NOTE

– NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly - owned subsidiaries, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), Aspen Leaf Yogurt, LLC, a Colorado limited liability company (“ALY”), U - Swirl International, Inc. (“U - Swirl”) (a Nevada corporation), and its

39%

- owned subsidiary, U - Swirl, Inc., a Nevada corporation (“SWRL”) of which, RMCF had financial control until

February

29,

2016

(collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

The Company is an international franchisor, confectionery manufacturer and retail operator in the United States, Canada, Japan, South Korea and the United Arab Emirates. Founded in

1981,

the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U - Swirl franchises and operates self - serve frozen yogurt cafés. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.

Effective

March

2015,

the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, which was previously the public company, became a wholly - owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value

$0.03

per share, were exchanged on a

one

- for -

one

basis for shares of common stock, par value

$0.001

per share, of Newco. The new holding company began trading on

March

2015

on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.

January

2013,

through our wholly - owned subsidiaries, including ALY, the Company entered into

two

agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self - serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in

January

2013,

to SWRL, in exchange for a

60%

controlling equity interest in SWRL, which was subsequently diluted down to

39%

as of

November

30,

2016

following various issuances of common stock of SWRL. At that time, U - Swirl was a wholly - owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company - owned ALY locations or sell and support frozen yogurt franchise locations, which were being supported by SWRL. As of

November

30,

2016,

the Company held a

39%

interest in SWRL. The SWRL Board of Directors is composed solely of Board members also serving on the Company’s Board of Directors.

In fiscal year (“FY”)

2014,

SWRL acquired the franchise rights and certain other assets of self - serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitions by SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly - owned subsidiary, U - Swirl. Under the SWRL Loan Agreement, SWRL was subject to various financial covenants. SWRL was not compliant with the financial covenants during the year ended

February

29,

2016

and the loan matured on

January

16,

2016

without payment in full by SWRL. Upon the occurrence and during the continuance of an event of default, the Company was entitled to charge interest on all amounts due under the SWRL Loan Agreement at the default rate of

15%

per annum, accelerate payment of all amounts due under the SWRL Loan Agreement, and foreclose on all or any portion of the security interest. As a result of the defaults, the Company issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, the Company foreclosed on all of the outstanding stock of U - Swirl on

February

29,

2016

in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U - Swirl becoming a wholly - owned subsidiary of the Company as of

February

29,

2016

and concurrently the Company ceased to have financial control of SWRL as of

February

29,

2016.

As of

February

29,

2016,

SWRL had no operating assets.

U - Swirl operates self - serve frozen yogurt cafés under the names “U - Swirl,” “Yogurtini,” “CherryBerry,” “Josie’s Frozen Yogurt,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” 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 of both confectionery products and frozen yogurt; and sales at Company - owned stores of chocolates, frozen yogurt, and other confectionery products.

The following table summarizes the number of stores operated under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés as of

November

30,

2016:

	Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		4		4
Franchise stores – Domestic stores and kiosks		7		191		198
International license stores		-		94		94
Cold Stone Creamery – co-branded		4		82		86
U-Swirl (Including all associated brands)
Company-owned stores		-		2		2
Company-owned stores – co-branded		-		3		3
Franchise stores – Domestic stores		*		143		143
Franchise stores – Domestic – co-branded		*		18		18
International License Stores		-		7		7
Total		11		544		555

*U - Swirl cafés and the brands franchised by U - Swirl have historically utilized a development area sales model. The result is that many areas are under development, and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.

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. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. 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

nine

months ended

November

30,

2016

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

- K for the fiscal year ended

February

29,

2016.

Subsequent Events

Management evaluated all activity of the Company through the issue date of the financial statements and concluded that no subsequent events have occurred that would require recognition or disclosure in the financial statements.

New Accounting Pronouncements

January

2016,

the Financial Accounting Standards Board (“FASB”) issued ASU

2016

01,

Financial Instruments - Overall (Subtopic

825

10),

Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU

2016

will be effective for us in the

first

quarter of our fiscal year

2019,

and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

February

2016,

FASB issued ASU

2016

02,

Leases (Topic

842),

which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC

840

“Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after

December

15,

2018,

including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

August

2016,

FASB issued ASU

2016

15,

Statement of Cash Flows (Topic

230):

Classification of Certain Cash Receipts and Cash Payments. ASU No.

2016

clarifies and provides specific guidance on

eight

cash flow classification issues that are not currently addressed by current GAAP and thereby reduce the current diversity in practice. ASU No.

2016

is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after

December

15,

2017,

with early application permitted. This guidance is applicable to the Company's fiscal year beginning

March

2018.

The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

June

2016,

the FASB issued ASU

2016

13,

Financial Instruments - Credit Losses (Topic

326):

Measurement of Credit Losses on Financial Instruments. ASU

2016

significantly changes the impairment model for most financial assets and certain other instruments. ASU

2016

will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU

2016

is effective for the Company's fiscal year beginning

March

2020

and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU

2016

will have on the Company's condensed consolidated financial statements.

March

2016,

the FASB issued ASU No.

2016

09,

Compensation — Stock Compensation, (Topic

718):

Improvements to Employee Share - Based Payment Accounting, which is intended to simplify aspects of the accounting for share - based payment transactions. The ASU simplifies the accounting of stock compensation, including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU No.

2016

is effective for public business entities for annual and interim periods beginning after

December

15,

2016,

with early application permitted. This guidance is applicable to the Company's fiscal year beginning

March

2017.

Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows

may

be applied either prospectively or retrospectively based on the Company’s election. Amendments related to the statement of cash flows presentation of employee taxes paid when an employer withholds shares must be applied retrospectively. The Company is in the process of assessing the impact of the adoption of ASU No.

2016

on its consolidated financial statements.

May

2014,

the FASB issued ASU No.

2014

09,

Revenue from Contracts with Customers (Topic

606).

This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in Topic

605,

Revenue Recognition. This guidance will be effective for annual reporting periods beginning after

December

15,

2017,

including interim reporting periods. Early application of the guidance is permitted for annual reporting periods beginning after

December

31,

2016.

This guidance is applicable to the Company's fiscal year beginning

March

2018.

The Company is currently evaluating this guidance to determine the potential impact on its consolidated financial statements.