Edgar Filing: ROCKY MOUNTAIN CHOCOLATE FACTORY INC

rmcf20130705_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2013

___	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to________

Commission file number: 0-14749

Rocky Mountain Chocolate Factory, Inc.

(Exact name of registrant as specified in its charter)

Colorado	84-0910696
(State of incorporation)	(I.R.S. Employer Identification No.)

265 Turner Drive, Durango, CO 81303

(Address of principal executive offices, including zip code)

(970) 259-0554

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	Accelerated filer

Non-accelerated filer	Smaller reporting company X
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X

On June 30, 2013, the registrant had outstanding 6,080,290 shares of its common stock, $.03 par value.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
CONSOLIDATED STATEMENTS OF INCOME		3
CONSOLIDATED BALANCE SHEETS		4
CONSOLIDATED STATEMENTS OF CASH FLOWS		5
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16

PART II. OTHER INFORMATION		17
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Mine Safety Disclosures	18
Item 5.	Other Information	18
Item 6.	Exhibits	18

Signature		19

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended May 31,
	2013		2012
Revenues
Sales	$	8,178,689	$	8,090,626
Franchise and royalty fees		1,999,173		1,567,567
Total revenues		10,177,862		9,658,193

Costs and Expenses
Cost of sales, exclusive of depreciation and amortization expense of $71,870 and $70,395, respectively		5,027,164		5,022,236
Franchise costs		478,810		544,426
Sales and marketing		505,437		461,182
General and administrative		1,270,704		840,096
Retail operating		840,962		931,013
Depreciation and amortization		235,756		237,140

Total costs and expenses		8,358,833		8,036,093

Income from Operations		1,819,029		1,622,100

Interest Income		11,664		11,294

Income Before Income Taxes		1,830,693		1,633,394

Income Tax Provision		584,154		571,065

Consolidated Net Income	$	1,246,539	$	1,062,329
Less: Net (loss) income attributable to non-controlling interest		67,232		-
Net Income attributable to RMCF	$	1,179,307	$	1,062,329

Basic Earnings per Common Share	$	.19	$	.17
Diluted Earnings per Common Share	$	.19	$	.17

Weighted Average Common Shares Outstanding		6,074,332		6,159,445
Dilutive Effect of Stock Options		237,416		151,317
Weighted Average Common Shares Outstanding, Assuming Dilution		6,311,748		6,310,762

The accompanying notes are an integral part of these consolidated financial statements.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	May 31,		February 28,
	2013		2013
Assets	(unaudited)
Current Assets
Cash and cash equivalents	$	5,372,448	$	5,321,696
Accounts receivable, less allowance for doubtful accounts of $634,146 and $507,806, respectively		3,413,367		3,916,320
Notes receivable, current portion, less current portion of the valuation allowance of $10,382 and $10,382, respectively		240,516		197,078
Inventories, less reserve for obsolete inventory of $255,527 and $253,148, respectively		4,174,348		4,221,036
Deferred income taxes		643,748		628,633
Other		417,451		259,170
Total current assets		14,261,878		14,543,933

Property and Equipment, Net		6,628,690		6,777,143

Other Assets
Notes receivable, less current portion and valuation allowance of $37,400 and $37,400, respectively		517,750		469,362
Goodwill, net		1,046,944		1,046,944
Franchise rights		800,000		800,000
Intangible assets, net		476		635
Other		214,976		195,928
Total other assets		2,580,146		2,512,869

Total Assets	$	23,470,714	$	23,833,945

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	1,246,141	$	1,998,897
Accrued salaries and wages		512,289		1,184,739
Other accrued expenses		1,550,763		1,294,487
Dividend payable		668,832		667,532
Deferred income		475,179		417,484
Total current liabilities		4,453,204		5,563,139

Deferred Income Taxes		859,385		881,694

Commitments and Contingencies

Stockholders’ Equity
Preferred stock, $.10 par value; 250,000 authorized; 0 shares issued and outstanding Series A Junior Participating Preferred Stock, authorized 50,000 shares		-		-
Undesignated series, authorized 200,000 shares		-		-
Common stock, $.03 par value, 100,000,000 shares authorized,6,080,290 and 6,068,470 issued and outstanding, respectively		182,409		182,054
Additional paid-in capital		7,722,171		7,559,442
Retained earnings		9,152,568		8,642,093
Non-controlling interest in equity of subsidiary		1,100,977		1,005,523
Total stockholders’ equity		18,158,125		17,389,112

