The following discussion and analysis of financial condition and results of operations is qualified by reference and should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the 10-K filed with the SEC on May 27, 2022, for the fiscal year ended February 28, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022.

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, the following discussion contains certain forward-looking information. See "Forward-Looking Statements" above for certain information concerning forward-looking statements.





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/licensed 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 November 30, 2022, there was one Company-owned, 101 licensee-owned and 162 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, Panama, and the Philippines. As of November 30, 2022, U-Swirl operated three Company-owned cafés and 58 franchised cafés located in 21 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".





Labor and Supply Chain

As a result of 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 begun to see labor and logistics challenges, which we believe have contributed to lower factory, retail, and e-commerce sales of our products due to the availability of material, labor, and freight. In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our manufacturing facility, or if we or our franchisees experience delays in stocking our products. For additional information, see "Part I. Item 1A. - Risk Factors - The Availability and Price of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our Control" in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022.

Contested Solicitation of Proxies

During the three and nine months ended November 30, 2022, the Company incurred substantial costs associated with a stockholder's contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three and nine months ended November 30, 2022, the Company incurred approximately $764,000 and $2.9 million, respectively, of costs associated with the contested solicitation of proxies, compared with $800,000 and $1.7 million of costs associated with a contested solicitation of proxies incurred in the three and nine months ended November 30, 2021. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations. Future costs associated with the stockholder's contested solicitation of proxies, the related legal proceedings, and the settlement thereof, as described in Note 1 to the consolidated financial statements appearing in Item 1 of Part I of this quarterly report under the caption "Subsequent Events" in this Form 10-Q may have a material impact on the result of future periods. Additionally, as a result of the contested solicitation of proxies in the prior year and the resulting changes to the composition of the Company's Board of Directors, the Company incurred $934,000 of severance costs during the nine months ended November 30, 2022, resulting from the retirement of Edward L. Dudley in September 2022.

Termination of Strategic Partnership with Edible Arrangements

On November 1, 2022, the Company sent a formal notice to Edible Arrangements, LLC ("Edible Arrangements"), terminating the Exclusive Supplier Operating Agreement, dated December 20, 2019 ("Exclusive Supplier Agreement"), by and between the Company and Edible Arrangements, and the Ecommerce Licensing Agreement, dated March 16, 2020 ("Licensing Agreement"), by and between the Company and Edible Arrangements. Subsequent to the termination of the Supplier Agreement and Licensing Agreement, the Company has no remaining material obligations under the Strategic Alliance Agreement, dated as of December 20, 2019, by and among the Company, Farids & Co. LLC and Edible Arrangements; the Common Stock Purchase Warrant, dated December 20, 2019, issued to Edible Arrangements; and the Indemnification Letter Agreement, dated March 16, 2020, by and between the Company and Edible Arrangements.





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Results of Operations

Three Months Ended November 30, 2022, Compared to the Three Months Ended November 30, 2021





Results Summary

Basic loss per share decreased from a loss of $0.24 per share in the three months ended November 30, 2021, to a loss of $0.03 per share in the three months ended November 30, 2022. Revenues increased 11.4% from $8.5 million in the three months ended November 30, 2021, to $9.5 million in the three months ended November 30, 2022. The loss from operations decreased from a loss of $2.0 million in the three months ended November 30, 2021, to a loss from operations of $215,000 in the three months ended November 30, 2022. Net loss decreased from a net loss of $1.5 million in the three months ended November 30, 2021, to a net loss of $212,000 in the three months ended November 30, 2022.





Revenues



                               Three Months Ended
                                  November 30,              $           %
($'s in thousands)             2022          2021        Change      Change
Factory sales                $ 7,284.9     $ 6,376.4     $ 908.5        14.2 %
Retail sales                     678.6         636.0        42.6         6.7 %
Franchise fees                    58.5          61.7        (3.2 )      (5.2 )%
Royalty and marketing fees     1,453.4       1,433.5        19.9         1.4 %
Total                        $ 9,475.4     $ 8,507.6     $ 967.8        11.4 %




Factory Sales

The increase in factory sales for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, was primarily due to a 13.0%, $661,000, increase in sales of product to our network of franchised and licensed retail stores and a 19.1%, $248,000, increase in shipments of product to customers outside our network of franchised retail stores. The increase in sales of product to our network of franchised and licensed retail stores was primarily the result of a higher sell price and higher same-store pounds purchased. Same-store pounds purchased by domestic franchise and licensed locations increased 5.7% during the three months ended November 30, 2022, when compared to the three months ended November 30, 2021.





