News Column

ROCKY MOUNTAIN CHOCOLATE FACTORY INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 11, 2014

Current Trends and Outlook

Our business was significantly affected by the global recession during 2008-2009. We continued to experience this difficult environment throughout FY 2010 and FY 2011. The environment somewhat improved from FY 2012 to FY 2014, though we do not believe that the challenges have fully reversed. As a result, we have and will continue to focus on managing the business in a seasoned, disciplined and controlled manner. 20 -------------------------------------------------------------------------------- The financing that our franchisees have historically relied upon was substantially affected by the changes in banking and lending requirements in the years after the global recession. Limited financing alternatives for domestic franchise growth have led us to pursue a strategy of expansion through Co-branding with complimentary concepts such as ice cream and frozen yogurt, international development, sale of our products to specialty markets, licensing the Rocky Mountain Chocolate Factory brand for use with other appropriate consumer products, and selected entry of Rocky Mountain Chocolate Factory branded products into other wholesale channels, along with business acquisitions as primary drivers of growth. This is a trend that continued in FY 2014 and into the foreseeable future. Going forward in FY 2015, we are taking a conservative view of market conditions in the United States. We will continue to focus on our long-term objectives while seeking to maintain flexibility to respond to market conditions, including the pursuit of international growth opportunities to reduce our dependence on the domestic economy. We are a product-based international franchisor. Our revenues and profitability are derived principally from our franchised system of retail stores that feature chocolate, frozen yogurt and other confectionery products. We also sell our candy in selected locations outside our system of retail stores to build brand awareness. We operate six Rocky Mountain Chocolate Factory and 13 U-Swirl 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 franchisees, which have traditionally been located in resort or tourist locations, and the nature of the products we sell, which are highly seasonal. As we expanded our geographical diversity to include regional centers and our franchise offerings to include frozen desserts, we have seen some moderation to our seasonal sales mix. Seasonal fluctuation in sales causes fluctuations in quarterly results of operations. Historically, the strongest sales of our products have occurred during key holidays 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. Our ability to successfully achieve expansion of our 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, competition, the receptivity of our franchise system to our product introductions and promotional programs. In FY 2014, same store pounds purchased from the factory by franchised stores increased approximately 2.6% in the first quarter, increased approximately 2.2% in the second quarter, declined approximately 4.9% in the third quarter, declined approximately 0.5% in the fourth quarter, and declined approximately 0.1% overall in FY 2014 as compared to the same periods in FY 2013. In May 2009, we announced the expansion of the co-branding test relationship with Cold Stone Creamery. The Company and Cold Stone Creamery, Inc. have agreed to expand the co-branding relationship to several hundred potential locations, based upon the performance of several test locations, operating under the test agreement announced in October 2008. We believe that if this co-branding strategy continues to prove financially viable it could represent a significant future growth opportunity. As of February 28, 2014, Cold Stone licensees operated 65 co-branded locations. On April 30, 2012 we announced the execution of a Master Licensing Agreement covering the country of Japan. Under the terms of the Agreement, the Licensee will pay the Company a Master License Fee for the right to open Rocky Mountain Chocolate Factory stores for its own account and for the account of franchisees throughout the country of Japan. The Agreement requires at least 10 new stores to open each year for 10 years, for a total minimum of 100 stores in the Licensed Territory by the expiration of the initial term of the Agreement. As of March 31, 2014, three units were operating under the Agreement. On January 14, 2013, Ulysses Asset Acquisition, LLC ("Newco"), a wholly-owned subsidiary formed in the State of Colorado on January 2, 2013, entered into an agreement to acquire substantially all of the assets 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, we entered into two agreements to sell all of our membership interests in Newco and substantially all of our assets in Aspen Leaf Yogurt, LLC ("ALY") to U-Swirl, Inc., a publicly traded company (QTCQB: SWRL), in exchange for a 60% controlling equity interest in U-Swirl, Inc. Upon completion of these transactions, we ceased to directly operate any Company-owned Aspen Leaf Yogurt locations or sell and support franchise locations. We believe that the acquisition of a controlling interest in U-Swirl, Inc. provides us with the ability to reverse operating losses incurred by the development and operation of Aspen Leaf Yogurt, LLC and provides an opportunity to continue to expand our presence in the self-serve frozen yogurt industry. Our ability to execute on this strategy is dependent upon continued expansion of the franchise network of U-Swirl, Inc. and the success of the franchisees. 21 -------------------------------------------------------------------------------- On January 17, 2014, we entered into an Asset Purchase Agreement (the "CherryBerry Purchase Agreement") with CherryBerry Enterprises LLC, CherryBerry Corporate LLC and CherryBerry LLC (collectively, "CherryBerry"), which are the franchisors of self-serve frozen yogurt retail stores branded as "CherryBerry", and the members of CherryBerry. Pursuant to the CherryBerry Purchase Agreement, U-Swirl purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store (the "CherryBerry Acquisition"). The assets were acquired for approximately $4.25 million in cash and 4 million shares of U-Swirl common stock. On January 17, 2014, we entered into an Asset Purchase Agreement (the "Yogli Mogli Purchase Agreement") with Yogli Mogli LLC and certain of its affiliates (collectively, "Yogli Mogli"), which are the franchisors of self-serve frozen yogurt retail stores 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 stores, including all of its franchise rights and four company-owned stores (the "Yogli Mogli Acquisition", and together with the CherryBerry Acquisition, the "Acquisitions"). The assets were acquired for approximately $2.15 million in cash and $200,000 in shares of U-Swirl common stock. On February 20, 2014 we entered into an Asset Purchase Agreement (the "Fuzzy Peach 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. We 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.



Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of accounts and notes receivable from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. We base our estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.



We believe that the following represent our more critical estimates and assumptions used in the preparation of our financial statements, although not all inclusive.

Accounts and Notes Receivable - In the normal course of business, we extend credit to customers, primarily franchisees, that satisfy pre-defined credit criteria. We believe that we have a limited concentration of credit risk primarily because our receivables are secured by the assets of the franchisees to which we ordinarily extend credit, including, but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a customer by customer, or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future. We recorded an average expense of approximately $299,300 per year for potential uncollectible accounts over the three-year period ended February 28, 2014. Write-offs of uncollectible accounts net of recoveries averaged approximately $242,500 over the same period. The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over the past three years, the allowances for doubtful notes and accounts have ranged from 6.5% to 11.5% of gross receivables. Revenue Recognition - We recognize revenue on sales of products to franchisees and other customers at the time of delivery. Franchise fee revenue is recognized upon the opening of the store. We also recognize a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory and U-Swirl franchised stores' gross retail sales and a royalty fee based on gross retail sales. Beginning with franchise store openings in the third quarter of fiscal year 2004, we modified our royalty structure. Under the current structure, we recognize no royalty on Rocky Mountain Chocolate Factory franchised stores' retail sales of products purchased from us and recognize a ten percent (10%) royalty on all other sales of product sold at franchise locations. For franchise stores opened prior to the third quarter of FY 2004 we recognize a royalty fee of five percent (5%) of franchised stores' gross retail sales. Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees. Product rebates are recognized in the period in which they are earned. Rebates related to company-owned locations are offset against operating costs. 22

