											$ 0	$ 45,652
Restricted Stock Units (RSUs) [Member]
Share-based Payment Arrangement, Expense								$ 143,719			$ 287,437
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period (in shares)											47,929	28,502
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Grant Date Fair Value, Amount											$ 1,850,943
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition (Year)											4 years 54 days
Subsequent Event [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized (in shares)	300,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant (in shares)	319,324
Maximum [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period (Year)									6 years		6 years
Minimum [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period (Year)											5 years
Warrant to Purchase Common Stock [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights (in dollars per share)			$ 8.76
Certain Revenue Thresholds, Cumulative Basis Connection with Performance Basis (Year)			5 years
Warrants and Rights Outstanding, Term (Month)			180 days
Warrant to Purchase Common Stock [Member] | Maximum [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights (in shares)			960,677

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Note 10 - Stockholders' Equity - Restricted Stock Unit Awards Outstanding Under the Plans (Details) - Restricted Stock Units (RSUs) [Member] - $ / shares	6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019
Outstanding non-vested restricted stock units as of February 28 or 29: (in shares)	265,555	25,002
Granted (in shares)		270,000
Vested (in shares)	(47,929)	(28,502)
Cancelled/forfeited (in shares)
Outstanding non-vested restricted stock units as of August 31: (in shares)	217,626	266,500
Weighted average grant date fair value (in dollars per share)	$ 9.40	$ 9.40
Weighted average remaining vesting period (Year)	4 years 54 days	5 years 51 days

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Note 11 - Earnings Per Share (Details Textual)	6 Months Ended
	Aug. 31, 2020 shares
Warrant [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares)	960,677
Restricted Stock Units (RSUs) [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares)	222,634

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Note 12 - Leasing Arrangements (Details Textual) - USD ($)	6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019	Mar. 01, 2019
Operating Lease, Expense	$ 440,121	$ 478,707
Operating Lease, Liability, Total	$ 2,334,842
Operating Lease, Weighted Average Discount Rate, Percent	3.40%
Lessee, Operating Lease, Liability, to be Paid, Total	$ 2,576,650
Company-owned Location [Member]
Operating Lease, Liability, Total		476,611
Lessee, Operating Lease, Liability, to be Paid, Total		$ 532,811
Accounting Standards Update 2016-02 [Member]
Operating Lease, Liability, Total			$ 3,300,000
Maximum [Member]
Lessee, Operating Lease, Term of Contract (Year)	10 years
Lessee, Operating Lease, Renewal Term (Year)	10 years
Minimum [Member]
Lessee, Operating Lease, Renewal Term (Year)	5 years

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Note 12 - Leasing Arrangements - Maturities of Lease Liabilities for Operating Leases (Details)	Aug. 31, 2020 USD ($)
FY 21	$ 411,447
FY 22	694,755
FY 23	437,445
FY 24	315,962
FY 25	164,223
Thereafter	552,818
Total	2,576,650
Less: imputed interest	(241,808)
Operating Lease, Liability, Total	$ 2,334,842
Weighted average lease term (in years) (Year)	6 years 255 days

XML

Note 13 - Commitments and Contingencies (Details Textual)	6 Months Ended
	Aug. 31, 2020 USD ($)
Contractual Obligation, Total	$ 100,000
Minimum [Member]
Purchase Contracts, Term (Month)	180 days
Maximum [Member]
Purchase Contracts, Term (Month)	1 year 180 days

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Note 14 - FTD Loss Contingency (Details Textual) - USD ($)	6 Months Ended
	Aug. 31, 2020	Feb. 29, 2020
Inventory, Net, Total	$ 5,726,426	$ 3,750,978
Accounts Receivable, after Allowance for Credit Loss, Current, Total	2,917,061	$ 4,049,959
FTD's Bankruptcy [Member]
Inventory, Net, Total	226,000
Accounts Receivable, after Allowance for Credit Loss, Current, Total	80,000
Loss Contingency, Loss in Period	$ 146,000

XML

Note 15 - Income Taxes (Details Textual)	6 Months Ended
	Aug. 31, 2020
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	21.00%

XML

Note 16 - Operating Segments (Details Textual)	6 Months Ended
	Aug. 31, 2020
Number of Reportable Segments	5

