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EX-32.1 - EXHIBIT 32.1 - ROCKY MOUNTAIN CHOCOLATE FACTORY INCex32-1.htm
EX-32.2 - EXHIBIT 32.2 - ROCKY MOUNTAIN CHOCOLATE FACTORY INCex32-2.htm
EX-31.1 - EXHIBIT 31.1 - ROCKY MOUNTAIN CHOCOLATE FACTORY INCex31-1.htm
EX-31.2 - EXHIBIT 31.2 - ROCKY MOUNTAIN CHOCOLATE FACTORY INCex31-2.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 November 30, 2010

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

265 Turner Drive, Durango, CO 81303
(Address of principal executive offices)

(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 (§ 229.405 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 ___ 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 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 January 1, 2011 the registrant had outstanding 6,063,508 shares of its common stock, $.03 par value.

 
1

 
 
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
 
FORM 10-Q
 
TABLE OF CONTENTS
 
   
Page No.
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements
 
3-12
 
Consolidated Statements of Income
 
3
 
Consolidated Balance Sheets
 
4
 
Consolidated Statements of Cash Flows
 
5
 
Notes to Interim Consolidated Financial Statements
 
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
12
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
19
Item 4.
Controls and Procedures
 
19
PART II.
OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
20
Item 1A.
Risk Factors
20
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
20
Item 3.
Defaults Upon Senior Securities
 
20
Item 4.
Reserved
 
20
Item 5.
Other Information
 
20
Item 6.
Exhibits
 
20
SIGNATURE
  21

 
2

 
PART I.        FINANCIAL INFORMATION

Item 1.           Financial Statements

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

   
Three Months Ended November 30,
   
Nine Months Ended November 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
                       
Sales
  $ 6,625,043     $ 5,733,623     $ 17,979,260     $ 15,718,025  
Franchise and royalty fees
    1,290,889       1,147,731       4,178,274       3,919,421  
Total revenues
    7,915,932       6,881,354       22,157,534       19,637,446  
                                 
Costs and Expenses
                               
Cost of sales, exclusive of depreciation and amortization expense of $82,039, $83,420, $247,761 and $252,344, respectively
          4,375,609             3,742,087             11,501,952             10,208,313  
Franchise costs
    402,688       377,349       1,115,985       1,149,111  
Sales and marketing
    395,670       357,378       1,143,908       1,035,139  
General and administrative
    686,558       572,352       1,998,913       1,775,288  
Retail operating
    569,340       458,936       1,691,489       1,167,249  
Depreciation and amortization
    162,740       174,054       504,082       528,742  
Total costs and expenses
    6,592,605       5,682,156       17,956,329       15,863,842  
                                 
Income from Operations
    1,323,327       1,199,198       4,201,205       3,773,604  
                                 
Interest Income
    16,105       7,070       41,170       19,450  
                                 
Income Before Income Taxes
    1,339,432       1,206,268       4,242,375       3,793,054  
                                 
Income Tax Provision
    465,952       456,305       1,493,652       1,413,015  
                                 
Net Income
  $ 873,480     $ 749,963     $ 2,748,723     $ 2,380,039  
                                 
Basic Earnings per Common Share
  $ .14     $ .12     $ .45     $ .40  
Diluted Earnings per Common Share
  $ .14     $ .12     $ .44     $ .38  
                                 
Weighted Average Common Shares Outstanding
    6,063,720       6,025,938       6,045,782       6,008,099  
Dilutive Effect of Stock Options
    244,026       196,913       236,496       199,770  
Weighted Average Common Shares Outstanding, Assuming Dilution
      6,307,746         6,222,851         6,282,278         6,207,869  


The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


    November 30,
2010
   
February 28,
2010 
 
    (unaudited)        
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 3,356,025     $ 3,743,092  
Accounts receivable, less allowance for doubtful accounts of $515,491 and $395,291, respectively
    4,618,303       4,427,526  
Notes receivable, current portion
    202,395       91,059  
Inventories, less reserve for slow moving inventory of $254,272 and $263,872, respectively
    4,012,015       3,281,447  
Deferred income taxes
    443,686       461,249  
Other
    450,079       220,163  
Total current assets
    13,082,503       12,224,536  
                 
Property and Equipment, Net
    5,331,145       5,186,709  
                 
Other Assets
               
Notes receivable, less current portion and valuation allowance of $14,000 and $0, respectively
    576,327       263,650  
Goodwill, net
    1,046,944       1,046,944  
Intangible assets, net
    61,542       110,025  
Other
    83,578       88,050  
Total other assets
    1,768,391       1,508,669  
                 
Total assets
  $ 20,182,039     $ 18,919,914  
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Accounts payable
  $ 1,317,137     $ 877,832  
Accrued salaries and wages
    391,625       646,156  
Other accrued expenses
    869,253       946,528  
Dividend payable
    606,351       602,694  
Deferred income
    205,410       220,938  
                 
Total current liabilities
    3,389,776       3,294,148  
                 
Deferred Income Taxes
    812,026       894,429  
                 
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, 6,063,508 and 6,026,938 issued and outstanding, respectively
      181,905         180,808  
Additional paid-in capital
    7,941,477       7,626,602  
Retained earnings
    7,856,855       6,923,927  
Total stockholders’ equity
    15,980,237       14,731,337  
                 