Total Liabilities and Stockholders’ Equity	$	23,470,714	$	23,833,945

The accompanying notes are an integral part of these consolidated financial statements.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended May 31,
	2013			2012
Cash Flows From Operating Activities
Net income	$	1,179,307		$	1,062,329
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		235,756			237,140
Provision for loss on accounts and notes receivable		70,709			88,000
Provision for obsolete inventory		-			15,000
Gain on sale of property and equipment		(2,600	)		-
Expense recorded for stock compensation		142,808			135,033
Deferred income taxes		(37,424	)		(68,829	)
Changes in operating assets and liabilities:
Accounts receivable		446,607			509,779
Inventories		262,391			604,183
Other current assets		(158,610	)		(185,437	)
Accounts payable		(968,459	)		(591,728	)
Accrued liabilities		(416,174	)		335,572
Deferred income		57,695			(10,500	)
Net cash provided by operating activities		812,006			2,130,542

Cash Flows From Investing Activities
Addition to notes receivable		(153,893	)		(37,351	)
Proceeds received on notes receivable		47,704			61,176
Proceeds from sale or distribution of assets		2,600			-
Purchases of property and equipment		(57,795	)		(252,852	)
Other		47,386			(2,565	)
Net cash used in investing activities		(113,998	)		(231,592	)

Cash Flows From Financing Activities
Repurchase of common stock		-			(362,680	)
Tax benefit of stock awards		20,276			5,740
Dividends paid		(667,532	)		(616,239	)
Net cash used in financing activities		(647,256	)		(973,179	)

Net Increase in Cash and Cash Equivalents		50,752			925,771

Cash and Cash Equivalents, Beginning of Period		5,321,696			4,125,444

Cash and Cash Equivalents, End of Period	$	5,372,448		$	5,051,215

The accompanying notes are an integral part of these consolidated financial statements.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., its wholly-owned subsidiary, Aspen Leaf Yogurt, LLC and its majority-owned subsidiary, U-Swirl, Inc. (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

Rocky Mountain Chocolate Factory, Inc. (“RMCF”) is an international franchisor, confectionery manufacturer and retail operator in the United States, Japan, South Korea, Canada and the United Arab Emirates. RMCF manufactures an extensive line of premium chocolate candies and other confectionery products.

Aspen Leaf Yogurt, LLC (“ALY”) was incorporated in the state of Colorado as Aspen Leaf Yogurt, Inc. on September 30, 2010 and organized through conversion as Aspen Leaf Yogurt, LLC on October 14, 2010. ALY was a franchisor and retail operator of self-serve frozen yogurt retail locations until the sale of substantially all of its assets in January 2013. ALY has ceased to operate any Company-owned Aspen Leaf Yogurt locations, or sell and support franchise locations.

On January 14, 2013, Ulysses Asset Acquisition, LLC (“Newco”), a wholly-owned subsidiary of the Company formed in the State of Colorado on January 2, 2013, entered into an agreement to acquire substantially all of the franchise rights of YHI, Inc. and Yogurtini International, LLC (collectively, “Yogurtini”), which are the franchisors of self-serve frozen yogurt retail units branded as “Yogurtini.” In addition, on January 14, 2013, the Company entered into two agreements to sell all of its membership interests in Newco and substantially all of its assets in ALY to U-Swirl, Inc., a publicly traded company (OTCQB: SWRL), in exchange for a 60% controlling equity interest in U-Swirl, Inc. U-Swirl, Inc. is in the business of offering consumers frozen desserts such as yogurt and sorbet. U-Swirl launched a national chain of self-serve frozen yogurt cafés called U-Swirl Frozen Yogurt and are franchising this concept. U-Swirl has built and operates cafés owned and operated by U-Swirl, Inc. (“Company-owned”) and franchises to others the right to own and operate U-Swirl cafés. It also franchises and operates self-serve frozen yogurt cafes under the name “Yogurtini” and “Aspen Leaf Yogurt.”

The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates and frozen yogurt and other confectionery products. The following table summarizes the number of stores operating under RMCF and its subsidiaries at May 31, 2013:

	Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		7		7
Franchise stores – Domestic stores		4		218		222
Franchise stores – Domestic kiosks		-		6		6
Franchise units – International		1		67		68
Cold Stone Creamery – co-branded		2		56		58
U-Swirl, Inc. Stores (Including Yogurtini and Aspen Leaf Yogurt)
Company-owned stores		-		14		14
Franchise stores – Domestic stores		4		57		61
Total		11		425		436

Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three months ended May 31, 2013 are not necessarily indicative of the results to be expected for the entire fiscal year.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2013.

