RMCF 10-K & 10-Q changes, risk factors and insider trading

In May 2023, subsequent to our fiscal year-end, we announced that we had completed the sale of substantially all of the assets of U-Swirl, our wholly-ownedwholly owned subsidiary and frozen yogurt business. The consummation of the sale of the U-Swirl business involves risks, including retention of uncertain contingent liabilities related to the divested business which could result in a material adverse effect to our financial condition, results of operations or cash flows. We cannot be certain that we will be successful in managing these or any other significant risks that we encounter as a result of divesting the U-Swirl business.

Our same store sales, defined as year-over-year sales for a store that has been open for at least one year, have fluctuated in the past on an annual and quarterly basis and are expected to continue to fluctuate in the future. Sustained declines in same store sales or significant same store sales declines in any single period could have a material adverse effect on our results of operations. For example, same store sales declineddeclines duringcould FY 2021, primarilyoccur as a result of nearlywidespread alloperational ofdisruptions theor franchisereduced storesconsumer beingtraffic directlyacross many locations, including impacts from labor shortages, supply chain constraints, and negativelyinflationary impactedpressures byaffecting publicdiscretionary 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. Same store sales increased during FY 2022, primarily as a result of nearly all of the franchise stores being directly and positively impacted by a resurgence in consumer demand following the relaxing of many public health measures taken in response to COVID-19.spending. If same-store sales decline in the future, we may experience a decrease in demand for products we sell and a decrease in revenue from royalty and marketing fees.

Our sales and earnings are seasonal, with higher sales and earnings occurring during holidays and summer vacation seasonseason. thanThis at other times of the year, whichseasonality causes fluctuations in our quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale 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 the results that may be achieved in other quarters or for a full fiscal year.

We and our franchisees rely on our computer systems and network infrastructure across our operations, including point-of-sale (POS) processing at our stores. Our and our franchisees’ operations depend upon our and our franchisees’ ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external cybersecurity breaches, viruses and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us or our franchisees to litigation or to actions by regulatory authorities. Furthermore, the importance of such information technology systems and networks increased in FY 2021 and continued and will continue into FY 2022, FY 2023, FY 20242026 and FY 2025 due to many of our employees working remotely.beyond.

We are continuing to invest in and expand, upgrade and develop our information technology capabilities, including enterprise resource planning (ERP) software and point-of-sale (POS) systems, as well as the adoption of cloud services for e-mail, intranet, and file storage. If we are unable to successfully upgrade or expand our technological capabilities, or if these systems do not operate as intended, we may not be able to take advantage of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures. Additionally, unforeseen problems with our ERP or POS systemsystems may affect our operational abilities and internal controls and we may incur additional costs in connection with suchour upgradesERP andor expansion.POS systems.

From time to time, we may evaluate potential acquisitions,acquisitions (including of individual stores), divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our results of operations.

Our Auditor’s OpinionReport onOn Our Audited Consolidated Financial Statements forFor theThe Year Ended February 28, 2025,2026, includedIncluded inIn thisThis Annual Report, Contains anAn Explanatory Paragraph Relating toTo ourOur Ability toTo Continue asAs aA Going Concern.

During the year ended February 28, 2025,2026, we incurred a net loss of $6.1$4.6 million and used cash in operating activities of $6.6$1.8 million. In addition, at February 28, 2025,2026, we were in violation of a debt covenant for our $6.0 million Credit AgreementAgreements where(as thedefined lender can demand repayment.below). These factors raise substantial doubts about our ability to continue as a going concern within one year of the date that the consolidated financial statements included in this Annual Report are issued. Our auditor’s opinionreport on our audited consolidated financial statements for the year ended February 28, 20252026 includes an explanatory paragraph stating that our losses and negative cash flows from operations and uncertainty in generating sufficient cash to meet our operating obligations raise substantial doubt about our ability to continue as a going concern. While we are considering a variety of funding sources and transactions that could raise capital, there can be no assurances that we will be successful in these efforts or will be able to resolve our liquidity issues or eliminate our operating losses. If we are unable to obtain sufficient funding, we would need to significantly reduce our operating plans and curtail some or all of our strategic plans. Accordingly, our business, prospects, financial condition, and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