Total liabilities and stockholders’ equity
  $ 20,182,039     $ 18,919,914  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
4

 
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Nine Months Ended
 
   
November 30,
 
   
2010
   
2009
 
Cash Flows From Operating activities
           
Net income
  $ 2,748,723     $ 2,380,039  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation and amortization
    504,082       528,742  
Provision for loss on accounts and notes receivable
    135,000       150,000  
Provision for obsolete inventory
    45,000       45,000  
Loss (gain) on sale or acquisition of property and equipment
    481       (9,809 )
Expense recorded for stock compensation
    315,972       236,489  
Deferred income taxes
    (64,840 )     722  
Changes in operating assets and liabilities:
               
Accounts receivable
    (378,781 )     (546,146 )
Inventories
    (775,568 )     321,195  
Other current assets
    (237,058 )     (104,456 )
Accounts payable
    439,305       4,392  
Deferred income
    (15,528 )     38,500  
Accrued liabilities
    (331,807 )     85,648  
Net cash provided by operating activities
    2,384,981       3,130,316  
                 
Cash Flows From Investing Activities
               
Addition to notes receivable
  $ (549,259 )   $ (196,147 )
Proceeds received on notes receivable
    111,246       -  
Proceeds from sale or distribution of assets
    18,602       5,000  
Purchases of property and equipment
    (532,403 )     (338,256 )
Increase in other assets
    (8,097 )     (79,706 )
Net cash used in investing activities
    (959,911 )     (609,109 )
                 
Cash Flows From Financing Activities
               
Dividends paid
  $ (1,812,137 )   $ (1,800,864 )
Net cash used in financing activities
    (1,812,137 )     (1,800,864 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    (387,067 )     720,343  
                 
Cash and Cash Equivalents, Beginning of Period
  $ 3,743,092     $ 1,253,947  
                 
Cash and Cash Equivalents, End of Period
  $ 3,356,025     $ 1,974,290  

 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

 
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
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. 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, 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.  Since its inception, ALY has been developing franchise related documents, negotiating leases for retail locations, developing vendor relationships and other organizational activities.  ALY has been primarily focused on activities of organization and has not recognized any revenue. For the nine months ended November 30, 2010 ALY has recognized start up costs as incurred.

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 other confectionery products.  The following table summarizes the number of stores operating under RMCF and ALY at November 30, 2010:

   
Sold, Not Yet Open
 
Open
 
Total
Rocky Mountain Chocolate Factory
                 
Company-owned stores
    -       12       12  
Franchise stores – Domestic stores
    6       244       250  
Franchise stores – Domestic kiosks
    -       7       7  
Franchise units – International
    -       55       55  
Cold Stone Creamery – co-branded
    5       38       43  
Aspen Leaf Yogurt Stores
                       
Company-owned stores
    4       -       4  
Franchise stores – Domestic stores
    -       -       -  
Total
    15       356       371  

Basis of Presentation

The accompanying 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 financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the 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 and nine months ended November 30, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year.

These 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, 2010.

 
6

 
 
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION - CONTINUED

Subsequent Events

The Company has performed an evaluation of subsequent events through January 13, 2011, the date the Company issued these financial statements. Based on our evaluation, the Company is not aware of any subsequent events which would require recognition or disclosure.

Stock-Based Compensation

At November 30, 2010, the Company had stock-based compensation plans for employees and non-employee directors which authorized the granting of stock awards.

The Company recognized $97,686 and $315,972 of equity-based compensation expense during the three and nine month periods ended November 30, 2010, respectively, compared to $73,892 and $236,491, during the three and nine month periods ended November 30, 2009, respectively. Compensation costs related to share-based compensation are generally amortized over the vesting period.

The following table summarizes stock option transactions for common stock during the nine months ended November 30, 2010 and November 30, 2009:
 
   
Nine Months Ended
 
   
November 30,
 
 
 
2010
   
2009
 
Outstanding stock options as of February 28:
    367,762       371,437  
Granted
    -       -  
Exercised
    -       -  
Cancelled/forfeited
    (9,702 )     (1,050 )
Outstanding stock options as of November 30:
    358,060       370,387  
                 
Weighted average exercise price
  $ 9.81     $ 9.98  
Weighted average remaining contractual term (in years)
     3.45        4.36  

The following table summarizes non-vested restricted stock unit transactions for common stock during the nine months ended November 30, 2010 and November 30, 2009:

   
Nine Months Ended
 
   
November 30,
 
 
 
2010
   
2009
 
Outstanding non-vested restricted stock units as of February 28:
     129,280        165,400  
Granted
    44,300       -  
Vested
    (32,320 )     (33,080 )
Cancelled/forfeited
    -       (1,760 )
Outstanding non-vested restricted stock units as of November 30:
     141,260        130,560  
                 
Weighted average grant date fair value
  $ 9.17     $ 9.04  
Weighted average remaining vesting period (in years)
     3.21        3.65  

During the nine month period ended November 30, 2010, the Company issued 4,000 fully vested, unrestricted shares of stock to non-employee directors compared with 3,000 fully vested, unrestricted shares issued to non-employee directors in same period of the prior fiscal year. There were no unrestricted shares issued during the three month period ended November 30, 2010 or November 30, 2009.  In connection with these non-employee director stock issuances, the Company recognized $38,000 and $13,080 of equity-based compensation expense during the nine-month period ended November 30, 2010 and November 30, 2009, respectively.

