Rocky Mountain Chocolate Factory, Inc.

Rocky Mountain Chocolate Factory, Inc. is an international franchisor, confectionery producer, and retail operator headquartered in Durango, Colorado, founded in 1981. The Company produces an extensive line of premium chocolate and other confectionery products, with revenues and profitability derived principally from its franchised and licensed system of retail stores. As of February 28, 2026, the Company operated three Company-owned stores and had 111 licensee-owned and 139 Rocky Mountain Chocolate Factory franchised stores spread across 34 states and the Philippines. The Company’s consolidated revenues in fiscal year 2026 were primarily derived from three principal sources: sales to franchisees and other third parties of chocolates and other confectionery products produced by the Company (71% of revenue), sales at Company-owned stores (7%), and the collection of initial franchise fees, royalties, and marketing fees from franchisees (22%). For FY 2026, nearly all revenues were derived from domestic sources, with less than 1% derived from international sources.

The Company’s business strategy focuses on building upon the solid market position of its brand and high-quality products to create a world-class experience for consumers of premium chocolate and confectionery products. Key elements of this strategy include maintaining product quality and variety using proprietary recipes, creating an inviting store atmosphere through in-store product preparation, careful site selection, increasing same-store retail sales, enhancing operating efficiencies, and pursuing unit growth through franchising and co-branding arrangements. As of February 28, 2026, Cold Stone Creamery franchisees operated 101 co-branded locations, and U-Swirl, Inc. franchisees operated 10 co-branded locations. The Company also had three international units in operation, all within the Republic of the Philippines.

During FY 2026, the Company’s manufacturing operations produced approximately 1.33 million pounds of chocolate products, a decrease of approximately 35% from the approximately 2.05 million pounds produced in FY 2025. The Company operates six trucks and ships a substantial portion of its products from the production facility on its own fleet. The Company’s production facility is a 53,000 square foot manufacturing facility that the Company owns, located at 265 Turner Drive, Durango, Colorado. In July 2024, the Company sold an unused parcel of land in Durango, Colorado for a purchase price of approximately $0.9 million.

For FY 2026, total revenues decreased by 7.0% from $29.6 million in FY 2025 to $27.5 million in FY 2026. Operating loss improved from $5.9 million in FY 2025 to $3.6 million in FY 2026. Basic loss per share from continuing operations improved from $(0.86) per share in FY 2025 to $(0.56) per share in FY 2026. The decrease in total sales was primarily due to an 11% decrease in sales of products to the Company’s network of franchised and licensed retail stores, Specialty Markets customers, and e-commerce customers, partially offset by price increases. Certain unfavorable specialty market contracts were not renewed in FY 2026.

The Company’s sales to Specialty Market customers during FY 2026 were approximately $1.3 million or 5% of total revenue. In FY 2026, approximately 7% of Durango plant sales resulted from the sale of products outside the system of franchised and licensed locations, compared with 16% and 10% in FY 2025 and FY 2024, respectively. The Company signed four area development agreements in FY 2026 that include the addition of 34 new franchise stores over the next three to five years.

Management’s discussion of the outlook focuses on several key areas. The Company expects to continue experiencing higher raw material, labor, and freight costs as a result of recent macroeconomic inflationary trends, including tariffs, and disruptions to the global supply chain. The Company has experienced labor and logistics challenges, which management believes have contributed to lower factory, retail, and e-commerce sales. The Company could experience additional lost sales opportunities if products are not available for purchase due to continued disruptions in the supply chain relating to an inability to obtain raw materials or packaging, or if the Company or its franchisees experience delays in stocking products.

The most important factors for continued growth in earnings are identified as the ability to increase sales of premium chocolate products produced in the Durango production facility, support of franchisees in increasing customer visit frequency and average transaction value, ongoing e-commerce revenue growth, and new franchised store growth. The Company’s ability to successfully achieve expansion of its franchise systems depends on many factors not within its control, including the availability of suitable sites for new store locations and the availability of qualified franchisees to support expansion plans. Efforts to increase same-store pounds purchased from the 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, and the receptivity of the franchise system to product introductions and promotional programs.

The Company continues to invest in new and more efficient production equipment, as well as rationalizing its portfolio of products and streamlining production lines to reduce labor costs and improve product quality, consistency, and margin. The Company is continually exploring opportunities to grow its brand and expand its business, including pursuing unit growth opportunities in locations where it has traditionally been successful and new markets with favorable demographics. The Company believes it is well positioned to attract multi-unit operators seeking to diversify their franchise portfolios with a premium chocolate concept.

The Company expects staffing and labor challenges to continue into FY 2027. The Company has experienced a shortage of labor for store positions due to job market trends and conditions, which could decrease the pool of available qualified talent for key functions. Competition for qualified drivers for both stores and supply-chain functions also continues to increase. The Company is subject to seasonal fluctuations in sales because of key holidays and the location of its franchisees, with the strongest sales historically occurring during key holidays and summer vacation seasons.

The Company’s capital allocation plans are constrained by its credit agreements. The RMCF2 Credit Agreement limits capital expenditures to $3.5 million per year. The Company has no present intention of paying a cash dividend on its common stock. The Company may need to obtain additional funding in connection with its continuing operations, and there are no other commitments by any person for future financing.

The Company faces numerous material risks as disclosed in the filing. The Company incurred a net loss of $4.6 million ¹ and used cash in operating activities of $1.8 million during the year ended February 28, 2026, and these factors, along with a debt covenant violation, raise substantial doubts about the Company’s ability to continue as a going concern. As of February 28, 2026, the Company was not in compliance with the requirement under its Credit Agreements to maintain a ratio of total liabilities to tangible net worth of no more than 2.0 to 1, with the actual ratio being 3.8 to 1. The Company has received waivers from the lenders through August 31, 2026, but there can be no assurance that lenders will grant waivers for future noncompliance. The Company’s sales to Specialty Market customers are concentrated among a small number of customers, with such sales being approximately $1.3 million or 5% of total revenue during FY 2026. The Company is subject to risks from changes in trade policies, including tariff and import/export regulations, which could result in increased costs for goods. The Company has identified a material weakness in internal control over financial reporting related to inventory. The Company is also subject to risks related to information technology system failures, cybersecurity breaches, product quality and safety issues, changes in consumer tastes, increased competition, higher labor costs, and the financial performance of franchisees. A significant shift by franchisees from Company-manufactured products to products produced by third parties could adversely affect operations, as the Company has seen a significant increase in system-wide sales of store-made and other products, which has led to a decrease in purchases from the Company.

Management’s message to shareholders emphasizes the Company’s long-term strategic objective to build upon the solid market position of its brand and high-quality products to create a world-class experience for consumers of premium chocolate and confectionery products. The strategic priorities emphasized are the delivery of an exceptional store experience, development of category leadership through innovation, and the pursuit of unit growth opportunities. Management states that the Company will employ a business strategy that includes maintaining product quality and variety, enhancing store atmosphere, careful site selection, increasing same-store retail sales, enhancing operating efficiencies, and pursuing expansion through unit growth, high-traffic environments, multi-unit operators, and new market penetration. Management also notes that the Company is considering a variety of funding sources and transactions that could raise capital, but there can be no assurances that the Company will be successful in these efforts or will be able to resolve its liquidity issues or eliminate its operating losses.