Retail Sales

Retail sales at Company-owned stores increased 6.7% during the three months ended November 30, 2022, compared to the three months ended November 30, 2021, as a result of an increase in Company-owned same store sales. Same store sales at all Company-owned locations increased 12.9% during the three months ended November 30, 2022, when compared to the three months ended November 30, 2021. This increase was partially offset by a decrease in the average number of Company-owned stores in operation resulting from the sale of a Company-owned location to a franchisee.

Royalties, Marketing Fees, and Franchise Fees

The increase in royalty and marketing fees from the three months ended November 30, 2021, to the three months ended November 30, 2022, was primarily due to an increase in same store sales at domestic Rocky Mountain Chocolate Factory locations and at U-Swirl Frozen Yogurt cafés. Same-store sales at domestic franchise Rocky Mountain Chocolate Factory locations increased by 3.0% and same-store sales at U-Swirl Frozen Yogurt cafés increased by 14.0% during the three months ended November 30, 2022, when compared to the three months ended November 30, 2021.

Franchise fee revenue for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, was relatively unchanged.





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Costs and Expenses



Cost of Sales



                                Three Months Ended
                                   November 30,               $             %
($'s in thousands)             2022           2021          Change       Change

Cost of sales - factory      $ 5,613.7     $  4,960.9     $    652.8        13.2 %
Cost of sales - retail           255.9          239.8           16.1         6.7 %
Franchise costs                  551.5          458.5           93.0        20.3 %
Sales and marketing              607.2          377.2          230.0        61.0 %
General and administrative     2,111.7        3,865.9       (1,754.2 )     (45.4 )%
Retail operating                 422.4          420.3            2.1         0.5 %
Total                        $ 9,562.4     $ 10,322.6     $   (760.2 )      (7.4 )%




Gross Margin



                         Three Months Ended
                            November 30,              $           %
($'s in thousands)       2022          2021        Change      Change

Factory gross profit   $ 1,671.2     $ 1,415.5     $ 255.7        18.1 %
Retail gross profit        422.7         396.2        26.5         6.7 %
Total                  $ 2,093.9     $ 1,811.7     $ 282.2        15.6 %




                         Three Months Ended
                            November 30,              %            %
                         2022           2021        Change       Change
(Percent)
Factory gross margin        22.9 %        22.2 %        0.7 %        3.2 %
Retail gross margin         62.3 %        62.3 %        0.0 %        0.0 %
Total                       26.3 %        25.8 %        0.5 %        1.9 %




Adjusted Gross Margin



                                        Three Months Ended
                                           November 30,              $           %
($'s in thousands)                      2022          2021        Change      Change

Factory gross margin                  $ 1,671.2     $ 1,415.5     $ 255.7        18.1 %
Plus: depreciation and amortization       160.0         155.2         4.8         3.1 %
Factory adjusted gross margin           1,831.2       1,570.7       260.5        16.6 %
Retail gross margin                       422.7         396.2        26.5         6.7 %
Total Adjusted Gross Margin           $ 2,253.9     $ 1,966.9     $ 287.0        14.6 %

Factory adjusted gross margin              25.1 %        24.6 %       0.5 %       2.0 %
Retail gross margin                        62.3 %        62.3 %       0.0 %       0.0 %
Total Adjusted Gross Margin                28.3 %        28.0 %       0.3 %       1.1 %

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 them 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 gross margins increased to 22.9% in the three months ended November 30, 2022, compared to 22.2% in the three months ended November 30, 2021. This increase was due primarily to an increase in prices partially offset by increased labor and material costs and expense associated with inventory obsolescence.

Retail gross margins were unchanged at 62.3% during the three months ended November 30, 2022, and 2021.





Franchise Costs

The increase in franchise costs in the three months ended November 30, 2022, compared to the three months ended November 30, 2021, was due primarily to an increase in franchise convention and travel expenses in the three months ended November 30, 2022. As a percentage of total royalty and marketing fees, and franchise fee revenue, franchise costs increased to 36.5% in the three months ended November 30, 2022, from 30.7% in the three months ended November 30, 2021. This increase as a percentage of royalty, marketing and franchise fees is primarily the result of higher costs.