During the three and nine month periods ended November 30, 2010, the Company recognized $97,686 and $275,552, respectively, of equity-based compensation expense related to non-vested, non-forfeited restricted stock unit grants. The restricted stock unit grants generally vest 20% annually over a period of five years.  During the nine months ended November 30,

 
7

 
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION - CONTINUED

Stock Based Compensation - Continued

2010, 32,320 restricted stock units vested and were issued as common stock.  Total unrecognized compensation expense of non-vested, non-forfeited shares granted, as of November 30, 2010, was $1,136,677, which is expected to be recognized over the weighted average period of 3.2 years

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 November 30, 2010 and 2009, 116,004 and 128,090 stock options, respectively, were excluded from the computation of earnings per share because their effect would have been anti-dilutive. For the nine months ended November 30, 2010 and 2009, 119,238 and 187,163 stock options, respectively, were excluded from the computation of earnings per share because their effect would have been anti-dilutive.

NOTE 3 – INVENTORIES

Inventories consist of the following:

   
November 30, 2010
   
February 28, 2010
 
Ingredients and supplies
  $ 2,438,039     $ 1,945,626  
Finished candy
    1,573,976       1,335,821  
Total inventories
  $ 4,012,015     $ 3,281,447  

NOTE 4 - PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

   
November 30, 2010
   
February 28, 2010
 
Land
  $ 513,618     $ 513,618  
Building
    4,691,792       4,699,167  
Machinery and equipment
    7,301,731       7,006,146  
Furniture and fixtures
    875,761       794,387  
Leasehold improvements
    420,057       404,191  
Transportation equipment
    358,721       379,238  
      14,161,680       13,796,747  
                 
Less accumulated depreciation
    8,830,535       8,610,038  
Property and equipment, net
  $ 5,331,145     $ 5,186,709  

NOTE 5 - STOCKHOLDERS’ EQUITY

Shareholder Rights Plan

On May 19, 2009, the Company and Computershare Trust Company, N.A. entered into an Amended and Restated Shareholder Rights Agreement (“Rights Agreement”) which amended and restated the existing Shareholder Rights Agreement dated May 28, 1999, (“Existing Rights Plan”). In connection with the Existing Rights Plan the Company’s Board of Directors declared a dividend of one right to purchase one one-hundredth of a share of the Company’s Series  Junior Participating Preferred Stock, par value $0.10 per share, for each outstanding share of the Company’s common stock, par value $0.03 per share, of the Company that was outstanding on May 28, 1999. Each share of Series A Junior Participating Preferred Stock originally entitled the holder to one hundred votes and dividends equal to one hundred times the aggregate per share amount of dividends declared per common share. There are no shares of Series A Junior Participating Preferred Stock outstanding.  The Existing Rights Plan was set to expire on May 28, 2009 and, through board declaration, was replaced in its entirety by the Rights Agreement on May 18, 2009 when the Board of Directors of the Company authorized and declared a dividend of one Right (a "Right") for each outstanding share of Common Stock of the Company (the "Common Shares").  The dividend was paid on May 19, 2009 (the "Record Date")
 
 
8

 
NOTE 5 - STOCKHOLDERS’ EQUITY - CONTINUED

Shareholder Rights Plan - Continued

to the holders of record of the Common Shares at the close of business on that date. The Rights will become exercisable and detachable only following the earlier of 10 days following a public announcement that a person or group has acquired beneficial ownership of 15 percent or more of the outstanding Common Shares or 10 business days following the announcement of a tender offer or exchange offer for 15 percent or more of the outstanding Common Shares.  In addition, the Company has authorized the issuance of one Right with respect to each share of Common Stock that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date. When exercisable, each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.10 per share, of the Company (the "Preferred Shares"), at a price of $30 per one one-thousandth of a Preferred Share (the "Purchase Price"), subject to adjustment.  Each share of Series A Junior Participating Preferred Stock entitles the holder to one thousand votes and dividends equal to one thousand times the aggregate per share amount of dividends declared per common share.

Cash Dividend

The Company paid a quarterly cash dividend of $0.10 per common share on March 12, 2010 to shareholders of record on February 26, 2010. The Company paid a quarterly cash dividend of $0.10 per common share on June 11, 2010 to shareholders of record on May 27, 2010.  The Company paid a quarterly cash dividend of $0.10 per common share on September 17, 2010 to shareholders of record on September 7, 2010. On November 16, 2010 the Company declared a quarterly cash dividend of $0.10 per common share payable on December 10, 2010 to shareholders of record on November 30, 2010.