Stock-Based Compensation

At May 31, 2013, the Company had stock-based compensation plans for employees and non-employee directors that authorized the granting of stock awards, including stock options and restricted stock units.

The Company recognized $142,808 of stock-based compensation expense during the three months ended May 31, 2013 compared with $135,033 during the three months ended May 31, 2012. Compensation costs related to stock-based compensation are generally amortized over the vesting period.

The following table summarizes stock option transactions for common stock during the three months ended May 31, 2013 and 2012:

	Three Months Ended
	May 31,

	2013			2012
Outstanding stock options as of February 28 or 29:		270,945			307,088
Granted		-			-
Exercised		-			-
Cancelled/forfeited		(88,725	)		(14,952	)
Outstanding stock options as of May 31:		182,220			292,136

Weighted average exercise price	$	7.93		$	10.64
Weighted average remaining contractual term (in years)		1.17			2.57

The following table summarizes non-vested restricted stock unit transactions for common stock during the three months ended May 31, 2013 and 2012:

	Three Months Ended
	May 31,

	2013			2012
Outstanding non-vested restricted stock units as of February 28 or 29:		57,030			101,980
Granted		280,900			-
Vested		(7,820	)		(10,420	)
Cancelled/forfeited		-			(560	)
Outstanding non-vested restricted stock units as of May 31:		330,110			91,000

Weighted average grant date fair value	$	11.78		$	9.15
Weighted average remaining vesting period (in years)		5.17			1.61

During the three months ended May 31, 2013, the Company issued 4,000 fully vested, unrestricted shares of stock to non-employee directors compared with 4,000 fully vested, unrestricted shares of stock to non-employee directors in the three months ended May 31, 2012. In connection with these non-employee director stock issuances, the Company recognized $48,400 and $37,200 of stock-based compensation expense during the three-month period ended May 31, 2013 and 2012, respectively.

During the three months ended May 31, 2013, the Company recognized $94,408 of stock-based compensation expense related to non-vested, non-forfeited restricted stock unit grants. The restricted stock units generally vest 20% annually over a period of five years. Total unrecognized compensation expense of non-vested, non-forfeited restricted stock units, as of May 31, 2013, was $3,609,515, which is expected to be recognized over the weighted average period of 5.2 years.

During the three month period ended May 31, 2013, the Company granted 280,900 shares of restricted stock units with a grant date fair value of $3,437,950 or $12.24 per share, compared with no restricted stock units awarded in the three months ended May 31, 2012. The restricted stock unit grants vest between 17% and 20% annually over a period of five to six years. There were no stock options awarded during the three months ended May 31, 2013 or 2012.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:

NOTE 2 - EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. For the three months ended May 31, 2013 and 2012, 101,661 and 105,236 stock options were excluded, respectively, from the computation of earnings per share because their effect would have been anti-dilutive.

NOTE 3 – INVENTORIES

The Company held the following inventory at May 31, 2013 and February 28, 2013:

	May 31, 2013		February 28, 2013

Ingredients and supplies	$	2,734,069	$	2,531,559
Finished candy		1,338,297		1,590,966
U-Swirl, Inc. food and packaging		101,982		98,511
Total inventories	$	4,174,348	$	4,221,036

NOTE 4 - PROPERTY AND EQUIPMENT, NET

Property and equipment at May 31, 2013 and February 28, 2013 consists of the following:

	May 31, 2013		February 28, 2013
Land	$	513,618	$	513,618
Building		4,777,476		4,764,005
Machinery and equipment		8,923,060		8,864,126
Furniture and fixtures		1,033,254		1,024,261
Leasehold improvements		1,930,991		1,930,991
Transportation equipment		392,755		392,755
		17,571,154	$	17,489,756

Less accumulated depreciation		10,942,464		10,712,613
Property and equipment net	$	6,628,690	$	6,777,143

NOTE 5 - STOCKHOLDERS’ EQUITY

Stock Repurchases

On February 19, 2008, the Company announced the plan to purchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. During the three months ended May 31, 2012, the Company repurchased 33,800 shares under the plan at an average price of $10.73 per share. The Company did not repurchase any shares during the three months ended May 31, 2013.

