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Note 1 - Nature of Operations and Summary of Significant Accounting Policies

3 Months Ended

May 31, 2014

Business Description and Accounting Policies [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. (“RMCF”), its wholly-owned subsidiary, Aspen Leaf Yogurt, LLC (“ALY”) and its 40%-owned subsidiary, U-Swirl, Inc. (“U-Swirl”), of which RMCF has financial control (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation. As of May 31, 2014, RMCF held approximately 40% of U-Swirl’soutstanding common stock. Additionally, RMCF has the right to acquire approximately 27,100,000 shares of U-Swirl’s common stock through the conversion of outstanding debt owed by U-Swirl to RMCF. If RMCF exercised this conversion right, RMCF would hold approximately 75% of U-Swirl’s common stock. Certain directors of RMCF constitute a majority of the directors of U-Swirl. Pursuant to a voting agreement among RMCF, ALY and certain shareholders of U-Swirl, the parties agree to vote their shares such that certain designees of RMCF shall constitute a majority of U-Swirl’s board of directors so long as RMCF or its affiliates own greater than 10% of U-Swirl’s outstanding common stock.

RMCF is an international franchisor, confectionery manufacturer and retail operator in the United States, Canada, Japan, South Korea, and the United Arab Emirates. RMCF manufactures an extensive line of premium chocolate candies and other confectionery products.

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 units until the sale of substantially all assets in January 2013. As of January 2013, the Company 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 names “Yogurtini,” “CherryBerry,” “Josie’s Frozen Yogurt,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” and “Aspen Leaf Yogurt” as a result of the transactions described above.

On January 17, 2014, U-Swirl entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt cafés branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, U-Swirl purchased certain assets of CherryBerry used in its business of franchising frozen yogurt cafés, including all of its franchise rights and one company-owned café. The assets were acquired for approximately $4.25 million in cash and 4 million shares of U-Swirl common stock. U-Swirl also entered into an Asset Purchase Agreement with Yogli Mogli LLC, which was the franchisor of self-serve frozen yogurt cafés branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, U-Swirl purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt cafés, including all of its franchise rights and four company-owned cafés. The assets were acquired for approximately $2.15 million in cash and $200,000 in shares of U-Swirl common stock. The Yogli Mogli Purchase Agreement contains customary representations and warranties, covenants and indemnification obligations.

On February 20, 2014 U-Swirl entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rights associated with 17 Fuzzy Peach Frozen Yogurt stores. U-Swirl purchased the Fuzzy Peach Franchising, LLC assets for $481,000 in cash paid at the time of closing, plus an earn-out that could increase the purchase price by up to another $349,000 based upon royalty income generated by Fuzzy Peach stores over the next twelve months.

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, royalty and marketing fees from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.

The following table summarizes the number of stores operating under RMCF and its subsidiaries at May 31, 2014:

	Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		6		6
Franchise stores – Domestic stores		5		206		211
Franchise stores – Domestic kiosks		-		6		6
International License Stores		1		69		70
Cold Stone Creamery – co-branded		5		65		70
U-Swirl, Inc. Stores (Including all associated brands)
Company-owned stores		-		11		11
Company-owned stores – co-branded		-		2		2
Franchise stores – Domestic stores		-		268		268
Franchise stores – Domestic – co-branded		-		11		11
International License Stores		-		6		6
Total		11		650		661

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, 2014 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, 2014.

Subsequent Events

In June 2014, the Company entered into a definitive agreement to sell three company-owned cafés. The Company received a deposit of $600,000 from the buyer in May 2014 to secure the rights to acquire the assets through a definitive agreement. These cafés were acquired in January 2014 as part of the Yogli Mogli Acquisition. The Company believes that the sale of these assets will approximate the preliminary value assigned to the assets and that the sale of the assets will not have a material impact on results of operations.

Stock-Based Compensation

At May 31, 2014, 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 $214,323 of stock-based compensation expense during the three months ended May 31, 2014 compared with $142,808 during the three months ended May 31, 2013. 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, 2014 and 2013:

	Three Months Ended
	May 31,
	2014			2013
Outstanding stock options as of February 28:		155,880			270,945
Granted		-			-
Exercised		(133,240	)		-
Cancelled/forfeited		-			(88,725	)
Outstanding stock options as of May 31:		22,640			182,220

Weighted average exercise price	$	11.57		$	7.93
Weighted average remaining contractual term (in years)		1.06			1.17

The following table summarizes non-vested restricted stock unit transactions for common stock during the three months ended May 31, 2014 and 2013:

	Three Months Ended
	May 31,
	2014			2013
Outstanding non-vested restricted stock units as of February 28:		295,040			57,030
Granted		-			280,900
Vested		(7,820	)		(7,820	)
Cancelled/forfeited		-			-
Outstanding non-vested restricted stock units as of May 31:		287,220			330,110

Weighted average grant date fair value	$	12.16		$	11.78
Weighted average remaining vesting period (in years)		4.84			5.17

During the three months ended May 31, 2014, 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, 2013. In connection with these non-employee director stock issuances, the Company recognized $47,480 and $48,400 of stock-based compensation expense during the three-month period ended May 31, 2014 and 2013, respectively.

During the three months ended May 31, 2014, the Company recognized $166,843 of stock-based compensation expense related to non-vested, non-forfeited restricted stock unit grants. The restricted stock units generally vest between 17% and 20% annually over a period of five to six years. Total unrecognized compensation expense of non-vested, non-forfeited restricted stock units, as of May 31, 2014, was $2,981,018, which is expected to be recognized over the weighted average period of 4.8 years.

No restricted stock units were granted during the three months ended May 31, 2014. 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. 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, 2014 or 2013.

The Company recognized $82,449 of U-Swirl, Inc. stock-based compensation expense during the three months ended May 31, 2014 compared with $28,223 recognized during the three months ended May 31, 2013.