-------------------------------------------------------------------------------- Inventories - Our inventories are stated at the lower of cost or market value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review of inventories on hand compared to estimated future usage and demand for our products. Such review encompasses not only potentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usage and demand for our products are less favorable than those projected by our review, inventory reserve adjustments may be required. We closely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we have experienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year period ended February 28, 2014, the Company recorded expense averaging $54,700 per year for potential inventory losses, or approximately 0.3% of total cost of sales for that period. Consolidation - The management of RMCF accounts for the activities of Rocky Mountain Chocolate Factory and our wholly owned subsidiary, Aspen Leaf Yogurt, LLC. On January 14, 2013 we acquired a majority interest in U-Swirl, Inc., a publicly traded company (OTCQB: SWRL). Prior to January 14, 2013 our financial statements exclude the financial information of U-Swirl, Inc. The management of U-Swirl, Inc. separately accounts for the activities of U-Swirl, Inc. utilizing critical accounting policies substantially the same as those of RMCF. Beginning on January 14, 2013 and continuing through February 28, 2014, the results of operations, assets and liabilities of U-Swirl, Inc. have been included in our Consolidated Financial Statements. We have consolidated $5,501,539 and $1,951,092 of assets, $3,758,634 and $945,569 of liabilities and an operating loss of $806,892 and $320,446 for the years ended February 28, 2014 and 2013, respectively. All material inter-Company balances have been eliminated upon consolidation. Goodwill - Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. Effective March 1, 2002, under ASC Topic 350, all goodwill with indefinite lives is no longer subject to amortization. ASC Topic 350 requires that an impairment test be conducted annually or in the event of an impairment indicator. Our test conducted in FY 2014 showed no impairment of our goodwill.



Franchise Rights - Franchise Rights consists of the purchase price paid in consideration of certain rights associated with Franchise Agreements. These franchise agreements provide for future payments to the franchisor of royalty and marketing fees. We consider franchise rights to have a 20 year life.

Other accounting estimates inherent in the preparation of the Company's financial statements include estimates associated with its evaluation of the recoverability of deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above. Results of Operations



Fiscal 2014 Compared To Fiscal 2013

Results Summary Basic earnings per share increased 200.0% from $.24 in FY 2013 to $.72 in FY 2014. Revenues increased 7.9% from $36.3 million for FY 2013 to $39.2 million for FY 2014. Operating income increased 106.1% from $2.5 million in FY 2013 to $5.2 million in FY 2014. Net income increased 197.2% from $1.5 million in FY 2013 to $4.4 million in FY 2014. The increase in operating income and net income for FY 2014 compared to FY 2013 is due primarily to an impairment loss for ALY operations being recognized during FY 2013 in the amount of $2.01 million for long-lived assets related to eight underperforming Company-owned stores. Revenues For the Year Ended February 28, $ % ($'s in thousands) 2014 2013 Change Change Factory sales $ 25,218.9$ 24,651.5$ 567.4 2.3 % Retail sales 6,443.4 5,492.6 950.8 17.3 % Royalty and marketing fees 7,070.5 5,876.9 1,193.6 20.3 % Franchise fees 452.0 294.2 157.8 53.6 % Total $ 39,184.8$ 36,315.2$ 2,869.6 7.9 % 23

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Factory Sales The increase in factory sales for FY 2014 compared to FY 2013 was primarily due to an increase in sales to international licensed stores and an 28.9% increase in shipments of product to customers outside our network of franchised retail stores. These increases were partially offset by a 0.1% decrease in same-store pounds purchased by franchise locations FY 2014 compared with FY 2013. The increases were also partially offset by a 5.5% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation. Retail Sales The increase in retail sales was primarily due to changes in units in operation, resulting from the acquisition of a majority ownership in U-Swirl, Inc. and the acquisition of CherryBerry and Yogli Mogli business assets, which included the acquisition of five additional Company owned cafÉs. Additionally, same store sales at Company-owned stores and cafÉs decreased 0.7% during FY 2014, compared with FY 2013.



Royalties, Marketing Fees and Franchise Fees

The increase in royalties and marketing fees during FY 2014, compared with FY 2013, resulted from a 28.9% increase in domestic franchise stores in operation during FY 2014 compared to FY 2013, primarily as a result of our acquisition of a majority ownership position in U-Swirl, Inc. and accordingly, the U-Swirl franchise system. This increase was partially offset by a 5.5% decrease in the number of domestic Rocky Mountain Chocolate Factory franchises in operation. The average number of domestic Rocky Mountain Chocolate Factory franchise stores in operation decreased from 236 during FY 2013 to 223 during FY 2014. This decrease is the result of domestic store closures exceeding domestic store openings. Franchise fee revenues increased primarily as a result of the license fees associated with the license agreements for the development and franchising of Rocky Mountain Chocolate Factory stores in South Korea and the Kingdom of Saudi Arabia. Same store sales at domestic Rocky Mountain Chocolate Factory locations increased 1.2% during FY 2014, compared with FY 2013.