Sales and Marketing

The increase in sales and marketing costs for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, was primarily due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.

General and Administrative

The decrease in general and administrative costs for the three months ended November 30, 2022, compared to the three months ended November 30, 2021, is primarily due to lower costs associated with a stockholder's contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the three months ended November 30, 2022, the Company incurred approximately $764,000 of costs associated with the contested solicitation of proxies, compared with $2.7 million of costs associated with a contested solicitation of proxies and associated severance costs during the three months ended November 30, 2021. This decrease was partially offset by an increase in legal expenses and salaries and wages in the three months ended November 30, 2022, compared with the three months ended November 30, 2021. As a percentage of total revenues, general and administrative expenses decreased to 22.3% in the three months ended November 30, 2022, compared to 45.4% in the three months ended November 30, 2021.





Retail Operating Expenses

Retail operating expenses were relatively unchanged during the three months ended November 30, 2022, compared to the three months ended November 30, 2021. Retail operating expenses, as a percentage of retail sales, decreased from 66.1% in the three months ended November 30, 2021, to 62.2% in the three months ended November 30, 2022. This decrease is primarily the result of higher retail sales.

Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $128,000 in the three months ended November 30, 2022, a decrease of 10.9% from $144,000 in the three months ended November 30, 2021. 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 the annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 3.1% to $160,000 in the three months ended November 30, 2022, compared to $155,000 in the three months ended November 30, 2021.





Other Income

Net interest income was $3,000 in the three months ended November 30, 2022, compared to net interest income of $2,200 incurred in the three months ended November 30, 2021.

Income Tax Expense (Benefit)

During the three months ended November 30, 2022, we did not incur any income tax benefit on a loss before income taxes of $212,000. This was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the three months ended November 30, 2021, was 24.5%. See Note 14 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.





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Nine Months Ended November 30, 2022, Compared to the Nine Months Ended November 30, 2021





Results Summary

Basic earnings per share decreased from a net loss of $0.11 per share for the nine months ended November 30, 2021, to a net loss of $0.64 per share for the nine months ended November 30, 2022. Revenues increased 3.3% from $24.0 million for the nine months ended November 30, 2021, to $24.8 million for the nine months ended November 30, 2022. The loss from operations increased from a loss of $1.1 million for the nine months ended November 30, 2021, to a loss from operations of $2.6 million for the nine months ended November 30, 2022. Net loss increased from a net loss of $701,000 for the nine months ended November 30, 2021, to a net loss of $4.0 million for the nine months ended November 30, 2022.





Revenues



                                 Nine Months Ended
                                   November 30,               $           %
($'s in thousands)              2022           2021        Change       Change
Factory sales                $ 17,250.8     $ 16,578.5     $ 672.3          4.1 %
Retail sales                    2,267.9        2,208.1        59.8          2.7 %
Franchise fees                    180.0          165.0        15.0          9.1 %
Royalty and marketing fees      5,128.9        5,075.8        53.1          1.0 %
Total                        $ 24,827.6     $ 24,027.4     $ 800.2          3.3 %




Factory Sales

The increase in factory sales for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was primarily due to an 8.0%, $1.1 million, increase in sales of product to our network of franchised and licensed retail stores partially offset by a 15.7%, $429,000, decrease in shipments of product to customers outside our network of franchised retail stores.





Retail Sales

Retail sales at Company-owned stores increased 2.7% during the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, primarily as a result of an increase in same-store sales at Company-owned locations. Same-store sales at all Company-owned locations increased 6.1% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021.

Royalties, Marketing Fees, and Franchise Fees

The slight increase in royalty and marketing fees for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was primarily due to an increase in same-store sales at domestic franchise frozen yogurt cafés. Same-store sales at all domestic franchise locations increased 3.8% during the nine months ended November 30, 2022, when compared to the nine months ended November 30, 2021, with same-store sales at the Company's domestic franchise frozen yogurt cafés increasing 19.2% during the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021.

The increase in franchise fee revenue for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was the result of store closures and the acceleration of unrecognized franchise fee revenue, and more franchise agreements outstanding and subject to revenue recognition.





