ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management ’ s Discussion and Analysis of Financial Condition and Results of Operations (this “ MD&A ” ) is intended to assist in an understanding of our financial condition and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in Item 8 of this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report, particularly in Item 1A. “ Risk Factors. ”
Overview
Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its subsidiaries (including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation) (“RMCF”) (referred to as the “Company,” “we,” “us,” or “our”) is an international franchisor, confectionery producer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and produce an extensive line of premium chocolate products and other confectionery products. Our revenues and profitability are derived principally from our franchised/licensed system of retail stores that feature chocolate and other confectionery products including gourmet caramel apples. We may also sell our confectionery products in select locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of February 28, 2026, there were three Company-owned, 111 licensee-owned and 139 franchised Rocky Mountain Chocolate Factory stores operating in 34 states and the Philippines.
Recent Developments
On August 28, 2025, the Company entered into a first amendment to the credit agreement (as amended, the "Credit Agreement"), with RMC Credit Facility LLC, a Colorado limited liability company ("RMC" or "Lender"), dated September 30, 2024. The Lender agreed to make an additional advance to the Company in the principal amount of $0.6 million, There was no change to other terms of the agreement. In connection with the amendment, the Company and the Lender agreed to waive the financial covenant providing for a maximum ratio of total liabilities to total net worth for each of the year ending February 28, 2026. The Company was not in compliance with the covenant as of February 28, 2026. The Company has received a waiver through August 31, 2026 from the Lender as of the date of issuance of the financial statements in respect of such non-compliance and is in compliance with all other aspects of the Credit Agreement. As of February 28, 2026, the Company repaid $0.6 million of the $6.6 million outstanding.
On August 28, 2025, the Company entered into a new credit agreement ("RMCF2 Credit Agreement") with RMCF2 Credit, LLC (“RMCF2”), a special purpose investment entity affiliated with Jeffrey R. Geygan, the Company's Interim Chief Executive Officer and one of the members of the Company's board of directors.
Pursuant to the RMCF2 Credit Agreement, RMCF2 agreed to make an advance to the Company in the principal amount of $1.2 million, which advance is evidenced by a promissory note (the “RMCF2 Note”). The RMCF2 Note matures on September 30, 2027 and interest accrues at a rate of 12% per annum and is payable monthly in arrears. All outstanding principal and interest will be due on the maturity date.
The RMCF2 Credit Agreement contains customary events of default as well as customary affirmative and negative covenants, including, without limitation, certain reporting obligations and certain limitations on liens, encumbrances, and indebtedness. The RMCF2 Credit Agreement also limits capital expenditures to $3.5 million per year and contains two financial covenants measured quarterly: a maximum ratio of total liabilities to total net worth and a minimum current ratio. Pursuant to the RMCF2 Credit Agreement, RMCF2 agreed to waive the financial covenant providing for a maximum ratio of total liabilities to total net worth for the fiscal year ending February 28, 2026. At February 28, 2026, all covenants were met with the exception of the covenant for the maximum ratio of total liabilities to total net worth. The Company has received a waiver through August 31, 2026 from RMCF2 as of the date of issuance of the financial statements in respect of such non-compliance and is in compliance with all other aspects of the RMCF2 Credit Agreement. As of February 28, 2026, the Company repaid $0.6 million of the $1.2 million outstanding.
Table of Contents
On December 18, 2025, the Company entered into a securities purchase agreement with ARM-D Rocky Mountain Chocolate Holdings LLC (the “Purchaser”) , pursuant to which, among other things, the Purchaser agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Purchaser, an aggregate of 1,500,000 shares of common stock at a price per share of $1.80, for total gross proceeds of approximately $2.7 million, less stock issuance costs of $0.2 million. On January 23, 2026, the shares were subsequently registered for resale by the Purchaser on a Form S-1 that was declared effective by the SEC on February 13, 2026.
