Franklin Crail - President and CEO Bryan Merryman - COO

George Whiteside - SWS Financial Services Matt Karr - Symons Capital Management Jeff Geygan - Milwaukee Private Wealth Management

Hello and welcome to the Rocky Mountain Chocolate Factory Second Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After this presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Some of the statements made during the call may be considered forward-looking statements involve a certain number of risks and uncertainties. There are several factors that could cause actual results of Rocky Mountain Chocolate Factory to differ materially from these forward-looking statements. These factors include, but are not limited to, the potential need for additional financing, the availability of suitable locations for new stores, availability of qualified franchisees to support new stores, customer acceptance of new products, dependence upon major customers, economic and consumer spending trends, and such other factors listed from time to time in the public announcements and in Rocky Mountain Chocolate Factory's reports. In addition, please be advised that the financial results for the fiscal periods presented in this call do not necessarily indicate the results that may be expected for any future quarters or the upcoming fiscal year. To Rocky Mountain Chocolate Factory's knowledge, the information relayed in this conference call is correct as of the date of its transmission and the Company does not undertake any obligation to update this information in the future. I would now like to turn the conference over to Franklin Crail, CEO. Mr. Crail, please go ahead.

Thank you, Operator. Good afternoon ladies and gentlemen and welcome to Rocky Mountain Chocolate Factory’s second quarter of fiscal 2015 conference call. I am Frank Crail, President of Rocky Mountain Chocolate Factory and with me here today is Mr. Bryan Merryman, the Company’s Chief Operating Officer. We’re going to start the call today with Bryan giving you a summary of our operating results for both the second quarter and the first six months of fiscal 2015. At the conclusion of this presentation, we would be happy to answer any questions that you may have. So at this point, I will turn the call over to Bryan.

Thanks, Frank. I would also like to thank everyone for attending the call today. I am going to start with some general commentary on the first half of the year and then get into some detail on the operating results for the first six months and for the second quarter. Although our GAAP earnings declined in the second quarter of fiscal 2000 due primarily to non-recurring restructuring and asset impairment charges primarily due from our subsidiary, U-Swirl. Our non-GAAP adjusted diluted earnings per share improved 25% when compared with the prior-year quarter. Other factors that caused year-to-date GAAP earnings to decline from fiscal 2014 levels include the impact of harsh winter storms upon customer traffic in the first quarter and higher chocolate prices in the first half of fiscal 2015. Despite these challenges, we remain optimistic that revenue and adjusted net income for the full year has a potential to increase to record levels. We are quite pleased with our adjusted EBITDA, a non-GAAP measure that does not include depreciation and amortization, equity compensation expense, and the impairment and restructuring charges increased 30% in the second quarter of fiscal 2015 and 12% year-to-date. Adjusted EBITDA from our frozen yogurt operation increased 127% from 608,000 in the six months ended August 31, 2014 to 1,381,000 in the current year, validating expectations that transactions consolidating our yogurt operation would create scale and a profitable company capable of becoming a consolidation force in the frozen yogurt industry. We experienced further international progress with the opening of our first two stores in the Kingdom of Saudi Arabia, and on September 12, we paid our 45th consecutive quarterly cash dividend. Our Board approved the repurchase of up to $3 million of our common stock and we have $2 million remaining under that authorization and we finished the quarter with over 8 million in cash. Total revenue increased 5% in the first six months of fiscal 2015. Factory sales declined 3.9% in the first six months. This is primarily due to a 3.6% decrease in same-store pounds purchased by our domestic franchise system and a 6.2% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchise stores in operation. Royalty and marketing fees increased 38.8% in the first six months of the year. This was due to the increase in franchise units in operation resulting from the acquisitions and consolidation of our frozen yogurt operations. Franchise fees decreased 39.3% in the first six months. In the first six months of last year, we had international license fees, two deals we closed, and we haven’t closed any deals this year. Retail sales increased 2.5%. This was results from the acquisition of four-company owned locations offset by the closing and/or sale of 6 locations. We had a 1.2% decrease in company owned same-stores retail sales. Franchise Rocky Mountain Chocolate Factory same-store sales were up 1.5% in the first six months. Factory adjusted margins decreased 220 basis points in the first half of the year. This was due to higher commodity costs, specifically coco and diary, which have been near historical highs. We also had reduced efficiencies in the factory resulting from an 8.3% decrease in production in the first six months. Adjusted EBITDA was $4,694,000 versus $4,193,000. Non-GAAP adjusted net income was $2,244,000 versus $2,225,000; Non-GAAP adjusted diluted earnings per share was unchanged at $0.35 in the current year and in the prior year. Net income was approximately $1,589,000 compared to $2,207,000. Fully diluted GAAP EPS was $0.25 versus $0.35. During the first six months, we continued to generate excess cash flow. On September 12, the company paid its 45th consecutive quarterly cash dividend at $0.11 per share. The company finished the first half of the year in excellent financial condition of 2.4:1 current ratio. In the first six months, we opened up 28 new locations including 18 new store locations, 3 Cold Stone, Rocky Mountain Chocolate Factory co-branded stores, 5 international stores, and 2 domestic Rocky Mountain Chocolate Factory stores. For the second quarter, total revenues increased 9.2%. Factory revenues were about the same as last year. This was due to a 4.3% decrease in same-store pounds purchased by our domestic franchise system and a 48.7% increase in shipments to customers outside our system of franchise stores. Retail sales were also approximately flat. This was the result of the acquisition of four company-owned locations offset by the closing and/or sale of five locations. Same-store sales at all company-owned stores declined 1%. Royalty and marketing fees increased 37.6%. This was due to an increase of 71.8% in domestic franchise stores from U-Swirl acquisitions. A same-store sales increase of 2.6% at domestic Rocky Mountain Chocolate Factory units, partially offset by 5.8% decline in the number of domestic franchise Rocky Mountain Chocolate Factory units in operation. In the second quarter, franchise fees increased 139.3%; this was due primarily to the sale of three company-operated locations during the quarter. Factory margins decreased 310 basis points in the second quarter, 32.7% margins versus 35.8%. This was primarily due to higher commodity costs, specifically coco and dairy and lower efficiencies from a 2.2% decrease in production volume. Adjusted EBITDA was $2,551,000 versus $1,968,000. Non-GAAP adjusted net income was a $1,320,000 versus a $1,032,000. Non-GAAP adjusted diluted earnings per share decreased from $0.20 to $0.16 in the prior year. Net income was $878,000 compared to $1,028,000. Fully-diluted GAAP earnings per share was $0.14 versus $0.16. During the quarter, we opened 10 stores, including 3 new store openings, two Cold Stone co-branded openings and one domestic franchise opening and four international openings. We finished the quarter with approximately $8.4 million in cash. With that I will turn it back over to Frank.