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

   
Nine Months Ended
 
   
November 30,
 
Cash paid (received) for:
 
2010
   
2009
 
    Interest
  $ (39,074 )   $ (30,386 )
    Income taxes
    1,749,482       1,342,833  
                 
Non-Cash Financing Activities
    Dividend Payable
  $ 3,657     $ 3,608  
Fair value of assets acquired in business combination
    Store assets
  $  63,198     $  -  

NOTE 7 - OPERATING SEGMENTS

The Company classifies its business interests into three reportable segments: Franchising, Manufacturing and Retail Stores.  The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these financial statements and Note 1 to the Company’s financial statements included in the Company’s annual report on Form 10-K for the fiscal year ended February 28, 2010.  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:

 
9

 

NOTE 7 - OPERATING SEGMENTS - CONTINUED

Three Months Ended
November 30, 2010
 
Franchising
   
Manufacturing
   
Retail
   
Other
   
Total
 
Total revenues
  $ 1,290,889     $ 6,471,210     $ 765,983     $ -     $ 8,528,082  
Intersegment revenues
    -       (612,150 )     -       -       (612,150 )
Revenue from external
 customers
    1,290,889       5,859,060       765,983       -       7,915,932  
Segment profit (loss)
    554,005       1,651,547       (169,664 )     (696,456 )     1,339,432  
Total assets
    1,431,276       11,158,330       3,000,480       4,591,953       20,182,039  
Capital expenditures
    -       35,727       144,361       37,369       217,457  
Total depreciation &
 amortization
  $ 19,335     $ 86,719     $ 21,753     $ 34,933     $ 162,740  

                               
Three Months Ended
November 30, 2009
 
Franchising
   
Manufacturing
   
Retail
   
Other
   
Total
 
Total revenues
  $ 1,147,731     $ 5,634,126     $ 598,252     $ -     $ 7,380,109  
Intersegment revenues
    -       (498,755 )     -       -       (498,755 )
Revenue from external
 customers
    1,147,731       5,135,371       598,252       -       6,881,354  
Segment profit (loss)
    473,059       1,470,026       (154,543 )     (582,274 )     1,206,268  
Total assets
    1,322,084       11,053,090       1,679,323       3,768,996       17,823,493  
Capital expenditures
    1,075       32,016       86,823       20,459       140,373  
Total depreciation &
 amortization
  $ 21,325     $ 88,167     $ 18,964     $ 45,598     $ 174,054  

Nine Months Ended
November 30, 2010
 
Franchising
   
Manufacturing
   
Retail
   
Other
   
Total
 
Total revenues
  $ 4,178,274     $ 17,084,006     $ 2,502,141     $ -     $ 23,764,421  
Intersegment revenues
    -       (1,606,887 )     -       -       (1,606,887 )
Revenue from external
 customers
    4,178,274       15,477,119       2,502,141       -       22,157,534  
Segment profit (loss)
    2,064,665       4,527,163       (280,906 )     (2,068,547 )     4,242,375  
Total assets
    1,431,276       11,158,330       3,000,480       4,591,953       20,182,039  
Capital expenditures
    3,524       146,488       173,620       208,771       532,403  
Total depreciation &
 amortization
  $ 59,002     $ 262,447     $ 71,491     $ 111,142     $ 504,082  

                               
Nine Months Ended
November 30, 2009
 
Franchising
   
Manufacturing
   
Retail
   
Other
   
Total
 
Total revenues
  $ 3,919,421     $ 15,301,218     $ 1,774,736     $ -     $ 20,995,375  
Intersegment revenues
    -       (1,357,929 )     -       -       (1,357,929 )
Revenue from external
 customers
    3,919,421       13,943,289       1,774,736       -       19,637,446  
Segment profit (loss)
    1,850,113       3,972,749       (123,948 )     (1,905,860 )     3,793,054  
Total assets
    1,322,084       11,053,090       1,679,323       3,768,996       17,823,493  
Capital expenditures
    3,368       121,587       163,493       49,808       338,256  
Total depreciation &
 amortization
  $ 66,872     $ 268,063     $ 54,203     $ 139,604     $ 528,742  

Revenue from one customer of the Company’s Manufacturing segment represented approximately $1.6 million of the Company’s revenues from external customers during the nine months ended November 30, 2010 compared to $1.5 million during the nine months ended November 30, 2009.

 
10

 
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:

     
November 30, 2010
   
February 28, 2010
 
 
Amortization Period
 
Gross Carrying Value
   
Accumulated Amortization
   
Gross Carrying Value
   
Accumulated Amortization
 
Intangible assets subject to amortization
                         
     Store design
10 Years
  $ 205,777     $ 185,368     $ 205,777     $ 169,535  
     Packaging licenses
3-5 Years
    120,830       120,831       120,830       119,164  
     Packaging design
10 Years
    430,973       389,839       430,973       358,856  
     Total
      757,580       696,038       757,580       647,555  
                                   
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  
                                   
Total intangible assets
    $ 2,466,908     $ 1,358,422     $ 2,466,908     $ 1,309,939  

Amortization expense related to intangible assets totaled $48,483 and $54,833 during the nine months ended November 30, 2010 and 2009, respectively. The aggregate estimated amortization expense for intangible assets remaining as of November 30, 2010 is as follows:

Remainder of fiscal 2011
  $ 16,000  
2012
    40,200  
2013
    4,700  
2014
    642  
Total
  $ 61,542  

NOTE 9 – STORE PURCHASE

On May 16, 2010, the Company purchased a previously franchise operated Rocky Mountain Chocolate Factory store and related assets in satisfaction of $54,607 of accounts receivable.  The Company currently intends to retain and operate the store and believes that the store has the potential to contribute to future operating results. The Company adopted ASC Topic 805, Business Combinations, as of March 1, 2009.  ASC Topic 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired.  In accordance with ASC 805, the Company recorded the business acquisition using the acquisition method.  The Company recorded the value of the business acquisition at fair value and recorded a gain of $8,592 associated with the business acquisition.  The following table summarizes the allocation of fair value on the date of acquisition:

Fair value of assets acquired in business combination
Store assets consisting of equipment,furniture, and fixtures:
  $    63,198  

Effective March 1, 2009, the Company adopted the fair value measurement and disclosure provisions of ASC Topic 805, Business Combinations, which establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities that are already subject to fair value measurements under current accounting rules.  The Company determined the fair value of the business combination using transaction information for historical asset costs, adjusted for the age of the asset.  These inputs to the valuation methodology are unobservable and significant to the fair value measurement (Level 3 of the ASC Topic 805 value hierarchy).