Current Trends Affecting Our Business and Outlook
As a result of recent macroeconomic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs. We have experienced labor and logistics challenges, which we believe have contributed to lower factory, retail and e-commerce sales. In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain raw materials or packaging, or if we or our franchisees experience delays in stocking our products.
We are subject to seasonal fluctuations in sales because of key holidays and the location of our franchisees, which have traditionally been located in high traffic areas such as resorts or tourist locations, and the nature of the products we sell, which are seasonal. Historically, the strongest sales of our products have occurred during key holidays and summer vacation seasons. Additionally, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sales of new franchise locations. Because of the seasonality of our business and the impact of new store openings and sales of new franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
The most important factors for continued growth in our earnings are our ability to increase the sales of premium chocolate products produced in our Durango production facility, and the support of our franchisees in increasing the frequency of customer visits and the average value of each customer transaction, along with ongoing e-commerce revenue growth, and new franchised store growth. In FY 2026 the Company signed four area development agreements that include the addition of 34 new franchise stores over the next three to five years.
Our ability to successfully achieve expansion of our franchise systems depends on many factors not within our control including the availability of suitable sites for new store locations and the availability of qualified franchisees to support our expansion plans.
Efforts to increase same store pounds purchased from our production facility by franchised stores and to increase total Durango production depend on many factors, including new store openings, effective e-commerce initiatives, industry competition, the receptivity of our franchise system to our product introductions and promotional programs.
Results of Continuing Operations
Fiscal 2026 Compared To Fiscal 2025
Results Summary
Basic loss per share decreased from a loss from continuing operations of $(0.86) per share in FY 2025 to a loss from continuing operations of $(0.56) per share in FY 2026. Revenues decreased by 7.0% from $29.6 million for FY 2025 to $27.5 million for FY 2026. Operating loss and loss from continuing operations was $5.9 million in FY 2025 compared to an operating loss of $3.6 million in FY 2026.
Table of Contents
REVENUES
For the Year Ended
February 28,
($'s in thousands)
Change
Change
Durango product and retail sales
Franchise fees
Royalty and marketing fees
Total
Durango Product and Retail Sales
The decrease in total sales for FY 2026 compared to FY 2025 was primarily due to a 11%, or $2.7 million, decrease in sales of products to our network of franchised and licensed retail stores, Specialty Markets customers, and e-commerce customers, and partially offset by price increases. Certain unfavorable specialty market contracts were not renewed in FY26.
We continue to improve production efficiencies, while adding new products we believe can generate high sales volumes and gross profit margins at or above our average level for bulk and packaged items. We continue to focus our marketing efforts to increase total pounds purchased by franchise locations.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees increased during FY 2026 compared to FY 2025 primarily due to the decrease in sales of products to our network of franchised retail stores. The royalty agreements allow for an increase in the royalty percentage due from the franchisees if the franchisee sales of product made in the stores exceeds or increases a certain percentage over the sale of Durango product items sold in franchised stores.
COSTS AND EXPENSES
Cost of Sales and Expenses
For the Year Ended
February 28,
($'s in thousands)
Change
Change
Total cost of sales
Franchise costs
Sales and marketing
General and administrative
Retail operating
Depreciation and amortization, exclusive of depreciation and amortization expense of $921 and $775, respectively, included in cost of sales
Total
Gross Margin
For the Year Ended
February 28,
($'s in thousands)
Change
Change
Total gross margin
Gross margin percentage
Cost of Sales and Gross Margin
Table of Contents
Total gross margin increased to 3.4% in FY 2026 compared to a gross margin of 0.4% during FY 2025, due primarily to the efficiencies obtained by relocating our consumer packaging operations back to our Durango production facility and sales price adjustments to offset inflationary pressures.
Franchise Costs
Franchise costs remained relatively unchanged during FY 2026 compared to FY 2025. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 40.0% in FY 2026 from 43.4% in FY 2025. This decrease as a percentage of royalty, marketing, and franchise fees is primarily a result of higher royalty fees partially offset by higher costs associated with providing a high level of customer service to our entire franchise network which had been lacking in prior years. As a percentage of total revenue, franchise costs increased to 8.9% during FY 2026, compared to 8.2% during FY 2025.
