NOTE

– LINE OF CREDIT AND LONG-TERM DEBT

The Company has a

$5.0

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

March 16, 2020,

as a precautionary measure, in light of the COVID-

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

$3.4

million (the full amount of

$5.0

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

50%

of eligible accounts receivable plus

50%

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

2.25%

(

2.4%

August 31, 2020).

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

August 31, 2020,

the Company was

not

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

$1.5

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

twelve

months ended

August 31, 2020.

As a result of COVID-

19,

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

June 26, 2020

and on

October 5, 2020

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

October 30, 2015

including, but

not

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

begin to become clear. There is

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

September 2021

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

19.

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

$1.5

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

April 2022

and have a

1.00%

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

may

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

prepayment penalties. As of

August 31, 2020,

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

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

may

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

75%

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

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

August 31, 2020,

the Company had recorded approximately

$5,855

of interest expense payable related to the SBA Loans.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

As of

August 31, 2020

and

February

29,

2020,

notes payable consisted of the following:

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