Cash Dividend

The Company paid a quarterly cash dividend of $0.11 per share of common stock on March 15, 2013 to shareholders of record on March 1, 2013. The Company declared a quarterly cash dividend of $0.11 per share of common stock on May 23, 2013 payable on June 14, 2013 to shareholders of record on June 4, 2013.

Future declaration of dividends will depend on, among other things, the Company's results of operations, capital requirements, financial condition and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long term interest of the shareholders.

NOTE 6 – SUPPLEMENTAL CASH FLOW INFORMATION

	Three Months Ended
	May 31,
Cash paid (received) for:	2013			2012
Interest	$	(8,606	)	$	(11,192	)
Income taxes		594,336			52,780
Non-Cash Operating Activities Accrued Inventory		215,703			243,605
Non-Cash Financing Activities Dividend payable	$	668,832		$	675,731

Accrued Capital Expenditures	$	-		$	47,216

NOTE 7 - OPERATING SEGMENTS

The Company classifies its business interests into five reportable segments: Franchising, Manufacturing, Retail Stores, U-Swirl, Inc. operations and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements and Note 1 to the Company’s financial statements included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2013. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:

Three Months Ended May 31, 2013	Franchising		Manufacturing			Retail			U-Swirl, Inc.		Other			Total

Total revenues	$	1,660,016	$	6,726,056		$	515,138		$	1,717,406	$	-		$	10,618,616
Intersegment revenues		-		(440,754	)		-			-		-			(440,754	)
Revenue from external customers		1,660,016		6,285,302			515,138			1,717,406		-			10,177,862
Segment profit (loss)		848,444		1,748,467			(44,859	)		168,079		(889,438	)		1,830,693
Total assets		1,334,534		10,035,858			1,277,606			3,357,523		7,465,193			23,470,714
Capital expenditures		8,451		31,481			5,611			-		12,252			57,795
Total depreciation & amortization		8,593		72,373			14,740			105,578		34,472			235,756

Three Months Ended May 31, 2012	Franchising		Manufacturing			Retail		U-Swirl, Inc.		Other			Total

Total revenues	$	1,567,567	$	6,956,432		$	1,677,281	$	-	$	-		$	10,201,280
Intersegment revenues		-		(543,087	)		-		-		-			(543,087	)
Revenue from external customers		1,567,567		6,413,345			1,677,281		-		-			9,658,193
Segment profit (loss)		668,935		1,818,267			12,635		-		(866,443	)		1,633,394
Total assets		1,463,906		9,594,086			5,158,282		-		7,460,317			23,676,591
Capital expenditures		7,539		52,422			160,859		-		32,032			252,852
Total depreciation & amortization		11,380		71,337			116,781		-		37,642			237,140

Revenue from one customer of the Company’s Manufacturing segment represented approximately $1.8 million of the Company’s revenues from external customers during the three months ended May 31, 2013 compared to $2.1 million during the three months ended May 31, 2012.

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

Intangible assets at May 31, 2013 and February 28, 2013 consist of the following:

				May 31, 2013				February 28, 2013

	Amortization Period (Years)			Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Intangible assets subject to amortization
Store design		10		$	205,777	$	205,301	$	205,777	$	205,142
Packaging licenses	3	-	5		120,830		120,830		120,830		120,830
Packaging design		10			430,973		430,973		430,973		430,973
Total					757,580		757,104		757,580		756,945
Intangible assets not subject to amortization
Franchising segment-
Company stores goodwill					1,099,328		267,020		1,099,328		267,020
Franchising goodwill					295,000		197,682		295,000		197,682
Manufacturing segment-Goodwill					295,000		197,682		295,000		197,682
Trademark					20,000		-		20,000		-
Total Goodwill					1,709,328		662,384		1,709,328		662,384

Franchise Rights					800,000		-		800,000		-

Total intangible assets				$	3,266,908	$	1,419,488	$	3,266,908	$	1,419,329

Amortization expense related to intangible assets totaled $159 and $2,494 during the three months ended May 31, 2013 and 2012, respectively. The decrease in amortization expense is primarily the result of some assets becoming fully amortized and Aspen Leaf Yogurt assets being sold. As of May 31, 2013 $476 net intangible assets subject to amortization remained to be amortized through FY 14.