Sales and Marketing
The decrease in sales and marketing costs during FY 2026, compared to FY 2025, was due primarily to operational efficiencies and changes with the organization of the department under which fewer marketing executives were hired to address gaps in our historic marketing plan, and a more focused ad spend was undertaken to direct resources to achieve a higher return on investment. As a percentage of total revenues, sales and marketing expenses decreased to 3.5% during FY 2026, compared to 6.7% during FY 2025.
General and Administrative
The decrease in general and administrative costs during FY 2026, compared to FY 2025, was due in part to cost cutting measures offset by an elevated level of professional fees. The Company had additional legal and professional costs associated with an equity raise and changes to our credit facilities. As a percentage of total revenues, general and administrative expenses decreased to 19.8% during FY 2026, compared to 21.3% during FY 2025.
Retail Operating Expenses
Retail operating expenses increased 56.1% during FY 2026 compared to FY 2025. This increase is primarily the result of the purchase of a third retail store in August 2025 . As a percentage of total revenues, retail operating expenses increased to 4.1% during FY 2026 compared to 2.4% during FY 2025.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $0.5 million during FY 2026, an increase from $0.2 million during FY 2025. Depreciation and amortization included in cost of sales increased 18.8% during FY 2025 to FY 2026. This increase was the result of deprecating prior year investment in updating technology and production equipment.
The Company made capital expenditures of $0.7 million and $3.8 million during FY 2026 and FY 2025, respectively.
Other Income (Expense)
Other expense was $0.8 million during FY 2026, compared to other income of $0.2 million during FY 2025. This represents interest expense of $0.8 million during FY 2026 compared to $0.5 million during FY 2025 and interest income of $54 thousand during FY 2026 compared to $27 thousand during FY 2025.
Table of Contents
Income Tax Provision
We had income tax expense of $0.2 million during the year ended February 28, 2026. We had no income tax expense during the years ended February 28, 2025 and February 29, 2024 due to our loss from operations. See Note 13 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.
Adjusted Gross Margin
Adjusted Gross Margin
For the Year Ended
(a non-GAAP measure)
February 28,
($'s in thousands)
Change
Change
Total gross margin
Plus: depreciation and amortization
Total Adjusted Gross Margin (non-GAAP measure)
Total Adjusted Gross Margin (non-GAAP measure)
Non-GAAP Measures
In addition to the results provided in accordance with GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP. Adjusted gross margin is a non-GAAP measure. Adjusted gross margin is equal to the sum of our total gross margin plus depreciation and amortization calculated in accordance with GAAP. We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin, and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin is 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 rather than gross margin to make incremental pricing decisions. Adjusted gross margin has 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 as measures of performance only in conjunction with GAAP measures of performance such as gross margin.
Liquidity and Capital Resources
As of February 28, 2026, working capital was $2.0 million compared with $2.4 million as of February 28, 2025. The decrease in working capital was due primarily to a net change in accounts receivable and accounts payable. Expected future cash requirements include supporting current operations and building inventory including capital expenditures to support our business.
Cash and cash equivalent balances increased from $0.7 million as of February 28, 2025 to $1.2 million as of February 28, 2026 primarily as a result of proceeds of $1.2 million from the RMCF2 Credit Agreement and gross proceeds of $2.7 million from the sale of 1,500,000 shares of common stock pursuant to a securities purchase agreement with the Purchaser. Our current ratio was 1.29 to 1.0 on February 28, 2026 compared to 1.34 to 1.0 on February 28, 2025. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
During FY 2026, we had a consolidated net loss of $4.6 million. Operating activities used cash of $1.8 million, with the principal adjustments to reconcile net income to net cash used in operating activities being depreciation and amortization of $1.4 million, decrease in inventory reserve of $0.4 million, stock compensation expense of $0.3 million, deferred income taxes of $0.2 million, provision for recovery on accounts and notes receivable of $0.2 million, and change in operating assets and liabilities of $1.3 million. During FY 2025, we had a consolidated net loss of $6.1 million. Operating activities used cash of $6.6 million, with the principal adjustments to reconcile net income to net cash used in operating activities being depreciation and amortization of $1.0 million, increase in inventory reserve of
Table of Contents
$0.3 million, stock compensation expense of $0.3 million, gain on the sale of assets of $0.2 million, and change in operating assets and liabilities of $1.8 million.
