Note 1 - Nature of Operations and Basis of Presentation

6 Months Ended

Aug. 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, Canada, Japan 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 units.

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, frozen yogurt, and other confectionery products.  The following table summarizes the number of stores operating under RMCF and ALY at August 31, 2012:

	Sold, Not Yet Open		Open		Total
Rocky Mountain Chocolate Factory
Company-owned stores		-		7		7
Franchise stores – Domestic stores		4		228		232
Franchise stores – Domestic kiosks		-		8		8
Franchise units – International		-		60		60
Cold Stone Creamery – co-branded		3		53		56
Aspen Leaf Yogurt Stores
Company-owned stores		-		8		8
Franchise stores – Domestic stores		4		5		9
Total		11		369		380

Basis of Presentation

The accompanying unaudited financial statements have been prepared by the Company 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 (“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 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 six months ended August 31, 2012 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 29, 2012.

Stock-Based Compensation

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

The Company recognized $94,867 and $229,900 of stock-based compensation expense during the three and six-month periods ended August 31, 2012, respectively, compared to $97,997 and $254,230 during the three and six-month periods ended August 31, 2011, respectively. 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 six months ended August 31, 2012 and August 31, 2011:

	Six Months Ended
	August 31,
	2012			2011
Outstanding stock options as of February 28 or 29:		307,088			341,890
Granted		-			12,936
Exercised		(3,000	)		(8,731	)
Cancelled/forfeited		(14,952	)		(1,575	)
Outstanding stock options as of August 31:		289,136			344,520
Weighted average exercise price	$	10.67		$	10.11
Weighted average remaining contractual term (in years)		2.32			2.97

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

	Six Months Ended
	August 31,
	2012			2011
Outstanding non-vested restricted stock units as of February 28 or 29:		101,980			141,260
Granted		-			4,540
Vested		(44,190	)		(43,300	)
Cancelled/forfeited		(560	)		-
Outstanding non-vested restricted stock units as of August 31:		57,230			102,500
Weighted average grant date fair value	$	9.22		$	9.19
Weighted average remaining vesting period (in years)		1.63			2.49

During the six months ended August 31, 2012, 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 and 12,936 shares of stock options issued to non-employee directors in the six months ended August 31, 2011. There were no unrestricted shares or stock options issued during the three-month periods ended August 31, 2012 or August 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 six-month periods ended August 31, 2012 and 2011, respectively.

During the three and six month periods ended August 31, 2012, the Company recognized $94,867 and $192,700, respectively, of stock-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 three and six month periods ended August 31, 2012, 33,770 and 44,190 restricted stock units vested and were issued as common stock, respectively.  Total unrecognized compensation expense of non-vested, non-forfeited shares

granted as of August 31, 2012 was $473,545, which is expected to be recognized over the weighted-average period of 1.6 years.

There were no stock options awarded during the six months ended August 31, 2012.  The weighted-average fair value of stock options awarded during the six months ended August 31, 2011 was $0.89.

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:

	Six Months Ended
	August 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 (in years)		n/a	5