Pursuant to a credit agreement (as amended, the “Credit Agreement”), with RMC Credit Facility LLC, a Colorado limited liability company (the “Lender”), dated September 30, 2024, we have a $6.0 million promissory note, made by the Company to the Lender, for general corporate and working capital purposespurposes. On August 28, 2025, we entered into an amendment to the Credit Agreement pursuant to which, among other things, the Lender made an additional loan to us in the amount of $0.6 million. The additional $0.6 million borrowed was repaid on December 31, 2025. In addition, on August 28, 2025, the Company entered into a credit agreement (the “RMCF2 Credit Agreement” and together with the Credit Agreement, the “Credit Agreements”) pursuant to which the Company borrowed $1.2 million from RMCF2 Credit, LLC, a special purpose investment entity ("NoteRMCF2" and together with the Lender, the "Lenders"). Theaffiliated with Jeffery R. Geygan, our interim chief executive officer and a member of our board of directors. On December 31, 2025, $0.6 million of the $1.2 million was repaid to RMCF2. Each Credit Agreement is secured by substantially all of our assets, except retail store assets. Interest on borrowings is set at 12.0% forand athe 3-yearloans termmature beginningon September 30, 2024.2027. Additionally, theeach Credit Agreement is subject to various financial ratios and leverage covenants. As of February 28, 2026, we were not in compliance with the requirement under the Credit Agreements to maintain a ratio of total liabilities to tangible net worth of no more than 2.0 to 1. Our ratio as of February 28, 2026 was 3.8 to 1. The covenants are measured quarterly.

The Company has received a waiverwaivers from the LenderLenders through August 31, 2026 as of the date of issuance of the consolidated financial statements and is in compliance with all other aspects of the Credit Agreement.Agreements. There can be no assurance that the LenderLenders will grant us a waiverwaivers for future noncompliance.

If we are not in compliance with the requirements under the Credit Agreement,Agreements, under the terms of the Credit Agreement,Agreements, the Lenderlenders hashave the option, but not the obligation, to immediately demand repayment of the full amount of the Note.obligations under the applicable Credit Agreements. As of the date of this Annual Report, we do not have enough cash on hand to satisfy our obligations under theeither NoteCredit Agreement if the Lenderlender thereunder exercised its option to demand repayment. If theany Lenderlender exercises its option and demands repayment at some time in the future, however, we may not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the LenderLenders may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement,Agreements, which would have an adverse effect on our liquidity, financial condition and results of operations.

In addition, theeach Lenderlender retains the right to act on covenant violations that occur after the date of delivery of any waiver. In the future, if theeither Lenderlender were to decline to grant us a waiver and instead demand repayment, we may need to seek alternative financing to pay these obligations as we may not have sufficient facilities or sufficient cash on hand at that time to satisfy these obligations.

Our business and financial results could be negatively impacted by public health outbreaks. The severity, magnitude and duration of global or regional public health outbreaks are uncertain and hard to predict. For example, COVID-19 significantly impacted economic activity and markets around the world, and resulted in broader supply, transportation and labor disruptions resulting in inflation and generally higher operating costs in our business. Relatedly, commodity and transportation costs have become more volatile and generally increased since the COVID-19 pandemic, as havevolatile, supply chain disruptions,disruptions have arisen and continued, and transportation and labor shortages.shortages have occurred. Additionally, government or regulatory responses to public health outbreaks could negatively impact our business. Mandatory lockdowns or other restrictions on operations in some countries temporarily disrupted our ability to distribute our products in some markets. Resumption, continuation or expansion of these disruptions could materially adversely impact our operations and results.

We areAre subjectSubject toTo risksRisks fromFrom changesChanges toTo theTrade tradePolicies, policies,Including includingTariff tariffAnd andImport/Export import/exportRegulations regulationsBy by theThe U.S. andAnd/orOr otherOther foreignForeign governments.Governments.

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, 2025,2026, there were 2three Company-owned, 117111 licensee-owned and 141139 franchised Rocky Mountain Chocolate Factory stores operating in 2734 states and the Philippines.