NOTE 9 – RELATED PARTY TRANSACTIONS

The Company has entered into Franchise Agreements and a Development Agreement with a member of the Company’s Board of Directors. The Director operates two ALY locations under the Franchise Agreements and the Development Agreement. As of May 31, 2013, the Company had receivables of approximately $2,200 due from the Director associated with the director’s ownership and operation of the two current ALY locations.

U-Swirl, Inc. was owed $11,489 and $8,597 as of May 31, 2013 and February 28, 2013, respectively, from a U-Swirl franchise that is owned and operated by the grandchildren of the Company’s Chief Marketing Officer. The corporate secretary and treasurer of the franchise is also the Company’s corporate secretary.

As of May 31, 2013 and February 28, 2013, U-Swirl, Inc. had deferred revenue of $30,000 and $30,000, respectively, from an area developer in which the Company’s Chief Executive Officer and Chief Operating Officer have a minority interest.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and related notes of the Company included elsewhere in this report. The statements included in this report other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and include statements regarding our cash flow, dividends, operating income and future growth. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "will," "believe," "expect," "anticipate," "estimate," and "potential," or similar expressions. Factors which could cause results to differ include, but are not limited to: changes in the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the success of U-Swirl, Inc., receptiveness of our products internationally, consumer trends, costs and availability of raw materials, competition, the success of our co-branding strategy and the effect of government regulations. Government regulations which we and our franchisees either are or may be subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see the “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 2013 which can be viewed at the SEC’s website at www.sec.gov or through our website at www.rmcf.com. These forward-looking statements apply only as of the date of this report. Readers are cautioned not to place undue reliance on the forward-looking statements in this Quarterly Report on Form 10-Q. Except as required by law, we are not obligated to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this report or those that might reflect the occurrence of unanticipated events.

Overview

We are a product-based international franchisor, confectionery manufacturer and retail operator. Our revenues and profitability are derived principally from our franchised system of retail stores that feature chocolate, frozen yogurt, and other confectionery products. We also sell our candy in selected locations outside our system of retail stores to build brand awareness. We own and operate sixteen retail units as a laboratory to test marketing, design and operational initiatives.

The most important factors in continued growth in our earnings are ongoing unit growth, increased same-store sales and increased same-store pounds purchased from the factory. Historically, unit growth has more than offset decreases in same-store sales and same-store pounds purchased.

Our ability to successfully achieve expansion of our Rocky Mountain Chocolate Factory franchise system depends on many factors not within our control, including the availability of suitable sites for new store establishment, the availability of adequate financing options and the availability of qualified franchisees to support such expansion.

Efforts to reverse the decline in same-store pounds purchased from the factory by franchised stores and to increase total factory sales depend on many factors, including new store openings, same-store sales, and the receptivity of our franchise system to our product introductions and promotional programs.

In January 2013, Ulysses Asset Acquisition, LLC (“Newco”), a wholly-owned subsidiary formed in the State of Colorado on January 2, 2013, entered into an agreement to acquire substantially all of the assets of YHI, Inc. and Yogurtini International, LLC (collectively, “Yogurtini”), which are the franchisors of self-serve frozen yogurt retail units branded as “Yogurtini.” In addition, we entered into two agreements to sell all of our membership interests in Newco and substantially all of our assets in Aspen Leaf Yogurt, LLC to U-Swirl, Inc., a publicly traded company (QTCQB: SWRL), in exchange for a 60% controlling equity interest in U-Swirl, Inc. Upon completion of these transactions, we ceased to operate any Company-owned Aspen Leaf Yogurt locations or sell and support franchise locations. We believe that the acquisition of 60% controlling interest in U-Swirl, Inc. will provide us with the ability to reverse operating losses incurred by the development and operation of Aspen Leaf Yogurt, LLC and provide an opportunity to continue to expand our presence in the self-serve frozen yogurt industry. Our ability to execute on this strategy is dependant upon continued expansion of the franchise network of U-Swirl, Inc. and the success of their franchisees.

In March 2013, we entered into a License Agreement covering the Kingdom of Saudi Arabia. Under the terms of the agreement, the licensee agreed to open and begin operating four (4) Rocky Mountain Chocolate Factory stores within 30 months following the execution of the agreement. The licensee has also been granted a 30-month option to convert its initial License Agreement into a Master License Agreement covering the entire country of Saudi Arabia. If the licensee chooses to exercise the option prior to its expiration date, the licensee will acquire the right to itself and/or through third-party franchisees to develop an additional six (6) Rocky Mountain Chocolate Factory stores in the Kingdom of Saudi Arabia.