 
11

 
 
NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the FASB issued Accounting Standards Update ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU No. 2010-20 enhances the existing disclosure requirements providing more transparency of the allowance for loan losses and credit quality of financing receivables. ASU 2010-20 is effective for the first interim and annual reporting periods ending on or after December 15, 2010. We will adopt the provisions of ASU 2010-20 effective for our fiscal 2011 year-end reporting and for interim periods beginning with our first quarterly reporting of fiscal 2012 and thereafter.

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

A Note About Forward-Looking Statements

The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the unaudited financial statements and related Notes of the Company included elsewhere in this report. The nature of the Company's operations and the environment in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this report 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. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect," "anticipate," "should," "plan," "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 the Company’s products, general economic conditions, consumer trends, costs and availability of raw materials, competition and the effect of government regulation. Government regulation which the Company and its 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 the Company’s actual results to differ from the forward-looking statements contained herein, please see the “Risk Factors” contained in the Company’s 10-K for the fiscal year ended February 28, 2010 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. As such they should not be unduly relied upon for more current circumstances. Except as required by law, the Company is 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.

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

We are subject to seasonal fluctuations in sales because of the location of our franchises, which are located in street fronts, tourist locations, outlet centers and regional centers. Seasonal fluctuation in sales cause fluctuations in quarterly results of operations. Historically, the strongest sales of our products have occurred during the Christmas holiday 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 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.

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.

 
12

 
Our ability to successfully achieve expansion of our Rocky Mountain Chocolate Factory and Aspen Leaf Yogurt franchise systems depends on many factors not within our control including the availability of suitable sites for new store establishment 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 and the receptivity of our franchise system to our product introductions and promotional programs. Same store pounds purchased from the factory by franchised stores declined approximately 0.5% in the first quarter, declined approximately 1.0% in the second quarter, increased approximately 2.3% in the third quarter and increased approximately 1.4% in the first nine months of fiscal 2011, as compared to the same periods in fiscal 2010.

As a result, the actual results realized by us could differ materially from the results discussed in or contemplated by the forward-looking statements made herein. Readers are cautioned not to place undue reliance on the forward-looking statements in this Quarterly Report on Form 10-Q.

Results of Operations

Three Months Ended November 30, 2010 Compared to the Three Months Ended
November 30, 2009

Basic earnings per share increased 16.7% from $.12 in the third quarter of fiscal 2010 to $.14 in the same period of fiscal 2011.  Revenues increased 15.0% from $6.9 million in the third quarter of fiscal 2010 to $7.9 million in the same period of fiscal 2011.  Operating income increased 10.4% from $1.2 million in the third quarter of fiscal 2010 to $1.3 million in the third quarter of fiscal 2011.  Net income increased 16.5% from $750,000 in the third quarter of fiscal 2010 to $873,000 in the third quarter of fiscal 2011.  The increase in operating income and net income for the third quarter of fiscal 2011 compared to the same period in fiscal 2010 was due primarily to an increase in shipments of product to our network of franchised and licensed stores and an increase in shipments to customers outside our network of franchised and licensed stores.

Revenues
 
Three Months Ended
             
   
November 30,
    $     %  
($’s in thousands)
 
2010
   
2009
   
Change
   
Change
 
Factory sales
  $ 5,859.0     $ 5,135.4     $ 723.6       14.1 %
Retail sales
    766.0       598.2       167.8       28.1 %
Franchise fees
    114.0       31.5       82.5       261.9 %
Royalty and Marketing fees
    1,176.9       1,116.2       60.7       5.4 %
  Total
  $ 7,915.9     $ 6,881.3     $ 1,034.6       15.0 %

Factory Sales

The increase in factory sales for the third quarter of fiscal 2011 compared to the same period in fiscal 2010 was due to an increase in sales to our franchise system resulting from a 2.3% increase in same store pounds purchased by franchised stores and an increase in sales of factory product to licensed locations and customers outside our system of franchised stores.

Retail Sales

The increase in retail sales resulted primarily from an increase in the average number of Company-owned stores in operation from 8 during the third quarter of fiscal 2010 to 12 in the same period of fiscal 2011. Same store retail sales increased 1.4% in the third quarter of fiscal 2011 compared to the same period in fiscal 2010.