During FY 2026, investing activities used cash of $0.8 million, primarily due to the purchases of property and equipment of $0.6 million and acquisition of the retail store in Camarillo, California of $0.2 million. Investing activities used cash of $1.7 million during FY 2025 primarily due to the purchases of property and equipment of $3.8 million, partially offset by investing cash flow from the sale of assets of $2.3 million.
During FY 2026, financing activities provided cash of $3.1 million, primarily due to proceeds from notes payable of $1.8 million and issuance of common stock through a securities purchase agreement with the Purchaser of $2.7 million, partially offset by stock issuance costs of $0.2 million, payment on notes payable of $1.2 million, and payment of debt issuance costs of $10 thousand. In comparison, financing activities provided cash of $6.9 million during FY 2025 primarily due to proceeds from notes payable of $6.0 million, proceeds from drawing on a line of credit of $2.2 million, and issuance of common stock of $2.2 million, partially offset by the payment on the line of credit of $3.5 million and payment of debt issuance costs of $0.1 million.
The Company’s recurring negative cashflows from operations and heavy reliance on debt and equity financing to sustain its operations raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial statements. In addition, our independent registered public accounting firm, in their report on the Company’s February 28, 2026, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.
Credit Agreement and Payment of Wells Fargo Credit Agreement
On September 30, 2024, the Company entered into a (the “Credit Agreement”). Pursuant to the Credit Agreement, the Company received an advance in the principal amount of $6.0 million, which advance is evidenced by a promissory note (the “Note”). The Note will mature on September 30, 2027 (the “Maturity Date”), and interest will accrue at a rate of 12% per annum and is payable monthly in arrears. All outstanding principal and interest will be due on the Maturity Date. The Credit Agreement is collateralized by the Company’s Durango real estate property and the related inventory and property, plant and equipment located on that property, as well as the Company’s accounts receivable and cash accounts.
On August 28, 2025, we amended the Credit Agreement and received an additional advance of $0.6 million. The additional $0.6 million borrowed was repaid on December 31, 2025. As of February 28, 2026, $6.0 million was outstanding on the Credit Agreement. The Credit Agreement contains customary events of default, including nonpayment of principal and interest when due, failure to comply with covenants, and a change of control of the Company, as well as customary affirmative and negative covenants, including, without limitation, certain reporting obligations and certain limitations on liens, encumbrances, and indebtedness. The Credit Agreement also limits our capital expenditures to $3.5 million per year and contains two financial covenants measured quarterly: a maximum ratio of total liabilities to total net worth and a minimum current ratio. In connection with the amendment, the Company and the Lender agreed to waive the financial covenant providing for a maximum ratio of total liabilities to total net worth of 2.0:1.0 for the fiscal year ending February 28, 2026. The Company was not in compliance with that covenant of, but was in compliance with all other covenants as of February 28, 2026.
The proceeds of the Credit Agreement were used as follows: (i) $3.5 million was used to repay the Wells Fargo Credit Agreement and (ii) the remaining balance was used for continued capital investment and working capital needs.
The Company paid off the outstanding balance of $3.5 million of the Wells Fargo Credit Agreement upon maturity on September 30, 2024.
The Company was not in compliance with the liabilities to tangible net worth of 2.0:1.0 as of February 28, 2026. The Company has received a waiver from the Lender through August 31, 2026 as of the date of issuance of these financial statements and is in compliance with all other aspects of the Credit Agreement.