In March 2013, we entered into a License Agreement covering South Korea. Under the terms of the agreement, the licensee agreed to open five (5) Rocky Mountain Chocolate Factory stores within 30 months following the execution of the agreement. The first Rocky Mountain Chocolate Factory store was opened in Seoul, South Korea in May 2013. The licensee has also been granted a 30-month option to convert its initial License Agreement into a Master License Agreement covering the entire country of South Korea. If the licensee chooses to exercise the option prior to its expiration date, the licensee will acquire the right to itself and/or through third-party franchisees to develop not less than 30 Rocky Mountain Chocolate Factory stores, inclusive of the five (5) stores developed under the terms of the initial License Agreement.

Results of Operations

Three Months Ended May 31, 2013 Compared to the Three Months Ended May 31, 2012

Basic earnings per share increased 11.8% from $.17 during the three months ended May 31, 2012 to $.19 during the three months ended May 31, 2013. Revenues increased by $519,700 in the three months ended May 31, 2013 compared to the three months ended May 31, 2012. This increase in revenues was due primarily to an increase in franchise related revenue, partially offset by a decline in factory sales resulting from a decrease in shipments of product to customers outside our network of franchised retail stores. Operating income increased 12.1% from $1.62 million for the three months ended May 31, 2012 to $1.82 million for the three months ended May 31, 2013. Net income increased 11.0% from $1.06 million in the three months ended May 31, 2012 to $1.18 million in the three months ended May 31, 2013. The increase in net income was due primarily to an income from operations related to frozen yogurt, compared with an operating loss in the same period of the prior year.

Revenues	Three Months Ended
	May 31,					$		%
($’s in thousands)	2013		2012		Change			Change
Factory sales	$	6,285.4	$	6,488.6	$	( 203.2	)		( 3.1	)%
Retail sales		1,893.3		1,602.0		291.3			18.2	%
Franchise fees		276.4		123.9		152.5			123.1	%
Royalty and marketing fees		1,722.8		1,443.7		279.1			19.3	%
Total	$	10,177.9	$	9,658.2	$	519.7			5.4	%

Factory Sales

The decrease in factory sales for the three months ended May 31, 2013 versus the three months ended May 31, 2012 was primarily due to a 9.6% decrease in shipments of product to customers outside our network of franchised retail stores and a 5.4% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation. These decreases were partially offset by a 2.6% increase in same-store pounds purchased by our network of franchised stores.

Retail Sales

The increase in retail sales was primarily due to changes in units in operation, resulting from the acquisition of a majority ownership in U-Swirl, Inc. Same store sales at Company-owned stores increased 6.0% in the three months ended May 31, 2013 compared to the three months ended May 31, 2012.

Royalties, Marketing Fees and Franchise Fees

The increase in royalties and marketing fees from the three months ended May 31, 2012 to the three months ended May 31, 2013 resulted from a 16.9% increase in domestic franchise stores in operation from the three months ended May 31, 2012 to the three months ended May 31, 2013, primarily as a result of our acquisition of a majority ownership position in the U-Swirl franchise system. This increase was partially offset by a decrease in the number of domestic Rocky Mountain Chocolate Factory franchises in operation. The average number of domestic Rocky Mountain Chocolate Factory franchise stores in operation decreased from 239 in the three months ended May 31, 2012 to 226 during the three months ended May 31, 2013. Franchise fee revenues increased as a result of the license fees associated with the license agreements for the development and franchising of Rocky Mountain Chocolate Factory stores in South Korea and the Kingdom of Saudi Arabia. This increase was partially offset by a decrease in the number of domestic franchise store openings from two in the three months ended May 31, 2012 to one opening in the three months ended May 31, 2013.