Okay, thanks Bryan. All right at this point we'd be happy to answer any questions that you might have.

Thank you. (Operator Instructions) And the first question comes from George Whiteside with SWS Financial Services. George Whiteside - SWS Financial Services: Good afternoon and congratulations on what appears to be a very good set of operating circumstances and results. I noted in the release that there was reference to your ownership interest in Swirl at a level of 40%. I had the idea from previous conference calls and releases that your interest was at the 60% level?

Our ownership interest went from 60% to 40% when we did the acquisitions of CherryBerry and Yogli Mogli, primarily CherryBerry. Both acquisitions included the issuance of stock and that's how our ownership went from 60% to 40%. If you look at the convertible note, that was used to finance these acquisitions and you look at the ownership percentage we would have if converted that note, it's in the 70% to 75% range. George Whiteside - SWS Financial Services: So effectively you've got an option to take your ownership interest back up and then over the 60% level.

Yes, depending on how long the notes outstanding and the balance on the note. When the note matures, our ownership interest will be in the neighborhood of 70% to 80% borrowing some other acquisitions where we use stock to acquire another company. George Whiteside - SWS Financial Services: Thank you very much. I will get back in the queue if I have any other questions.

Thanks George.

Thank you. And the next question comes from Matt Karr with Symons Capital. Matt Karr - Symons Capital Management: Just a quick housekeeping question first I missed this part of the transcript forgive me, but regarding the share buyback authorization, did the executive stock buyback arrangement that was announced a few months ago, did that count against the authorization as well?