The Company will continue to explore additional means of strengthening its liquidity position and ensuring compliance with its debt financing covenants, which may include the obtaining of waivers from our lenders.
Table of Contents
On August 5, 2024, the Company entered into securities purchase agreements with Steven L. Craig, an existing director of the Company and American Heritage Railways, Inc. a company affiliated with Allen C. Harper who joined the board of directors in December 2024 (the “Investors”), pursuant to which, among other things, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Investors in a private placement, an aggregate of 1,250,000 of shares of the Company’s common stock at a price per share equal to $1.75, for total proceeds of approximately $2.2 million. On September 5, 2024, the Company filed a Form S-1 registering the shares sold in the private placement. The Form S-1 was declared effective by the SEC on October 9, 2024.
New Credit Agreement
On August 28, 2025, we entered into the RMCF2 Credit Agreement with RMCF2.
Pursuant to the RMCF2 Credit Agreement, RMCF2 agreed to make an advance to the Company in the principal amount of $1.2 million, which advance is evidenced by the RMCF2 Note. The RMCF2 Note matures on September 30, 2027 and interest accrues at a rate of 12% per annum and is payable monthly in arrears. All outstanding principal and interest will be due on the maturity date. The RMCF2 Credit Agreement is collateralized by the Company's Durango real estate property and the related inventory and property, plant and equipment located on that property, as well as the Company's accounts receivable and cash accounts. As of February 28, 2026, the Company repaid $0.6 million of the $1.2 million outstanding.
The RMCF2 Credit Agreement contains customary events of default as well as customary affirmative and negative covenants, including, without limitation, certain reporting obligations and certain limitations on liens, encumbrances, and indebtedness. The RMCF2 Credit Agreement limits capital expenditures to $3.5 million per year and also contains two financial covenants measured quarterly: a maximum ratio of total liabilities to total net worth and a minimum current ratio. Pursuant to the RMCF2 Credit Agreement, the Company and RMCF2 agreed to waive the financial covenant providing for a maximum ratio of total liabilities to total net worth for the fiscal year ending February 28, 2026. The Company was not in compliance with the liabilities to tangible net worth covenant of 2.0:1.0 but was in compliance with all other covenants as of February 28, 2026.
The Company was not in compliance with the liabilities to tangible net worth of 2.0:1.0 as of February 28, 2026. The Company has received a waiver from the Lender through August 31, 2026 as of the date of issuance of these financial statements and is in compliance with all other aspects of the Credit Agreement.
In connection with the RMCF2 Credit Agreement and the RMCF2 Note, the Company entered into a Deed of Trust with RMCF2 and the Public Trustee of La Plata County, Colorado with respect to the Company’s property in Durango, Colorado
We will continue to explore additional means of strengthening our liquidity position and ensuring compliance with our debt-financing covenants, which may include the obtaining of waivers from our lenders.
New Security Purchase Agreement
On December 18, 2025, the Company entered into a securities purchase agreement with the Purchaser, pursuant to which, among other things, the Purchaser agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Purchaser, an aggregate of 1,500,000 shares of common stock at a price per share of $1.80, for total gross proceeds of approximately $2.7 million, less stock issuance costs of $0.2 million. On January 23, 2026, the shares were subsequently registered for resale by the Purchaser on a Form S-1 that was declared effective by the SEC on February 13, 2026.
Contractual Obligations
The table below presents significant contractual obligations of the Company at February 28, 2026.
(Amounts in thousands)
Table of Contents
Contractual Obligations
Total
Less than
1 year
2-3 Years
4-5 years
More
Than
5 years
Operating leases
Purchase contracts
Total
Impact of Inflation
Inflationary factors such as increases in the costs of raw materials and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on the current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The Company did not identify any critical estimates used in the preparation of our consolidated financial statements for the year ended February 28, 2026.