U-Swirl, Inc. CafÉ Sales, Royalties, Marketing Fees and Franchise Fees

During FY 2014, U-Swirl, Inc. revenue totaled $5,528,600 compared with $506,000 of U-Swirl, Inc. revenue consolidated within our results for FY 2013. We began consolidation of U-Swirl, Inc. results when we acquired a majority ownership interest in January 2013. Costs and Expenses For the Year Ended February 28, $ % ($'s in thousands) 2014 2013 Change Change



Cost of sales - factory adjusted $ 17,303.1$ 16,803.9$ 499.2

3.0 % Cost of sales - retail 2,310.3 2,151.2 159.1 7.4 % Franchise costs 2,062.5 2,080.1 (17.6 ) (0.8 %) Sales and marketing 2,153.8 1,939.0 214.8 11.1 % General and administrative 5,003.3 3,846.9 1,156.4 30.1 % Retail operating 3,303.5 3,371.7 (68.2 ) (2.0 %) Total $ 32,136.5$ 30,192.8$ 1,943.7 6.4 % Adjusted Gross Margin For the Year Ended February 28, $ % ($'s in thousands) 2014 2013 Change Change Factory adjusted gross margin $ 7,915.8$ 7,847.6$ 68.2 0.9 % Retail 4,133.1 3,341.4 791.7 23.7 % Total $ 12,048.9$ 11,189.0$ 859.9 7.7 % Adjusted Gross Margin For the Year Ended February 28, % % 2014 2013 Change Change (Percent) Factory adjusted gross margin 31.4 % 31.8 % (0.4% ) (1.3% ) Retail 64.1 % 60.8 % 3.3 % 5.4 % Total 38.1 % 37.1 % 1.0 % 2.7 % 24

-------------------------------------------------------------------------------- Adjusted gross margin, a non-GAAP measure, is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin minus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are 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 and factory adjusted gross margin are useful to investors because they provide 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 and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as an analytical tool because they exclude the impact of depreciation and amortization expense and you should not consider them 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 and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin. The following table provides a reconciliation of factory adjusted gross margin to factory gross margin, the most comparable performance measure under GAAP: For the Year Ended February 28, ($'s in thousands) 2014 2013



Factory adjusted gross margin $ 7,915.8$ 7,847.6 Less: Depreciation and Amortization 292.9 286.6 Factory GAAP gross margin

$ 7,622.9$ 7,561.0



Cost of Sales and Gross Margin

Factory adjusted gross margin decreased 40 basis points during FY 2014 compared to FY 2013 due to an increase in the average selling price of products to domestic franchise units being more than offset by increases in the costs of certain materials. The increase in Company-owned store margin is due primarily to an increase in U-Swirl stores in operation and associated higher margins. Franchise Costs The decrease in franchise costs for FY 2014 compared to FY 2013 is due primarily to a decrease in franchise development costs associated with Aspen Leaf Yogurt due to the sale of the Aspen Leaf Yogurt concept to U-Swirl in January 2013, partially offset by increased franchise costs from the consolidation of U-Swirl, Inc. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 27.4% during FY 2014 from 33.7% during FY 2013. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of a 21.9% increase in royalty, marketing and franchise fee revenue as a result of an increase in system-wide franchise stores during FY 2014 compared to FY 2013. Sales and Marketing



The increase in sales and marketing expense during FY 2014 compared to FY 2013 is due primarily to increased marketing-related compensation costs and an increase in marketing costs associated with U-Swirl, Inc. franchise locations.