It did, yes. Matt Karr - Symons Capital Management: Okay, fantastic, thanks. And then just getting back over to the U-Swirl side of things, I know that there have been some changes regarding your role Bryan, so I was just kind of curious I know that this plan still was to really focus on integration of acquisitions in this side of the business rather than really expanding through acquisition. So just kind of curious qualitatively here given some of the changes in the management of that, are we going to see maybe some acceleration of those integration activities versus what was planned before, I know that there was a fairly large amount of restructuring this quarter but maybe if you can kind of talk qualitatively about pace of integration with where you guys are and closing some unprofitable doors versus maybe where you’d hope to be at this point.

Well I think primarily the restructuring has put a real focus on franchise support, and that area was lacking prior to the restructuring that we did just recently I think we have a great team in place, the company has a new President, it has a new Executive In-charge of the supply chain, we have an executive that is in-charge of franchise support. We have taken all the other functions from Rocky Mountain and integrated those functions into U-Swirl. It happened a lot faster than we expected to happen. I think the company is rapidly becoming ready to do some more acquisitions, and I think we’ll be doing acquisitions sooner rather than later given the progress that the team has made so far. Matt Karr - Symons Capital Management: And so, just want to make sure because that seems a little bit different relative to what you guys have said, I guess last quarter. So presumably reading there that the integration has gone a lot faster than you expected; I just want to make sure I’m on the same page?

That’s correct. Matt Karr - Symons Capital Management: Okay, great. That’s it from me guys. Thanks.

Thank you. And the next question comes from Jeff Geygan with Milwaukee Private Wealth Management. Jeff Geygan - Milwaukee Private Wealth Management: Can you talk little bit about the change in the Rocky Mountain store count during the period that is adds and closes? And how qualitatively the environment for developing that side of the business has changed that all?

From the last quarter, change in last quarter? Jeff Geygan - Milwaukee Private Wealth Management: I look generally because I know for a couple years it’s been SBA financing issues and so on.

There has been really no change in the rate at which new Rocky Mountain Chocolate Factory standalone stores have been opening. I don’t think the financing environment has changed much, and we don’t expect in the near term to really see an acceleration in domestic franchise openings, which is why we’ve really changed our strategy and focus on non-traditional growth, also focus on wholesale distribution, focus on international, focus on licensing. So it’s not that there isn’t a focus on that side of the business, it’s just that we don’t expect the lot of growth from just domestic standalone openings. Jeff Geygan - Milwaukee Private Wealth Management: And then you ran through a lot of numbers, did you give us the store count open domestically as well as the store close count domestically for the quarter?

For the first six months of the year, we opened 28 stores in total and we closed 17. Jeff Geygan - Milwaukee Private Wealth Management: What about just Rocky Mountain?

Standalone Rocky Mountain Chocolate Factory stores; we opened two domestically, we opened three co-branded stores, and we opened five international stores. Domestically, we closed four stores, we closed one company store, and we closed two Cold Stone Creamery U-Swirl co-brands. Jeff Geygan - Milwaukee Private Wealth Management: All right and is -- I’d think but is Canada part of the domestic count or is that considered international as well?

Canada is not part of our domestic count. Jeff Geygan - Milwaukee Private Wealth Management: Okay. And last question and I appreciate this, you said you have shipments to custom outside of your Rocky Mountain system, I’m not sure I understand who that customer is or what that customer looks like?

Well, there is a variety of customers outside of the system of domestic stores, we’ve talked about a number of them on previous calls, provide ecommerce as an example, the customer -- the Kroger grocery store chain was a new customer that we added during first part of this year, also Wine Country Gift Baskets is a customer, we have a variety of customers outside of the domestic franchise system. That business has been growing nicely in the past and continues to grow. Jeff Geygan - Milwaukee Private Wealth Management: Thank you and good luck.

Thank you. And we have a follow up question from Matt Karr with Symons Capital. Matt Karr - Symons Capital Management: Hey, thanks again. Back to the point on the sales outside the franchise network was any of those factory sales related to any of the Candy Bar initiatives are no?

Yes, I mean it was not a material enough. Matt Karr - Symons Capital: Okay.

That we shift so far during the quarter we didn’t ship any but subsequent to the end of the quarter we did ship product into those stores. Matt Karr - Symons Capital: Okay.

King Sooper City Market stores in both Colorado and Wyoming. Matt Karr - Symons Capital Management: Okay. And then I guess just thinking about that initiative broadly with the co-branding on the serial side of things. Do you guys view that as almost maybe better word like a Trojan Horse to kind of test market acceptance for the product, maybe build the brand and so you could potentially see candy bar distribution across where you have the serial distribution relationship as well?