Royalties, Marketing Fees and Franchise Fees

Royalties and marketing fees increased 5.4% in the third quarter of fiscal 2011 compared to the same period in fiscal 2010.  The increase in royalty and marketing fees resulted from an increase in same store sales at franchise locations partially offset by a 4.2% decrease in the average number of domestic units in operation from 263 in the third quarter of fiscal 2010 compared to 252 in the same period of fiscal 2011.  Same store sales increased 2.1% in the third quarter of fiscal 2011 compared to the same period in fiscal 2010.  Franchise fee revenue increased as a result of an increase in the number of new domestic franchise store openings from 2 in the third quarter of fiscal 2010 compared to 4 openings in the same period of fiscal 2011 and an increase in license fees associated with the opening of 8 Cold Stone Creamery co-branded locations in the third quarter of fiscal 2011 compared to 4 in the same period of fiscal 2010.

 
13

 
 
Costs and Expenses
   
Three Months Ended
                 
     
November 30,
      $       %  
($’s in thousands)
   
2010
     
2009
     
Change
     
Change
 
                                 
Cost of sales – factory adjusted
  $ 4,045.6     $ 3,509.0     $ 536.6       15.3 %
Cost of sales - retail
    330.0       233.1       96.9       41.6 %
Franchise costs
    402.7       377.3       25.4       6.7 %
Sales and marketing
    395.7       357.4       38.3       10.7 %
General and administrative
    686.6       572.4       114.2       20.0 %
Retail operating
    569.3       458.9       110.4       24.1 %
  Total
  $ 6,429.9     $ 5,508.1     $ 921.8       16.7 %
 
   
Three Months Ended
             
Adjusted gross margin
 
November 30,
   
$
   
%
 
   
2010
   
2009
   
Change
   
Change
 
($’s in thousands)
                       
Factory adjusted gross margin
  $ 1,813.4     $ 1,626.4     $ 187.0       11.5 %
Retail
    436.0       365.1       70.9       19.4 %
  Total
  $ 2,249.4     $ 1,991.5     $ 257.9       13.0 %

                         
(Percent)
                       
Factory adjusted gross margin
    31.0 %     31.6 %     (0.6 %)     (1.9 %)
Retail
    56.9 %     61.0 %     (4.1 %)     (6.7 %)
  Total
    34.0 %     34.7 %     (0.7 %)     (2.0 %)

Adjusted gross margin is equal to gross margin minus depreciation and amortization expense.  We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin and other performance measures calculated in conformity with accounting principles generally accepted in the United States ("GAAP").  We believe that adjusted gross margin is useful to investors because it provides 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 rather than gross margin to make incremental pricing decisions.  Adjusted gross margin has limitations as an analytical tool because it excludes 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 as a measure of performance only in conjunction with GAAP measures of performance such as gross margin.  The following table provides a reconciliation of adjusted gross margin to gross margin, the most comparable performance measure under GAAP:

   
Three Months Ended
 
   
November 30,
 
($’s in thousands)
 
2010
   
2009
 
Factory adjusted gross margin
  $ 1,813.4     $ 1,626.4  
Less: Depreciation and Amortization
    82.0       83.4  
Factory GAAP gross margin
  $ 1,731.4     $ 1,543.0  
 
Cost of Sales and Gross Margin

Factory margins decreased 60 basis points from the third quarter of fiscal 2010 compared to the same period of fiscal 2011 due primarily to a product mix shift, mostly offset by an increase in manufacturing efficiencies associated with higher production volume during the third quarter of fiscal 2011 compared to the same period in fiscal 2010.

 
14

 
 
Franchise Costs

The increase in franchise costs for the third quarter of fiscal 2011 compared to the same period of fiscal 2010 is due primarily to increased professional fees related to development of Aspen Leaf Yogurt, LLC.  As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 31.2% in the third quarter of fiscal 2011 from 32.9% in the same period of fiscal 2010.  This increase as a percentage of royalty, marketing and franchise fees is primarily a result of higher franchise revenues relative to franchise costs.

Sales and Marketing

The increase in sales and marketing costs for the third quarter of fiscal 2011 compared to the same period in fiscal 2010 is primarily due to increased marketing related compensation costs and increased advertising.

General and Administrative

The increase in general and administrative costs for the third quarter of fiscal 2011 compared to the same period in fiscal 2010 is due primarily to an increase in compensation expense and an increase in the reserve for uncollectable accounts and notes receivable. As a percentage of total revenues, general and administrative expense increased to 8.7% in the third quarter of fiscal 2011 compared to 8.3% in the same period of fiscal 2010.

Retail Operating Expenses

The increase in retail operating expenses during the third quarter of fiscal 2011 compared to the same period of fiscal 2010 was due primarily to an increase in the average number of Company-owned stores from 8 during the third quarter of fiscal 2010 to 12 during the same period of fiscal 2011. Retail operating expenses, as a percentage of retail sales, decreased from 76.7% in the third quarter of fiscal 2010 to 74.3% in the same period of fiscal 2011.

Depreciation and Amortization

Depreciation and amortization of $163,000 in the third quarter of fiscal 2011 decreased 6.3% from $174,000 incurred in the same period of fiscal 2010, due to certain assets becoming fully depreciated.

Other, Net

Other, net of $16,100 realized in the third quarter of fiscal 2011 represents an increase of $9,030 from the $7,070 realized in the same period of fiscal 2010 due to an increase in interest income realized related to notes receivable and higher average outstanding cash balances.