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Costs and Expenses



Cost of Sales



                                 Nine Months Ended
                                   November 30,                $            %
($'s in thousands)              2022           2021         Change       Change

Cost of sales - factory      $ 13,823.2     $ 13,065.3     $   757.9         5.8 %
Cost of sales - retail            848.8          754.1          94.7        12.6 %
Franchise costs                 1,569.8        1,747.4        (177.6 )     (10.2 )%
Sales and marketing             1,617.1        1,195.8         421.3        35.2 %
General and administrative      7,810.6        6,575.0       1,235.6        18.8 %
Retail operating                1,364.7        1,304.6          60.1         4.6 %
Total                        $ 27,034.2     $ 24,642.2     $ 2,392.0         9.7 %




Gross Margin



                          Nine Months Ended
                            November 30,              $            %
                         2022          2021         Change      Change

Factory gross profit   $ 3,427.6     $ 3,513.2     $  (85.6 )      (2.4 )%
Retail gross profit      1,419.1       1,454.0        (34.9 )      (2.4 )%
Total                  $ 4,846.7     $ 4,967.2     $ (120.5 )      (2.4 )%




                         Nine Months Ended
                            November 30,             %            %
                         2022           2021      Change       Change



Factory gross margin        19.9 %       21.2 %      (1.3 )%      (6.2 )%
Retail gross margin         62.6 %       65.8 %      (3.3 )%      (5.0 )%
Total                       24.8 %       26.4 %      (1.6 )%      (6.1 )%




Adjusted Gross Margin



                                         Nine Months Ended
                                           November 30,              $             %
($'s in thousands)                      2022          2021         Change       Change

Factory gross margin                  $ 3,427.6     $ 3,513.2     $  (85.6 )       (2.4 )%
Plus: depreciation and amortization       480.5         464.8         15.7          3.4 %
Factory adjusted gross margin           3,908.1       3,978.0        (69.9 )       (1.8 )%
Retail gross margin                     1,419.1       1,454.0        (34.9 )       (2.4 )%
Total Adjusted Gross Margin           $ 5,327.2     $ 5,432.0     $ (104.8 )       (1.9 )%

Factory adjusted gross margin              22.7 %        24.0 %       (1.3 )%      (5.6 )%
Retail gross margin                        62.6 %        65.8 %       (3.3 )%      (5.0 )%
Total Adjusted Gross Margin                27.3 %        28.9 %       (1.6 )%      (5.6 )%

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 them 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 gross margins decreased to 19.9% in the nine months ended November 30, 2022, compared to a gross margin of 21.2% during the nine months ended November 30, 2021, due primarily to an increase in costs from wage and material inflation and the impacts of Employee Retention Credits recognized in the nine months ended November 30, 2021, with no comparable credits in the nine months ended November 30, 2022. These cost increases were partially offset by an increase in product prices. The Company recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits ("ERC") in the nine months ended November 30, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to retroactively benefit from ERCs.

Retail gross margins decreased from 65.8% during the nine months ended November 30, 2021, to 62.6% during the nine months ended November 30, 2022. The decrease in retail gross margins was primarily the result of an increase in the costs of raw materials.





Franchise Costs

The decrease in franchise costs in the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to a decrease in professional fees, the result of litigation with our licensee in Canada incurred during the nine months ended November 30, 2021, with no comparable legal expense in the nine months ended November 30, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 29.6% in the nine months ended November 30, 2022, from 33.3% in the nine months ended November 30, 2021. This decrease as a percentage of royalty, marketing, and franchise fees is primarily the result of lower franchise costs.





Sales and Marketing

The increase in sales and marketing costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due to an increase in equity compensation costs and contract labor associated with the retirement of Edward Dudley, and an increase in advertising costs.





General and Administrative

The increase in general and administrative costs for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to costs associated with a stockholder's contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the nine months ended November 30, 2022, the Company incurred approximately $2.9 million of costs associated with the contested solicitation of proxies, compared with $1.7 million of costs associated with a contested solicitation of proxies during the nine months ended November 30, 2021. The Company also incurred increased professional fees related to legal support for our Board of Directors and legal costs associated with compensation arrangements for our former Chief Executive Officer and Chief Financial Officer and legal and professional costs associated with the search for, and appointment of, a new Chief Executive Officer and a new Chief Financial Officer. Additionally, due to a stockholder's contested solicitation of proxies in connection with our 2021 annual meeting of stockholders the Company had become contingently liable for certain change in control severance payments to Mr. Dudley if a triggering termination was to occur. As a result of Mr. Dudley's retirement in September 2022, the Company incurred $934,000 of associated severance costs. As a percentage of total revenues, general and administrative expenses increased to 31.5% in the nine months ended November 30, 2022, compared to 27.4% in the nine months ended November 30, 2021.





