Note 1 - Nature of Operations and Basis of Presentation

3 Months Ended

May 31, 2012

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

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. and its wholly-owned subsidiary, Aspen Leaf  Yogurt, LLC (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, 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 is a franchisor and retail operator of self-serve frozen yogurt retail locations.

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 ALY at May 31, 2012:

	Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		10		10
Franchise stores – Domestic stores		4		230		234
Franchise stores – Domestic kiosks		-		8		8
Franchise units – International		1		59		60
Cold Stone Creamery – co-branded		3		51		54
Aspen Leaf Yogurt Stores
Company-owned stores		-		9		9
Franchise stores – Domestic stores		-		4		4
Total		8		371		379

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, 2012 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 29, 2012.

Subsequent Events

On June 30, 2012, the Company entered an agreement to sell all of the assets associated with two Company-owned Rocky Mountain Chocolate Factory locations and one Company-owned Aspen Leaf Yogurt location. The stores were sold to franchisees and continue in operation as franchise locations.  The Company now operates eight Company-owned RMCF locations and eight ALY locations.  The sale of these assets is not expected to result in a material impact on the Company’s results of operations and proceeds from the sales were approximately $668,000.

Between June 1 and June 30, 2012 the Company repurchased 129,500 shares of common stock at an average price of $10.44 per share under the stock repurchase plan announced on February 19, 2008.

Stock-Based Compensation

At May 31, 2012, the Company had stock-based compensation plans for employees and non-employee directors that authorized the granting of stock awards consisting of stock options and restricted stock units.

The Company recognized $135,033 of stock-based compensation expense during the three months ended May 31, 2012 compared with $156,233 during the three months ended May 31, 2011. 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, 2012 and 2011:

	Three Months Ended
	May 31,
	2012			2011
Outstanding stock options as of February 28 or 29:		307,088			341,890
Granted		-			12,936
Exercised		-			(6,379	)
Cancelled/forfeited		(14,952	)		-
Outstanding stock options as of May 31:		292,136			348,447
Weighted average exercise price	$	10.64		$	10.13
Weighted average remaining contractual term (in years)		2.57			3.22

The following table summarizes non-vested restricted stock unit transactions for common stock during the three months ended May 31, 2012 and 2011:

	Three Months Ended
	May 31,
	2012			2011
Outstanding non-vested restricted stock units as of February 28 or 29:		101,980			141,260
Granted		-			-
Vested		(10,420	)		(10,420	)
Cancelled/forfeited		(560	)		-
Outstanding non-vested restricted stock units as of May 31:		91,000			130,840
Weighted average grant date fair value	$	9.15		$	9.15
Weighted average remaining vesting period (in years)		1.61			2.61

During the three months ended May 31, 2012, the Company issued 4,000 fully vested, unrestricted shares of stock and did not award any stock options to non-employee directors compared with 4,000 fully vested, unrestricted shares of stock and 12,936 shares of stock options issued to non-employee directors in the three months ended May 31, 2011.  In connection with these non-employee director stock issuances, the Company recognized $37,200 and $52,886 of stock-based compensation expense during the three-month period ended May 31, 2012 and 2011, respectively.

During the three months ended May 31, 2012, the Company recognized $97,833 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, 2012, was $568,412, which is expected to be recognized over the weighted average period of 1.6 years.

There were no stock options awarded during the three months ended May 31, 2012. The weighted-average fair value of stock options granted during the three months ended May 31, 2011 was $0.89 per share.

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:

	Three Months Ended
	May 31,
	2012		2011
Expected dividend yield		n/a		3.87	%
Expected stock price volatility		n/a		27	%
Risk-free interest rate		n/a		2.0	%
Expected life of options		n/a	5 years