Income Tax Expense

Our effective income tax rate in the third quarter of fiscal 2011 was 34.7% which is a decrease of 3.1% compared to the same period of fiscal 2010.  The decrease in the effective tax rate is primarily due to an increase in allowable deductions related to federal incentives for domestic production activities and a decrease in the tax rate in states where we derive a significant portion of our income.

Nine Months Ended November 30, 2010 Compared to the Nine Months Ended November 30, 2009

Basic earnings per share increased 12.5% from $.40 for the nine months ended November 30, 2009 to $­­.45 for the same period of fiscal 2011. Revenues increased 12.8% to $22.2 million for the nine months ended November 30, 2010 compared to $19.6 million in the same period of fiscal 2010. Operating income increased 11.3% from $3.8 million in the nine months ended November 30, 2009 to $4.2 million in the same period of fiscal 2011. Net income increased 15.5% from approximately $2.4 million in the nine months ended November 30, 2009 to approximately $2.7 million in the same period of fiscal 2011. The increase in revenues and net income for the nine months ended November 30, 2010 compared to the same period of fiscal 2010 was due primarily to an increase in revenues from domestic franchise retail locations and increased shipments of product to customers outside our network of franchised retail stores.

 
15

 
 
Revenues  
Nine Months Ended
             
   
November 30,
    $     %  
($’s in thousands)
 
2010
   
2009
   
Change
   
Change
 
Factory sales
  $ 15,477.0     $ 13,943.3     $ 1,533.7       11.0 %
Retail sales
    2,502.2       1,774.7       727.5       41.0 %
Franchise fees
    243.5       85.5       158.0       184.8 %
Royalty and marketing fees
    3,934.8       3,833.9       100.9       2.6 %
  Total
  $ 22,157.5     $ 19,637.4     $ 2,520.1       12.8 %

Factory Sales

The increase in factory sales for the first nine months of fiscal 2011 compared to the same period in fiscal 2010 was primarily due to an increase in shipments to customers outside our network of franchised stores, an increase same store pounds purchased by our network of franchised retail stores, and an increase in shipments of product to licensed co-branded retail stores.  Same store pounds purchased for the first nine months of fiscal 2011 increased approximately 1.4% from the same period in fiscal 2010.

Retail Sales

The increase in retail sales resulted primarily from an increase in the average number of Company-owned stores in operation from 7 in the first nine months of fiscal 2010 to 12 in the same period of fiscal 2011. Same store retail sales decreased 4.1% in the first nine months of fiscal 2011 compared to the same period in fiscal 2010.

Royalties, Marketing Fees and Franchise Fees

The increase in royalties and marketing fees resulted from an increase of 0.5% in same store sales in the nine months ended November 30, 2010 compared with the same period in the prior fiscal year. This increase was partially offset by a decrease in the average number of domestic franchise units in operation of 3.7%.  The average number of domestic franchise units in operation decreased from 267 in the first nine months of fiscal 2010 to 257 in the same period of fiscal 2011. Franchise fee revenue increased 185% in the first nine months of fiscal 2011 as a result of an increase in the number of franchise store openings from 6 in the first nine months of fiscal 2010 to 8 openings in the first nine months of fiscal 2011 and an increase in license fees recognized associated with openings of Cold Stone Creamery licensed locations.
 
Costs and Expenses
 
Nine Months Ended
             
   
November 30,
   
$
   
%
 
($’s in thousands)
 
2010
   
2009
   
Change
   
Change
 
Cost of sales – factory adjusted
  $ 10,515.8     $ 9,546.2     $ 969.6       10.2 %
Cost of sales - retail
    986.2       662.1       324.1       49.0 %
Franchise costs
    1,116.0       1,149.1       (33.1 )     (2.9 %)
Sales and marketing
    1,143.9       1,035.1       108.8       10.5 %
General and administrative
    1,998.9       1,775.3       223.6       12.6 %
Retail operating
    1,691.5       1,167.3       524.2       44.9 %
  Total
  $ 17,452.3     $ 15,335.1     $ 2,117.2       13.8 %
 
 
Adjusted gross margin
 
Nine Months Ended
             
   
November 30,
          $   %
($’s in thousands)
 
2010
   
2009
   
Change
   
Change
 
Factory adjusted gross margin
  $ 4,961.2     $ 4,397.1     $ 564.1       12.8 %
Retail
    1,516.0       1,112.6       403.4       36.3 %
  Total
  $ 6,477.2     $ 5,509.7     $ 967.5       17.6 %
 
(Percent)
                               
Factory adjusted gross margin
    32.1 %     31.5 %     0.6 %     1.9 %
Retail
    60.6 %     62.7 %     (2.1 %)     (3.3 %)
  Total
    36.0 %     35.1 %     0.9 %     2.6 %

 
16

 
 
Adjusted gross margin is equal to gross margin minus depreciation and amortization expense.  We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin and other performance measures calculated in conformity with accounting principles generally accepted in the United States ("GAAP").  We believe that adjusted gross margin is useful to investors because it provides 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 rather than gross margin to make incremental pricing decisions.  Adjusted gross margin has limitations as an analytical tool because it excludes 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 as a measure of performance only in conjunction with GAAP measures of performance such as gross margin.  The following table provides a reconciliation of adjusted gross margin to gross margin, the most comparable performance measure under GAAP:

   
Nine Months Ended
 
   
November 30,
 
($’s in thousands)
 
2010
   
2009
 
Factory adjusted gross margin
  $ 4,961.2     $ 4,397.1  
Less: Depreciation and Amortization
    247.8       252.3  
Factory GAAP gross margin
  $ 4,713.4     $ 4,144.8  

Cost of Sales and Gross Margin

Factory margins increased 60 basis points for the first nine months of fiscal 2011 compared to the same period in fiscal 2010 due primarily to increased efficiencies associated with higher production volume and lower transportation related costs resulting from a decrease in fuel costs mostly offset by increases in commodity costs during the first nine months of fiscal 2011 compared to the same period in fiscal 2010.