On September 30, 2024, the Company repaid the amount owed under its credit agreement with Wells Fargo Bank N.A. (the "Wells Fargo Credit Agreement") and entered into a new credit agreement (the “Credit Agreement”) with RMC Credit Facility, LLC (“RMC”). Pursuant to the RMCF2 Credit Agreement, theRMCF2 Companyagreed receivedto make an advance to the Company in the principal amount of $6.0$1.2 million, which advance is evidenced by a promissory note (the “RMCF2 Note”). The RMCF2 Note will maturematures on September 30, 2027 (the “Maturity Date”), and interest will accrueaccrues at a rate of 12% per annum and is payable monthly in arrears. All outstanding principal and interest will be due on the Maturitymaturity Date. RMC is a special purpose investment entity affiliated with Steven L. Craig, one of the members of the Company's board of directors.date.

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.

Basic loss per share increaseddecreased from a loss from continuing operations of $(0.77) per share in FY 2024 to a loss from continuing operations of $(0.86) per share in FY 2025.2025 to a loss from continuing operations of $(0.56) per share in FY 2026. Revenues increaseddecreased by 5.8%7.0% from $28.0 million for FY 2024 to $29.6 million for FY 2025.2025 to $27.5 million for FY 2026. Operating loss and loss from continuing operations was $4.9$5.9 million in FY 20242025 compared to an operating loss of $5.9$3.6 million in FY 2025.2026.

The increasedecrease in total sales for FY 20252026 compared to FY 20242025 was primarily due to a 9%,11%, or $2.0$2.7 million, increasedecrease in sales of products to our network of franchised and licensed retail stores, Specialty Markets customers, and e-commerce customers, and alsopartially reflectiveoffset ofby price increases. Certain unfavorable specialty market contracts were not renewed in FY26.

We continue to rationalize product offerings 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.

Royalty and marketing fees decreasedincreased during FY 20252026 compared to FY 2024 was2025 primarily due to the Companydecrease offeringin moresales favorableof products to our network of franchised retail stores. The royalty agreements withinallow ourfor updated franchise agreement designed toan increase in the amountroyalty 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. The change in franchise fee revenue during FY 2025 compared to FY 2024 was not material.

As of February 28, 2025,2026, working capital was $2.4$2.0 million compared with $1.5$2.4 million as of February 29,28, 2024.2025. The increasedecrease in working capital was due primarily to an equity capital raise of $2.2 million, a refinancing of the Company's previous revolving credit facility into a 3-year note payable that generated an additional $2.5 million of balance sheet liquidity, and the sale of assets that generated $2.3 million, offset by $3.8 million of capital investment in the Durango production facility, plus 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 decreasedincreased from $2.1 million as of February 29, 2024 to $0.7 million as of February 28, 2025 to $1.2 million as of February 28, 2026 primarily as a result of cashproceeds usedof by$1.2 operatingmillion from the RMCF2 Credit Agreement and investinggross activities.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 compared to 1.19 to 1.0 on February 29, 2024.2025. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

During FY 2025,2026, 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,million during FY 2025 primarily due to proceeds from notes payable of $6.0 million, proceeds from thedrawing on a line of credit of $2.2 million, and issuance of common stock through the securities purchase agreement 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. In comparison, financing activities provided cash of $1.3 million during FY 2024 resulting from the Company drawing down $1.3 million on its revolving line of credit.

The conditionsCompany’s aboverecurring 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, 2025,2026, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.

On September 30, 2024, the Company entered into a new credit agreement (the “Credit Agreement”) with RMC Credit Facility, LLC ("RMC"). 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.

TheOn proceedsAugust of28, 2025, we amended the Credit Agreement wereand usedreceived asan follows:additional (i)advance $3.5of $0.6 million. The additional $0.6 million borrowed was repaid on December 31, 2025. As of February 28, 2026, $6.0 million was usedoutstanding to repayon the Wells Fargo Credit Agreement and (ii) the remaining balance was used for continued capital investment and working capital needs.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 Company was not in compliance with the requirement under the Credit Agreement to limit annual capital expenditures to $3.5 million as of February 28, 2025, nor was the Company in compliance with the liabilities to tangible net worth of 2.0:1.0 as of February 28, 2025.2026. 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 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 Quarterly Report and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K, filed with the SEC on JuneMay 20,29, 2025,2026, for the fiscal year ended February 28, 2025.2026.