General and Administrative The increase in general and administrative costs during FY 2014 compared with FY 2013 is due primarily to the consolidation of U-Swirl, Inc.'s general and administrative costs and an increase in compensation related expenses. During FY 2014, approximately $1,453,000 of U-Swirl, Inc. general and administrative costs were consolidated within our results, compared with approximately $411,000 during FY 2013. As a percentage of total revenues, general and administrative expenses increased to 12.8% in FY 2014 compared to 10.6% in FY 2013. Retail Operating Expenses The decrease in retail operating expense was primarily due to a change in the mix of Company-owned stores in operation, resulting from the acquisition of a majority interest in U-Swirl, Inc. in January 2013, the acquisition of CherryBerry in January 2014, the acquisition of Yogli Mogli in January 2014, and the associated change in operating expenses during FY 2014 compared with FY 2013. The average number of Company-owned stores in operation increased from 17 during FY 2013 to 19 units during FY 2014. Retail operating expenses, as a percentage of retail sales, decreased from 61.4% during FY 2013 to 51.3% in FY 2014. This decrease is primarily the result of a change in units in operation and the resulting increase in retail sales, resulting from the acquisition of a majority interest in U-Swirl, Inc. in January 2013 and the acquisition of CherryBerry and Yogli Mogli in January 2014.



Depreciation and Amortization

Depreciation and amortization of $1,027,000 in FY 2014 increased 9.8% from the $935,000 incurred in FY 2013 due to an increase in amortization related to increased franchise rights, trademark and intangible assets resulting from business acquisitions during FY 2014.

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Interest Income



Interest income of approximately $85,000 realized in FY 2014 represents an increase of $41,000 from the $44,000 realized in FY 2013 due to higher balances of notes receivable.

Income Tax Expense Our effective income tax rate in FY 2014 was 40.7% which is a decrease of 6.9% compared to an effective rate of 47.7% during FY 2013. As described further in Note 6 to the Consolidated Financial Statements, the decrease in the effective tax rate is primarily due to the tax consequences of acquiring a controlling interest in U-Swirl, Inc. Investment Gain An investment gain of $18,380 was recognized during FY 2014 compared with no amount recognized in FY 2013. This gain was recognized as a result of us transferring 300,000 shares of U-Swirl, Inc. common stock for services provided in conjunction with business acquisitions during FY 2014. The gain represents the excess of the fair value of services, compared to our basis in the shares transferred.



Fiscal 2013 Compared To Fiscal 2012

Results Summary Basic earnings per share decreased 61.9% from $.63 in FY 2012 to $.24 in FY 2013. Revenues increased 4.9% from $34.6 million for FY 2012 to $36.3 million for FY 2013. Operating income decreased 57.6% from $5.9 million in FY 2012 to $2.5 million in FY 2013. Net income decreased 61.5% from $3.9 million in FY 2012 to $1.5 million in FY 2013. The decrease in operating income and net income for FY 2013 compared to FY 2012 is due primarily to a loss on the sale of long lived assets associated with the sale of certain Aspen Leaf Yogurt long-lived assets and restructuring charges associated with the acquisition of a 60% majority interest in U-Swirl, Inc. Revenues For the Year Ended February 28, $ % ($'s in thousands) 2013 2012 Change Change Factory sales $ 24,651.5$ 23,597.1$ 1,054.4 4.5 % Retail sales 5,492.6 5,278.5 214.1 4.1 % Royalty and marketing fees 5,876.9 5,495.6 381.3 6.9 % Franchise fees 294.2 255.7 38.5 15.1 % Total $ 36,315.2$ 34,626.9$ 1,688.3 4.9 % Factory Sales The increase in factory sales in FY 2013 compared to FY 2012 was primarily due to a 4.0% increase in shipments of product to customers outside our network of franchised retail stores and a 4.6% increase in purchases by our network of franchised and licensed retail stores during FY 2013 compared with FY 2012. Retail Sales The increase in retail sales in FY 2013 compared to FY 2012 was primarily due to an increase in the average number of Company-owned stores in operation as a result of Company-owned Aspen Leaf Yogurt locations in operation for the full year, partially offset by the sale of three Company-owned Rocky Mountain Chocolate Factory locations during the year and the closing of one Company-owned Rocky Mountain Chocolate Factory location. Same-store sales at Company-owned Rocky Mountain Chocolate Factory stores increased 1.7% in FY 2013 compared to FY 2014. 26