XML

Note 16 - Operating Segments - Segment Information (Details) - USD ($)	3 Months Ended		6 Months Ended
	Aug. 31, 2020	Aug. 31, 2019	Aug. 31, 2020	Aug. 31, 2019	Feb. 29, 2020
Revenues	$ 5,327,402	$ 7,385,270	$ 8,029,839	$ 15,811,269
Segment profit (loss)	100,733	1,247,763	(4,745,992)	2,191,547
Total assets	29,187,439	29,286,343	29,187,439	29,286,343	$ 27,817,388
Capital expenditures	28,364	197,436	50,853	480,984
Total depreciation and amortization	334,853	372,833	677,967	750,486
Capital expenditures	(28,364)	(197,436)	(50,853)	(480,984)
Franchising [Member]
Revenues	1,040,136	1,514,484	1,293,930	2,942,239
Segment profit (loss)	366,535	828,978	(84,784)	1,446,888
Total assets	1,387,005	1,445,041	1,387,005	1,445,041
Capital expenditures	150	2,040	150	8,500
Total depreciation and amortization	10,095	10,353	20,233	21,183
Capital expenditures	(150)	(2,040)	(150)	(8,500)
Manufacturing [Member]
Revenues	3,498,752	4,482,373	5,633,367	10,088,393
Segment profit (loss)	489,668	955,360	(293,801)	2,124,047
Total assets	12,241,965	11,838,237	12,241,965	11,838,237
Capital expenditures	11,343	162,127	25,197	385,679
Total depreciation and amortization	162,523	151,848	324,353	301,980
Capital expenditures	(11,343)	(162,127)	(25,197)	(385,679)
Retail Segment [Member]
Revenues	193,702	265,662	253,683	498,081
Segment profit (loss)	21,924	7,979	(455,902)	(7,033)
Total assets	618,323	1,005,356	618,323	1,005,356
Capital expenditures	72	23,106	72	32,624
Total depreciation and amortization	1,391	2,533	4,794	5,143
Capital expenditures	(72)	(23,106)	(72)	(32,624)
U-Swirl Segment [Member]
Revenues	594,812	1,122,751	848,859	2,282,556
Segment profit (loss)	11,903	296,880	(445,815)	576,043
Total assets	5,526,772	5,620,012	5,526,772	5,620,012
Capital expenditures		1,673	1,712	1,673
Total depreciation and amortization	140,823	185,208	287,772	375,977
Capital expenditures		(1,673)	(1,712)	(1,673)
Other Segments [Member]
Revenues		0		0
Segment profit (loss)	(789,297)	(841,434)	(3,465,690)	(1,948,398)
Total assets	9,413,374	9,377,697	9,413,374	9,377,697
Capital expenditures	16,799	12,570	23,722	52,508
Total depreciation and amortization	20,021	22,891	40,815	46,203
Capital expenditures	(16,799)	(12,570)	(23,722)	(52,508)
Operating Segments [Member]
Revenues	5,597,793	7,618,900	8,459,389	16,306,637
Operating Segments [Member] | Franchising [Member]
Revenues	1,040,863	1,515,805	1,295,339	2,944,846
Operating Segments [Member] | Manufacturing [Member]
Revenues	3,768,416	4,714,682	6,061,508	10,581,154
Operating Segments [Member] | Retail Segment [Member]
Revenues	193,702	265,662	253,683	498,081
Operating Segments [Member] | U-Swirl Segment [Member]
Revenues	594,812	1,122,751	848,859	2,282,556
Operating Segments [Member] | Other Segments [Member]
Revenues		0		0
Intersegment Eliminations [Member]
Revenues	(270,391)	(233,630)	(429,550)	(495,368)
Intersegment Eliminations [Member] | Franchising [Member]
Revenues	(727)	(1,321)	(1,409)	(2,607)
Intersegment Eliminations [Member] | Manufacturing [Member]
Revenues	(269,664)	(232,309)	(428,141)	(492,761)
Intersegment Eliminations [Member] | Retail Segment [Member]
Revenues	0	0	0	0
Intersegment Eliminations [Member] | U-Swirl Segment [Member]
Revenues	0	0	0	0
Intersegment Eliminations [Member] | Other Segments [Member]
Revenues	$ 0	$ 0	$ 0	$ 0