Costs and Expenses	Three Months Ended
	May 31,							%
($’s in thousands)	2013		2012		Change			Change

Cost of sales – factory adjusted	$	4,377.2	$	4,432.2	$	(55.0	)		(1.2	)%
Cost of sales - retail		650.0		590.0		60.0			10.2	%
Franchise costs		478.8		544.4		(65.6	)		(12.0	)%
Sales and marketing		505.4		461.2		44.2			9.6	%
General and administrative		1,270.7		840.1		430.6			51.3	%
Retail operating		841.0		931.0		(90.0	)		(9.7	)%
Total	$	8,138.1	$	7,798.9	$	339.2			4.2	%

		Three Months Ended
Adjusted Gross margin		May 31,				$		%
		2013		2012		Change		Change
($’s in thousands)
Factory adjusted gross margin	$	1,908.2	$	2,056.4	$	(148.2	)	(7.2	)%
Retail		1,243.3		1,012.0		231.3		22.9	%
Total	$	3,151.5	$	3,068.4	$	83.1		2.7	%

	Three Months Ended
Adjusted Gross margin	May 31,				%		%
	2013		2012		Change		Change
(Percent)
Factory adjusted gross margin	30.4	%	31.7	%	(1.3	)%	(4.1	)%
Retail	65.7	%	63.2	%	2.5	%	4.0	%
Total	38.5	%	37.9	%	.6	%	1.6	%

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 minus 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 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 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. The following table provides a reconciliation of factory adjusted gross margin to factory gross margin, the most comparable performance measure under GAAP:

	Three Months Ended
	May 31,
($’s in thousands)	2013		2012
Factory adjusted gross margin	$	1,908.2	$	2,056.4
Less: depreciation and amortization		71.9		70.4
Factory GAAP gross margin	$	1,836.3	$	1,986.0

Cost of Sales

Factory margins decreased 130 basis points in the three months ended May 31, 2013 compared to the three months ended May 31, 2012 due primarily to a decline in manufacturing efficiencies associated with 6.0% lower production volume in the three months ended May 31, 2013 compared to the three months ended May 31, 2012. The increase in Company-owned store margin is due primarily to an increase in U-Swirl units in operation and associated higher margins.

Franchise Costs

The decrease in franchise costs in the three months ended May 31, 2013 versus the three months ended May 31, 2012 is due primarily to a decrease in franchise development costs associated with Aspen Leaf Yogurt. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 23.9% in the three months ended May 31, 2013 from 34.7% in the three months ended May 31, 2012. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of lower franchise costs and higher franchise and royalty revenues.

Sales and Marketing

The increase in sales and marketing costs for the three months ended May 31, 2013 compared to the three months ended May 31, 2012 is primarily due to increased marketing-related compensation costs and an increase in marketing costs associated with U-Swirl, Inc. franchise locations.

General and Administrative

The increase in general and administrative costs for the three months ended May 31, 2013 compared to the three months ended May 31, 2012 is due primarily to the consolidation of U-Swirl, Inc. general and administrative costs and an increase in compensation related expenses. For the three months ended May 31, 2013, approximately $406,000 of U-Swirl, Inc. general and administrative costs were consolidated within our results, compared with no amount in the three months ended May 31, 2012. As a percentage of total revenues, general and administrative expenses increased to 12.5% in the three months ended May 31, 2013 compared to 8.7% in the three months ended May 31, 2012.

Retail Operating Expenses

The increase in retail operating expenses for the three months ended May 31, 2013 compared to the three months ended May 31, 2012 was due primarily to changes in units in operation, resulting from the acquisition of a majority ownership in U-Swirl, Inc. Retail operating expenses, as a percentage of retail sales, decreased from 58.1% in the three months ended May 31, 2012 to 44.4% in the three months ended May 31, 2013.

Depreciation and Amortization

Depreciation and amortization of $236,000 in the three months ended May 31, 2013 declined $1,000 from $237,000 incurred in the three months ended May 31, 2012, due to certain intangible assets becoming fully amortized.

Interest Income

Interest income of $11,700 realized in the three months ended May 31, 2013 represents an increase of $400 from the $11,300 realized in the three months ended May 31, 2012.

Income Tax Expense

Our effective income tax rate for the three months ended May 31, 2013 was 31.9%, compared to 35.0% for the three months ended May 31, 2012. The decrease of 3.1% was primarily the result of the consolidation of the U-Swirl, Inc. net operating income. There was no income tax expense recognized on U-Swirl, Inc. income before income taxes for the three months ended May 31, 2013. U-Swirl, Inc. has significant net operating loss carryovers. In accordance with section 382 of the Internal Revenue Code, deductibility of U-Swirl, Inc.’s U.S. net operating loss carryovers may be subject to annual limitation in the event of a change in control. We have performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl, Inc. when the Company acquired its 60% ownership interest in January 2013. Our effective income tax rate may increase in future periods, or for the full year as a result of estimates related to the income tax liability arising from the income before income taxes of U-Swirl, Inc.