Well the Kellogg’s distribution we were not able to tap into their distribution with our products other than the fact that they are licensing our name to sell their serial. So it’s not like we can tap into their distribution system with candy bars or any other products. We can and we are setting up what we hope to be a national broker system. We have four brokers in place right now. We have two brokers that we have approached and we have pending relationships with. And then we are in the process of contacting additional brokers. But we hope to have a national broker system in place that places our product and national retailers across the country. That’s something that we have to set up, that doesn’t have anything to do with licensing arrangements that we have with Kelloggs. Matt Karr - Symons Capital Management: Okay, great. Thanks guys. That’s it for me.

Thank you. Next question comes from [indiscernible] with [indiscernible] Securities.

So I had a question in regards to U-Swirl about the non-recurring cost. And I guess replacing the former management team with new management. My understanding of the release had something to do with the fact that obviously those salaries were going to be washed away, but correct me if I am wrong. But aren’t they going to be replaced with new salaries or is that already built into the management salaries for the Rocky Mountain and overall company?

Well with the integration into Rocky for instance. Rocky’s finance department has taken on the finance function U-Swirl. And there is a fee associated with that, the services agreement. However, we were able to reduce and eliminate completely 100% of the finance department of U-Swirl and there was a lot of leverage between what they were paying for that function and what Rocky is able to provide. Also we are going to be doing that with the sales and marketing functions. The franchise support function. And so U-Swirl able to plug into Rocky Mountain’s infrastructure. And really what’s left in terms of management that has just responsibility at U-Swirl, it’s basically an operating franchise support distribution channel management team. And so, we have three executive managers in U-Swirl’s management [ph]. And so there has been significant reduction in the amount of annual payroll already. It’s already been accomplished. The charges that you see related to that, related to severance benefits and other non-recurring restructuring charges and some impairment on some assets that were sold. But that was prudent to this quarter we don’t expect that to recur next quarter.

Okay, alright. That make sense. Excellent. And if I could just ask one other quick question if you don’t mind. I have noticed that since July there has been some pretty regular selling of the U-Swirl shares by insiders of the stock. Is there going to be some point where insiders are going to consider buying in the open market as well or I mean is there some type of and exit strategy that you guys have or?

I really don’t have comment on what insiders are going to do, that’s an individual decision that’s made by those individuals. And so I don’t really have any comment on that question. In terms of an exit strategy we are not having exit strategies right now. We are committed to the business and we intend to continue to invest in it.

Okay, great. Thank you very much.

Thank you. And the next question comes from John Gay [ph] [indiscernible] investor.

Hi, guys. I was curious about the situation in Japan which had a lot of promise a year ago and seems to have gotten cloudy. Do you have some clarification on that?

Right now the operation in Japan consists of two operating locations. And there are some businesses they have outside of their stores. They have some internet sales, caramel apples. But the Japan relationship I don’t expect it to be material in the future, it’s not material now. At one point we thought that have tremendous opportunity for the company and we don’t feel that way about it now. We are looking for another partner. We started out in Japan in an amazing fashion however it hasn’t turned out very well. So don’t expect our operations there with our current partner to expand much.

How about China, have you thought of the any operations there?

In China?

.:

Yes, we have been to China several times we’ve worked with commercial services to find the potential partners there, we also are in discussions with potential partners in Hong Kong for a wholesale distribution but we don’t have anything put together yet.

Okay, very well, thank you.

Thank you and we’ve follow up question from Jeff Geygan with Milwaukee Private Wealth Management. Jeff Geygan - Milwaukee Private Wealth Management: Yes, thanks again. Bryan, can you tell us a little bit about the trend in this frozen yogurt business on a store level and not just within your franchise but really on a national basis?

I think that what we’ve seen in almost every deal that we’ve worked at is high negative same store sales for organizations that most of their stores are not same stores. We’re seeing anywhere from 15% to 20% negative comps. As markets mature and the weaker stores close you see that comps then come down and in some cases are positive, we have couple of markets where we have positive same store sales right now but the newer stores that have the honeymoon effect are seeing significantly negative comps we don’t see that letting up at all in not just our stores but all of the stores that we looked at. How long it takes to shake out the market and eliminate the weaker players, don’t really know, it’s taking a lot longer than we hoped and it will probably continue on the way for some time. Jeff Geygan - Milwaukee Private Wealth Management: That’s kind of interesting, have you noticed any difference when you co-brand a frozen yogurt with a Rocky Mountain?