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Royalties, Marketing Fees and Franchise Fees

Royalties and marketing fees increased 6.9% in FY 2013 compared with FY 2012 as a result of an increase in royalties based on the Company's purchase based royalty structure, an increase in same store sales and an increase in royalties from co-branded locations, partially offset by a decrease in domestic franchise units. Same store sales at franchise locations increased 0.2% during FY 2013 compared to FY 2012. Average licensed locations in operation increased from 45 units FY 2012 to 53 units in FY 2013. The average number of domestic units in operation decreased 3.7% from 245 in FY 2012 to 236 in FY 2013. The increase in franchise fee revenue during FY 2013, compared with the prior year period was the result of an increase in international license fees partially offset by a decrease in domestic franchise openings from 12 during FY 2012 to 10 openings during FY 2013. Costs and Expenses For the Year Ended February 28, $ % ($'s in thousands) 2013 2012 Change Change



Cost of sales - factory adjusted $ 16,803.9$ 16,150.9$ 653.0

4.0 % Cost of sales - retail 2,151.2 2,158.3 ( 7.1 ) (0.3% ) Franchise costs 2,080.1 1,796.5 283.6 15.8 % Sales and marketing 1,939.0 1,683.7 255.3 15.2 % General and administrative 3,846.9 3,044.6 802.3 26.4 % Retail operating 3,371.7 3,189.2 182.5 5.7 % Total $ 30,192.8$ 28,023.2$ 2,169.6 7.7 % Adjusted Gross Margin For the Year Ended February 28, $ % ($'s in thousands) 2013 2012 Change Change Factory adjusted gross margin $ 7,847.6$ 7,446.2$ 401.4 5.4 % Retail 3,341.4 3,120.2 221.2 7.1 % Total $ 11,189.0$ 10,566.4$ 622.6 5.9 % Adjusted Gross Margin For the Year Ended February 28, % % 2013 2012 Change Change (Percent) Factory adjusted gross margin 31.8 % 31.6 % 0.2 % 0.6 % Retail 60.8 % 59.1 % 1.7 % 2.9 % Total 37.1 % 36.6 % 0.5 % 1.4 % Adjusted gross margin, a non-GAAP measure, is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin minus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin and factory 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 and factory adjusted gross margin are 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 and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted to gross margin and factory adjusted gross margin have 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 and factory adjusted gross margin as a measure of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin. The following table provides a reconciliation of factory adjusted gross margin to factory gross margin, the most comparable performance measure under GAAP: For the Year Ended February 28, ($'s in thousands) 2013 2012



Factory adjusted gross margin $ 7,847.6$ 7,446.2 Less: Depreciation and Amortization 286.6 278.3 Factory GAAP gross margin

$ 7,561.0$ 7,167.9 Cost of Sales Factory margins were approximately unchanged, increasing 20 basis points in FY 2013 compared with FY 2012. The increase in Company-owned store margin is due primarily to lower costs associated with Aspen Leaf Yogurt grand openings, a change in the number of Company-owned stores in operation, and the associated change in product mix. Franchise Costs The increase in franchise costs for FY 2013 compared to FY 2012 is due primarily to an increase in travel and support costs associated with our international development initiative, an increase in franchise opportunity advertising costs and an increase in compensation related costs. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 33.7% in the FY 2013 from 31.2% in FY 2012. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of higher franchise costs relative to revenues. 27

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Sales and Marketing



The increase in sales and marketing costs for FY 2013 compared to FY 2012 is primarily due to an increase in marketing-related compensation and benefit costs.