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 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 NovemberMay 30,31, 2025,2026, there were 34 Company-owned, 112108 licensee-owned and 139138 franchised Rocky Mountain Chocolate Factory stores operating in 3634 states and the Philippines.

On August 28, 2025, the Company entered into a first amendment to the Credit Agreement. RMC agreed to make an additional advance to the Company in the principal amount of $0.6 million,million. There was no change to other terms of the agreement. InThe connectionadditional advance of $0.6 million was repaid on December 31, 2025. The Company was not in compliance with the amendment, the Company and RMC agreed to waive the financial covenant providing for a maximum ratio of total liabilities to totaltangible net worth for each of the2.0:1.0 fiscalat quarters ending AugustMay 31, 2025 and November 30, 2025.2026. The Company wasreceived nota waiver from RMC and is in compliance with the covenant as of November 30, 2025. Allall other covenants were met. Subsequent to November 30, 2025, the Company repaid $0.6 millionaspects of the $6.6debt million outstanding.agreement.

On August 28, 2025, the Company entered into a new credit agreement (the "RMCF2 Credit Agreement") with RMCF2 Credit,Credit LLC (“"RMCF2”"), a special purpose investment entity affiliated with Jeffrey R. Geygan, the Company's Interimformer Chiefinterim Executive OfficerCEO and one of the members of the Company's board of directors.

Pursuant to the newRMCF2 creditCredit agreement,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 is collateralized by the Company's Durango real estate property and the related inventory and property, plant and equipment located on the property, as well as the Company's accounts receivable and cash accounts. Of the $1.2 million advanced, $0.6 million was repaid on December 31, 2025. The Company was not in compliance with the covenant providing for a maximum ratio of total liabilities to tangible net worth of 2.0:1.0 at May 31, 2026. The Company received a waiver from RMCF2 and is in compliance with all other aspects of the debt agreement.

On December 18, 2025, the Company entered into a securities purchase agreement with ARM-D Rocky Mountain Chocolate HoldingsHoldings, LLC (the “Purchaser”"ARM-D") , pursuant to which, among other things, the PurchaserARM-D agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Purchaser,ARM-D, an aggregate of 1,500,000 shares of the Company's common stock at a price per share of $1.80, for total proceeds of approximately $2.7 million, less gross issuance costs of $0.2 million. WeOn planJanuary to23, subsequently register2026, the shares were subsequently registered for resale by the PurchaserARM-D on a Form S-1.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 federallydisruptions imposedto tariffsthe onglobal certainsupply imported items,chain, we have experienced and expect to continue experiencing higher raw material, labor, and freight costs, although these trends have moderated during the quarter.costs. We have experienced labor and logistics challenges, which have contributed to higherlower costfactory, ofretail goodsand sold.e-commerce sales. In addition, we could experience additional lost salesales 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 traffichigh-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 in 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 franchise store growth. TheIn fiscal years 2026 and 2027, the Company recently signed fourfive area development agreements that include the addition of 34forty new franchise stores over the next three to five years.

Our ability to successfully achieve expansion of our franchise systemssystem 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, and the receptivity of our franchise system to our product introductions and promotional programs.

Three Months Ended NovemberMay 30,31, 20252026 Compared Toto the Three Months Ended NovemberMay 30,31, 20242025

Basic loss per share improvedincreased from a loss of $(0.110.04) per share for the three months ended NovemberMay 30,31, 20242025 to a loss of $(0.020.12) per share for the three months ended NovemberMay 30,31, 2025.2026. Revenues decreased by 4.4%4.1% from $7.9 million forcomparing the three months ended NovemberMay 30,31, 20242025 with to $7.5 million for the three months ended NovemberMay 30,31, 2025.2026. OperatingThe operating loss was $0.7 million for the three months ended November 30, 2024 compared to an operating income of $0.1 million for the three months ended NovemberMay 30,31, 2025.2025 compared to an operating loss of $1.0 million for the three months ended May 31, 2026. Net loss increased from a loss of $0.3 million for the three months ended May 31, 2025 to a net loss of $1.2 million for the three months ended May 31, 2026.