We have for instance we have two useful stores they are corporate stores that we cobranded with Rocky Mountain Chocolate Factory both of those stores have positive comps in August and September north of 20% and so co-branding with Rocky Mountain Chocolate Factory helps a lot, the store itself has to be a very good store it can’t be a real low volume store. When you add Rocky on it’s an impulse in the yogurt store just like it is overall. And so you have to have an adequate business already to support CapEx for the cost to add Rocky to your business but if you have a good store Rocky makes that store a lot better store. Jeff Geygan - Milwaukee Private Wealth Management: I appreciate that, just a final comment with respect to the future of the business it seems that there has been a substantial shift towards a frozen yogurt so clearly despite these trends I’m assuming that’s where you think the opportunity is for Rocky Mountain?

No, I think that yogurt is a nice opportunity for that company I think that Rocky can grow its co-branding with yogurt but I think the big opportunity for the Rocky Mountain Chocolate Factory brand’s wholesale distribution in specialty markets. We’re just getting started there we have some nice progress already, we’re getting a national brokers system in place and I think the real future of Rocky Mountain Chocolate Factory is sales of its product outside of its system of domestic stores including co-branded locations but more wholesale distribution I think that’s our biggest opportunity. Jeff Geygan - Milwaukee Private Wealth Management: Great, thank you again.

Thank you and we also have a follow-up from George Whiteside with SWS Financial Services. George Whiteside - SWS Financial Services: Bryan, in your announcement you had included Saudi Arabia indicating that you had opened a single store, what do you see in the future relative to Saudi in the number of stores that you might want to have in the entire far east?

The two stores that opened in Saudi Arabia, has just opened. They haven’t had a grand opening yet, they’re operating up on soft opening and we really don’t have a feel that how we’re doing in the marketplace. And so it’s too early to call that. We really don’t have an expectation or a target number. We’ll see how these first two stores go; if they go well, we’ll start to have the information to figure that out George. George Whiteside - SWS Financial Services: Good and I think you commented on the fact that you have efforts in the overseas markets that are continuing and that you hope to develop further in the overseas market. Is that sort of a gist of…

That’s correct, we continue to have ongoing dialogs with a variety of potential partners and expect that will close another deal or two before the end of the fiscal year. George Whiteside - SWS Financial Services: Very good, thank you.

Thank you. (Operator Instructions) And we do have a question from Michael [indiscernible], private investor.

Hello gentlemen, I have been a stockholder in U-Swirl for over three years and I applaud the quarter and the record level sales increases that the retail channel seems to have achieved. But I have something goes back to one of these previous gentlemen had commented on or questioned about. I’ve redeemed warrants and seeing these converted warrants dropping value way below the redemption price. My question is, why do insiders seem to be selling a significant number of shares on a quarterly basis? It seems to me this sends a mix message to investors by regulate diluting the share prices.

Again I answered that question before; I don’t have any comment on insider sales.

Okay, I mean that’s basically the thrust [ph] of my question because it seems -- it doesn’t send a clear message. I understand that you’re taking a position that you don’t want to comment but as an investor this is something that concerns me and I’m sure it concerns other investors.

We also have a question from Ralph [indiscernible], a Private Investor.

May I ask you a question, I know that Rocky Mountain Store being through slowdown quite a bit. Have you [indiscernible] research the type of piece of various size of transactions. If I buy some and I take the selection [indiscernible] selection was about 15 years ago, there is a [indiscernible] piece of chocolate covered [indiscernible] it attractive as you had back in the 90’s. Thank you.

Ralph, I can’t say that I agree with that, I mean we have 200 to 300 to skew [ph] that stores can authorize; I think our selection now is more skew [ph] available for the stores to choose now than there ever has been.

Well maybe I just got lucky. But in prior year, did you say you had 8 million in cash?

I’m sorry, I didn’t catch that Ralph.

Do you have cash balance of 8 million?

Well that’s the end of August our cash balance was 8.4 million.

Thank you and we show no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Thank you, Operator. Again, thank you very much everyone for attending our conference call today. We look forward to talking with you at the end of our third quarter in January. Have a nice day and thank you again.

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