General and Administrative The increase in general and administrative expense in FY 2013 compared to FY 2012 is due primarily to costs associated with restructuring of Aspen Leaf Yogurt, an increase in compensation costs and an increase in travel costs associated with our international development initiative. As a percentage of total revenues, general and administrative expenses increased to 10.6% in FY 2013 compared to 8.8% in FY 2012. Retail Operating Expenses The increase in retail operating expenses was due to an increase in the average number of Company-owned stores in operation as a result of Company-owned Aspen Leaf Yogurt locations in operation for the full year, partially offset by the sale of three Company-owned Rocky Mountain Chocolate Factory locations during the year and the closing of one Company-owned Rocky Mountain Chocolate Factory location. For FY 2013, a pre-restructuring operating loss of approximately $713,000 compared to an operating loss of $586,000 during FY 2012 was incurred related to the opening and operation of Aspen Leaf Yogurt locations. Retail operating expenses, as a percentage of retail sales, increased from 60.4% in FY 2012 to 61.4% in FY 2013.



Depreciation and Amortization

Depreciation and amortization of $935,000 in FY 2013 increased 24.6% from the $751,000 incurred in FY 2012 due to an increase in the number of Company-owned stores in operation and the depreciation expense associated with those assets. Interest Income



Interest income of approximately $44,000 realized in FY 2013 represents a decrease of $15,000 from the $59,000 realized in FY 2012 due to lower balances of notes receivable.

Income Tax Expense Our effective income tax rate in FY 2013 was 47.7% which is an increase of 13.3% compared to an effective rate of 34.4% during FY 2012. As described further in Note 6 to the Consolidated Financial Statements, the increase in the effective tax rate is primarily due to the tax consequences of acquiring a 60% majority interest in U-Swirl, Inc.



Liquidity and Capital Resources

As of February 28, 2014, working capital was $9.0 million compared with $9.0 million as of February 28, 2013. Working capital was unchanged due primarily to our operating results less the payment of $2.7 million in cash dividends and the use of long-term financing to fund business acquisitions. Cash and cash equivalent balances increased from $5.3 million as of February 28, 2013 to $5.9 million as of February 28, 2014 as a result of cash flows generated by operating activities being greater than cash flows used in financing and investing activities. The Company's current ratio was 2.1 to 1 at February 28, 2014 in comparison with 2.6 to 1 at February 28, 2013. The Company monitors current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements. The Company has a $5 million credit line, of which $5 million was available (subject to certain borrowing base limitations) as of February 28, 2014, secured by substantially all of the Company's assets except retail store assets. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2014 the Company was in compliance with all such covenants. The credit line is subject to renewal in July 2014. The Company's long-term debt is comprised of a promissory note used to finance the Company's business acquisitions (unpaid balance as of February 28, 2014, $6.4 million). 28

-------------------------------------------------------------------------------- The table below presents significant contractual obligations of the Company at February 28, 2014. (Amounts in thousands) Less than 1 More Than 5 Contractual Obligations Total year 2-3 Years

4-5 years years Line of credit - - - - - Notes payable 6,400 108 2,464 2,659 1,169 Operating leases 3,350 1,148 1,472 678 52 Other long-term obligations 1,112 467 566 79 - Total 10,862 1,723 4,502 3,416 1,221 For FY 2015, the Company anticipates making capital expenditures of approximately $900,000, which will be used to maintain and improve existing factory and administrative infrastructure and update certain Company-owned stores. The Company believes that cash flow from operations will be sufficient to fund capital expenditures and working capital requirements for FY 2015. If necessary, the Company has an available bank line of credit to help meet these requirements.



Off-Balance Sheet Arrangements

As of February 28, 2014, we had no off-balance sheet arrangements or obligations.

Impact of Inflation Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company's future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers. Depreciation expense is based on the historical cost to the Company of its 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 The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company's products have occurred during key holidays and the summer vacation season. 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 the Company's 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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Source: Edgar Glimpses


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