Welcome to Rocky Mountain Chocolate Factory's Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. The statements made on this conference call which are not historical facts or forward-looking based upon the company's current plan and strategies and reflect the company's current assessment of the risks and uncertainties related to its business including such things as product demand and market acceptance, the economic and business environment and the impact of government pressures, currency risk, capacity, efficiency and supply constraints and other risks detailed in the company's press releases, shareholder communication and Securities and Exchange Commission filings. For additional information the company urges you to consider reviewing its 10Q and 10K SEC filings. I would now like to turn the conference over to Frank Crail, Chief Executive Officer. Please go ahead.

Thank you, Operator. Good afternoon everyone and thank you for attending our third quarter of fiscal 2016 conference call. I'm Frank Crail, President in a 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 both our third quarter and first nine months of fiscal 2016 operating results and at the conclusion of his presentation we'll be happy to answer any questions you may have. So at this time I will turn the call over to Brian.

Thank you, Frank. I would also like to welcome everybody to today's call. I'm going to start with a summary of our first nine months of fiscal 2016 and then get into a little bit more detail on our third quarter. For the nine months total revenues declined 3% from 30.3 million last year to 29.4 million in the current year. This would result of factory sales increasing 2.3%, this increase was driven primarily by an 11.4% increase in shipments to customers outside our network of domestic franchise and licensed stores. This increase was partially offset by lower domestic Rocky Mountain Chocolate factory stores in operation and a 1.9% decrease in same store pounds purchased by our domestic franchise system. Royalty and marketing fees decreased 3.4% in the first nine months. This was due to a decline in domestic Rocky Mountain Chocolate Factory units in operation of approximately 5.7%. Also there was a decline of 11.3% in total franchise units in operation which was the result of store closures and acquired yogurt franchise systems, few acquisitions and store openings to offset the declines in units. We also had a system wide same store sales decrease of 0.2%, Rocky Mountain Chocolate Factory stores increased 1.4% and U-Swirl stores declined 1.8%. Franchise fees in the first nine months declined 7.5% this was primarily the result of fewer domestic frozen yogurt. franchise unit openings. Retail sales declined 21.2%, this was the result of the sale of three U-Swirl locations and the closure of an underperforming U-Swirl company owned location. We also sold the Rocky Mountain Chocolate Factory Company owned location. Company owned stores had a 2.2% decrease in the same store retail sales, Rocky Mountain Chocolate company stores declined 2.3% and U-Swirl Stores Company owned declined 1.9%. Factory adjusted margins decreased a 190…

Thanks, Bryan. Operator, at this point we would be glad to entertain any question.

[Operator Instructions]. Our first question comes from [indiscernible]. Please go ahead.

I said I am actually new to the name so I probably got some kind of more basic questions. I wondered if you could talk a little bit about the factory sales to your non-franchise business and give a better standing of what that customer base is and what the growth opportunities are?

Sure. The sales to customers outside of our system of franchised stores consists of a variety of customers, the bulk of the sales that we have are sold to partners that primarily sell their product over the Internet and that's what most of our sales are now. Our biggest customer is the division of provide Commerce called ProFlowers and we also sell to other companies who feature our product on their websites and recently we've started to sell into the food drug [ph] mass as well and we also sell products over our Internet site rmcf.com. So that’s sort of the customer make up of our outside of our system. We also have master licensees, international master licensees that we sell products to and we have co-branded stores that are licensed to sell Rocky Mountain Chocolate Factory, our biggest partner in that area is Cold Stone Creamery and then we also co-brand with a number of our frozen yogurt stores. So that's sort of the customer base outside of our domestic Rocky Mountain Chocolate Factory stores. That in the future will be we believe most of the growth in the company will come from that area, we think our domestic franchise system right now looks like it all be about the same number of units going forward maybe declined slightly just depending on the economic environment and the availability and financing. So I think our biggest opportunities in the future are going to be directed consumers through rockymountainchocolatefactory.com, also selling product into food drive mass [ph]. Right now while the initiative is very young. We’re already in over 1600 locations in the city of mass area. So we think that there's very good growth to be had in the future in all of those customers outside of our system.

And the biggest customer you said was ProFlowers, did I get that correctly?

Correct.

And are they selling it like brand like Rocky Mountain Chocolate Factory or is it their own product that label as their own?

The Rocky Mountain Chocolate Factory name is on the product.

And is that business being pretty stable over the last couple of years? Is it growing? Is it shrinking?