The decreaseincrease in Durango product and retail sales of 5.8%,3.5%, or $0.4$0.2 millionmillion, for the three months ended NovemberMay 30,31, 20252026 compared to the three months ended NovemberMay 30,31, 20242025 was primarily due to price increases offset by a decline in packaged product sales. Declines in royalty and marketing fees relate to a change in the non-renewalcalculation of anroyalties unprofitableunder contractrevised withfranchise a specialty market customer.agreements.

Royalty and marketing fees increaseddecreased 2.1%$0.4 or $23 thousandmillion during the three months ended NovemberMay 30,31, 20252026 compared to the three months ended NovemberMay 30,31, 2024.2025. FranchiseesUnder the older franchise agreements, franchisees pay higher10% royalties on sales of revenue generated from products made in the storestore, thanand no royalty on sales revenue generated from products purchased from the CompanyCompany. underWhen sales of store-made products increase, royalties increase. A significant percentage of franchisees have signed flat-rate amendments to their franchise agreements paying 5% royalty on all sales in the Company'sfirst historictwelve franchisemonths, agreement.causing Franchiseesa generally sell more products purchased from the Company during the holidays. The increasedecrease in franchiseroyalty fee revenue of $14 thousand during the three months ended November 30, 2025 compared to the three months ended November 30, 2024 was not material.revenue.

Total gross margin percentage increaseddecreased to 21.4%3.7% for the three months ended NovemberMay 30,31, 20252026 compared to a gross margin of 10.0%6.9% during the three months ended NovemberMay 30,31, 2024,2025, due primarily to salesthe pricedecline increases.in packaged product sales. The Company is redesigning its packaged product offerings.

The decrease in franchise costs for the three months ended NovemberMay 30,31, 20252026 compared to the three months ended NovemberMay 30,31, 20242025 was due primarily to operational efficiencies and cost cuttingcost-cutting measures. As a percentage of total revenue, franchise costs decreased to 8.0% during the three months ended May 31, 2026, compared to 9.3% during the three months ended May 31, 2025.

The decrease in sales and marketing costs during the three months ended NovemberMay 30,31, 20252026 compared to the three months ended NovemberMay 30,31, 20242025 was due primarily to operationalcost-cutting efficienciesmeasures as we re-evaluate our marketing strategies. As a percentage of total revenues, sales and inmarketing partexpenses duedecreased to timing3.1% ofduring anticipatedthe expenses.three months ended May 31, 2026, compared to 3.2% during the three months ended May 31, 2025.

The decreaseincrease in general and administrative costs during the three months ended NovemberMay 30,31, 20252026 compared to the three months ended NovemberMay 30,31, 2024,2025, was due primarily to costan cuttingincrease measures.in labor costs related to the implementation of websites and third-party delivery platforms for franchisees across the franchise network and additional professional fees. As a percentage of total revenues, general and administrative expenses decreasedincreased to 15.4%20.9% during the three months ended NovemberMay 30,31, 2025,2026, compared to 18.1%15.7% during the three months ended NovemberMay 30,31, 2024.2025.

Retail operating expenses increased 122.2%53.9% during the three months ended NovemberMay 30,31, 20252026 compared to the three months ended NovemberMay 30,31, 2024.2025. This increase is primarily the result of thean purchaseincrease from two company-owned stores to four company-owned stores. As a percentage of atotal thirdrevenues, retail storeoperating expenses increased to 5.2% during inthe Augustthree 2025months andended inMay part31, due2026 compared to 3.2% during the timingthree ofmonths expenses.ended May 31, 2025.

Depreciation and amortization, exclusive of depreciation and amortization included in cost of salessales, was $0.1 million during the three months ended November 30, 2025, an increase of 77.8% from $63$139 thousand during the three months ended NovemberMay 30,31, 2024.2026, Depreciationan and amortization included in costincrease of sales increased 10.4%17.8% from $0.21$118 millionthousand duringfor the three months ended NovemberMay 30, 2024 to $0.23 million during the three months ended November 30,31, 2025. This increase was the result of prior year investments in equipment.