Franchise Costs

The decrease in franchise costs is due to decreased professional fees partially offset by development costs associated with the development of Aspen Leaf Yogurt, LLC.  As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 26.7% in the first nine months of fiscal 2011 from 29.3% in the same period of fiscal 2010.

Sales and Marketing

The increase in sales and marketing costs for the first nine months of fiscal 2011 compared to the same period in fiscal 2010 is primarily due to increased marketing costs and higher marketing related compensation costs.

General and Administrative

The increase in general and administrative costs for the first nine months of fiscal 2011 compared to the same period in fiscal 2010 is due primarily to an increase in compensation costs.  As a percentage of total revenues, general and administrative expense was unchanged at 9% during the first nine months of fiscal 2011 compared to fiscal 2010.

Retail Operating Expenses

The increase in retail operating expenses during the first nine months of fiscal 2011 compared to the same period in fiscal 2010 was due primarily to an increase in the average number of Company-owned stores from 7 during the first nine months of fiscal 2010 to 12 during the same period of fiscal 2011. Retail operating expenses, as a percentage of retail sales, increased from 65.8% in the first nine months of fiscal 2010 to 67.6% in the same period of fiscal 2011.

Depreciation and Amortization

Depreciation and amortization of $504,000 in the first nine months of fiscal 2011 decreased 4.7% from the $529,000 incurred in the same period of fiscal 2010 due to certain assets becoming fully depreciated.

 
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Other, Net

Other, Net of $41,170 realized in the first nine months of fiscal 2011 represents an increase of $21,720 from the $19,450 realized in the same period of fiscal 2010 due to higher average outstanding cash balances and an increase in interest income realized related to notes receivable.
 
Income Tax Expense

Our effective income tax rate in the first nine months of fiscal 2011 was 35.2% which is a decrease of 2.1% compared to the same period of fiscal 2010.  The decrease in the effective tax rate is primarily due to an increase in allowable deductions related to federal incentives for domestic production activities and a decrease in the tax rate in states where we derive a significant portion of our income.

Liquidity and Capital Resources

As of November 30, 2010, working capital was $9.7 million, compared with $8.9 million as of February 28, 2010, an increase of $800,000.  The increase in working capital was primarily due to operating results less the payment of $1.8 million in cash dividends.

Cash and cash equivalent balances decreased from $3.7 million as of February 28, 2010 to $3.4 million as of November 30, 2010 as a result of cash flows provided by operating activities less than cash flows used by financing and investing activities. Our current ratio was 3.86 to 1 at November 30, 2010 compared to a ratio of 3.71 to 1 at February 28, 2010. 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 November 30, 2010) working capital line of credit collateralized by substantially all of our assets with the exception of our retail store assets.  The line is subject to renewal in July, 2011.

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 2011.

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 of our 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 products have occurred during the Christmas holiday and summer vacation seasons.  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.

 
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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, sugar, butter 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 may be required to pay above-market prices if prices fall and we are unable to renegotiate the terms of the contract.

As of November 30, 2010, all of our long-term debt was paid in full.  We also have a $5.0 million bank line of credit that bears interest at a variable rate.  As of November 30, 2010, 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 line of credit.

The Chief Financial Officer and Chief Operating Officer of the Company has primary responsibility over the Company’s long-term and short-term debt and for determining the timing and duration of commodity purchase contracts and negotiating the terms and conditions of those contracts.

Item 4.                      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains 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 the Company is made known to the officers who certify the Company’s 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 the Company’s 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 the CEO and CFO, has evaluated the effectiveness, as of November 30, 2010, of the Company’s disclosure controls and procedures.  Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of November 30, 2010.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the nine months ended November 30, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
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PARTII. 
OTHER INFORMATION

Item 1. 
Legal Proceedings

The Company is not currently involved in any legal proceedings other than routine litigation incidental to its 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, 2010.  There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.

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

None

Item 3.
Defaults Upon Senior Securities

None

Item 4. 
Reserved

Item 5. 
Other Information

None

Item 6. 
Exhibits

 
3.1
Articles of Incorporation of the Registrant, as amended, incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K of the Registrant for the year ended February 28, 2007

 
3.2
By-laws of the Registrant, as amended on December 11, 2007, incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K of the Registrant filed on December 14, 2007
 
 
31.1*
Certification filed pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer

 
31.2*
Certification filed pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002, Chief Financial Officer

 
32.1**
Certification furnished pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer

 
32.2**
Certification furnished pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, Chief Financial Officer

* Filed herewith.
** Furnished herewith.


 
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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:  January 13, 2011
 
/s/  Bryan J. Merryman
   
Bryan J. Merryman, Chief Operating Officer,
Chief Financial Officer, Treasurer and Director

 
 
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