Liquidity and Capital Resources

As of May 31, 2013, working capital was $9.8 million, compared with $9.0 million as of February 28, 2013, an increase of $800,000. The increase in working capital was primarily due to positive operating results.

Cash and cash equivalent balances increased $50,000 from $5.32 million as of February 28, 2013 to $5.37 million as of May 31, 2013 as a result of cash flow generated by operating activities being mostly offset by cash flows used by financing and investing activities. Our current ratio was 3.2 to 1 at May 31, 2013 in comparison with 2.6 to 1 at February 28, 2013. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

We have a $5.0 million ($5.0 million available as of May 31, 2013) working capital line of credit collateralized by substantially all of our assets with the exception of our retail store assets. Additionally, the line of credit is subject to various financial ratio and leverage covenants. As of May 31, 2013, we were in compliance with all such covenants. The line is subject to renewal on July 31, 2013. As of May 31, 2013, no amount was outstanding under this line of credit.

We believe cash flows generated by operating activities and available financing will be sufficient to fund our operations at least through the end of fiscal 2014.

Off-Balance Sheet Arrangements

As of May 31, 2013 we had no off-balance sheet arrangements or obligations.

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 fixed assets, and is therefore potentially less than it would be if it were based on 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 confectionary products have occurred during the Christmas holiday through Mother’s Day. We believe the strongest sales of frozen yogurt products will occur during the summer months. 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We do not engage in commodity futures trading or hedging activities and do not enter into derivative financial instrument transactions for trading or other speculative purposes. We also do not engage in transactions in foreign currencies or in interest rate swap transactions that could expose us to market risk. However, we are exposed to some commodity price and interest rate risks.

We frequently enter into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit us to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall and we are unable to renegotiate the terms of the contract. As of May 31, 2013, based on future contractual obligations for chocolate products, we estimate that a 10.0% change in the prices of cocoa would result in an $170,000 favorable or unfavorable price benefit resulting from our contracts.

We have a $5.0 million bank line of credit that bears interest at a variable rate. As of May 31, 2013, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this credit facility.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that material information relating to us is made known to the officers who certify as to our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of our CEO and CFO, has evaluated the effectiveness, as of May 31, 2013, of our disclosure controls and procedures. We acquired a 60% controlling interest in U-Swirl, Inc. in January 2013 and U-Swirl’s operations are consolidated into our unaudited financial statements included in this report. As such, the scope of our assessment of the effectiveness of our disclosure controls and procedures did not include the internal controls over financial reporting at U-Swirl. This exclusion is consistent with the SEC’s guidance that an assessment of a recently acquired business may be omitted from the scope of our assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of May 31, 2013.

Changes in Internal Control over Financial Reporting

As a result of the acquisition of U-Swirl, Inc. in January 2013, the Company is evaluating and implementing changes to processes, policies and other components of its internal control over financial reporting with respect to the consolidation of U-Swirl’s operations into the Company’s financial statements. Management continues to be engaged in substantial efforts to evaluate the effectiveness of our internal control procedures and the design of those control procedures relating to U-Swirl. Except for the activities described above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended May 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently involved in any material legal proceedings other than routine litigation incidental to our business.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2013. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

3.1

Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of the Registrant for the year ended February 28, 2009)

3.2

Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Registrant filed on May 22, 2009)

3.3

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Registrant filed on December 14, 2007)

31.1*

Certification of Chief Executive Officer Filed Pursuant To Section 302 Of The Sarbanes-Oxley Act of 2002

31.2*

Certification of Chief Financial Officer Filed Pursuant To Section 302 Of The Sarbanes-Oxley Act of 2002

32.1**

Certification of Chief Executive Officer Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002

32.2**

Certification of Chief Financial Officer Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002

101.INS

****XBRL Instance Document

101.SCH

****XBRL Taxonomy Extension Schema Document

101.CAL

****XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

****XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

****XBRL Taxonomy Extension Label Linkbase Document

101.PRE

****XBRL Taxonomy Extension Presentation Linkbase Document

____________________________

* Filed herewith.

** Furnished herewith.

****Furnished with this report. In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
	(Registrant)


Date: July 15, 2013		/s/ Bryan J. Merryman
		Bryan J. Merryman, Chief Operating Officer,
		Chief Financial Officer, Treasurer and Director