Retail Operating Expenses

The increase in retail operating expenses for the nine months ended November 30, 2022, compared to the nine months ended November 30, 2021, was due primarily to an increase in salaries and wages, and utilities in our Company-owned stores and cafés. Retail operating expenses, as a percentage of retail sales, increased from 59.1% in the nine months ended November 30, 2021, to 60.2% in the nine months ended November 30, 2022. This increase is primarily the result of higher retail costs.

Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $383,000 in the nine months ended November 30, 2022, a decrease of 13.0% from $440,000 in the nine months ended November 30, 2021. 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 financial statements for a summary of the annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 3.4% from $465,000 in the nine months ended November 30, 2021, to $480,000 in the nine months ended November 30, 2022. This increase was the result of investment in equipment.





Other Income

Other income was $9,600 in the nine months ended November 30, 2022, compared to other income of $176,500 during the nine months ended November 30, 2021. Net interest income was $9,600 in the nine months ended November 30, 2022, compared to interest income of $9,300 during the nine months ended November 30, 2021.





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The Company recognized a gain on insurance recovery of $167,100 during the nine months ended November 30, 2021, compared with no similar amounts recognized during the nine months ended November 30, 2022.





Income Tax Expense (Benefit)

During the nine months ended November 30, 2022, we incurred income tax expense of $1.4 million on a loss before income taxes of $2.6 million. This expense was the result of recording a full reserve on our deferred income tax asset. Our effective income tax rate for the nine months ended November 30, 2021, was 20.2%. See Note 14 to the financial statements for a description of income taxes, deferred tax assets, and associated reserves.





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Liquidity and Capital Resources

As of November 30, 2022, working capital was $7.4 million, compared to $9.7 million as of February 28, 2022, a decrease of $2.3 million. The decrease in working capital was primarily due to costs associated with a stockholder's contested solicitation of proxies in connection with our 2022 annual meeting of stockholders.

Cash and cash equivalent balances decreased approximately $4.4 million to $3.2 million as of November 30, 2022, compared to $7.6 million as of February 28, 2022. This decrease in cash and cash equivalents was primarily due to funding of a rabbi trust established for severance payments to our former Chief Executive Officer and the resulting $1.3 million decrease in cash balances and an increase in inventory of $2.1 million. Our current ratio was 2.2 to 1 at November 30, 2022, compared to 2.8 to 1 at February 28, 2022. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

During the nine months ended November 30, 2022, we had a net loss of $4.0 million. Operating activities used cash of $3,583,418, with the principal adjustment to reconcile the net income to net cash used by operating activities being deferred income taxes of $1,388,271, depreciation and amortization of $863,322, an increase in accounts payable of $1,976,869 and expense recorded for stock compensation of $471,530, mostly offset by an increase in inventory of $2,091,099, a decrease in accrued liabilities of $1,284,330 and an increase in accounts receivable of $1,171,146. During the comparable 2021 period, we had a net loss of $700,908, and operating activities provided cash of $857,048. The principal adjustment to reconcile the net income to net cash used by operating activities being an increase in accrued liabilities of $1,343,856, an increase in accounts payable of $1,079,671, depreciation and amortization of $904,972, and expense related to stock-based compensation of $709,210, partially offset by an increase in accounts receivable of $985,887 and an increase in inventory of $936,483.

During the nine months ended November 30, 2022, investing activities used cash of $787,824, primarily due to the purchases of property and equipment of $810,732. In comparison, investing activities used cash of $407,457 during the nine months ended November 30, 2021, primarily due to the purchases of property and equipment of $704,462 partially offset by proceeds from insurance recovery of $206,336.

During the nine months ended November 30, 2022, there were no cash flows from financing activities. In comparison, financing activities used cash of $61,276 in the nine months ended November 30, 2021, due to the redemption of the shareholder rights plan.

The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2023. If necessary, the Company has an available bank line of credit to help meet these requirements.

Off-Balance Sheet Arrangements

As of November 30, 2022, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.

As of November 30, 2022, we had purchase obligations of approximately $36,000. 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 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.





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.





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