It has been growing slightly, they have been a very long term customer. And we expect it will be comparable to last year up slightly this year.

The next question comes from Tim Call with Capital Management. Please go ahead.

Can you tell us what the timing of factory sales -- does that reflect that are more sales in December just from a shift of customers wanting to hold inventory for shorter periods and does that mean the next quarterly report will be stronger in that area?

Tim, not necessarily. Really for the first six months of the year that specialty market sales were over 50% and then after this quarter they were up in the neighborhood of 11.4% and so that was more in line with our expectations on the year to have them up double digits but not in the 50% range.

With the chocolate store base growing in the three months, is that something you see a stable or continuing to grow in future periods and then the fact that you're able to grow the number of international chocolate stores does that effect margins or revenues disproportionately, are the international stores -- do they sell more on average and are they more profitable for you on average?

No I think it's comparable the international stores with the domestic stores and we did see a number of openings in the first nine months internationally. Again I think that the international store openings don't move the needle a lot in the company. But I think over time we're still very optimistic that we will get critical mass in countries around the world that can lead to some meaningful improvement in our profitability.

Can you share a little more on the new candy bars and products that you might be selling through Kroger companies and other venues? How are the new products doing? Are there further new product introductions and are you going into a new retail channels?

We have refined our offerings and we've reduced our number of SKUs in some circumstances just to the better sellers and we are always working on new products and we've recently significantly expanded the number of locations where our product is sold. So I think again that’s -- we have just really started in that channel and I think it has a lot of good growth potential in future.

The share buybacks were strong in the last year. The stock price is now lower, does that mean management will be opportunistic and continue to reward shareholders with those dividends and share buybacks going forward?

Yes, I mean we remain very committed to buying back stock. During the first nine months we've purchased stock at values higher than the stock is today and we're going to try to be opportunistic and aggressive in the future in terms of buying back stock, absolutely.

The next question comes from John Anderson, a Private Investor. Please go ahead.

My question happens to be about the derivatives fair value charge going from 92,000 to 710,000. Could you shed some more light why this significant increase and how that is determined? Thank you.

Well I will tend to do, so it's fairly our accounting. The notes of the loan agreement between Rocky Mountain Chocolate Factory and-- it's a non-wholly owned subsidiary, Rocky Mountain Chocolate Factory owns about 39% of U-Swirl and there's a loan agreement between Rocky Mountain Chocolate factory and U-Swirl embedded in that agreement is a derivative that has value or had value, that derivative is the option of Rocky Mountain Chocolate Factory to be able to convert the note, the debt into preferred equity. During the quarter Rocky Mountain Chocolate Factory determined that it was highly unlikely that it would convert it's note into equity and that derivatives became a virtually worthless and so that was a write down of the value of that derivatives and so what that does is it reduces the borrowing costs on the U-Swirl subsidiary and it benefits the non-controlling interest in the U-Swirl subsidiary.

So I would assume that there's not going to be any further charges in the future in reference to the derivatives, you’ve written everything off, is that correct?

Not everything has been written off, but the notes matures January 22nd and so Rocky Mount Chocolate Factory management and board will be determining what they plan and do as it relates to that note. So if there is any further charges or pick-ups as it relates to the note it would be a fourth quarter and then don't anticipate anything next fiscal year as it relates to that note.

And what might we expect as far as the further write down if it hasn't been completely written off as of yet?

Really can't comment on that, it really depends on the actions that the Board of Directors of Rocky Mountain Chocolate Factory take as it relates to their rights under that note agreement.

The next question comes from Thomas Palmer [ph] with Life Oak Asset Management. Please go ahead.

I’ve got two questions, one is related to the stock buyback. I believe you said that you bought 233,000 shares back in the last year?

Last nine months.

The last nine months. So we're talking about somewhere around $3 million?

Actually it's a little over $4 million.

$4 million, all right. So we're looking at substantial loss you know in current market value, right?

The market value has declined from where we purchased the stock in the last nine months that's correct.

Okay. Where did that $4 million come from?

From our excess cash.

Did you have to borrow any of that money?

No. The only borrowings the company has done were borrowings under a fixed rate loan agreement, term loan agreement and the proceeds of which were loaned to our subsidiary that’s the only borrowing we have done.

And how much was that?

It was just over 6 million at it's maximum amount and it's down stands right now in the $5 million range little over $5 million.

Okay, well just being the devil's advocate. I believe in your press release you said that you purchased $4 million worth of stock and you’re returning money to shareholders and don’t you think that that might be a little bit of an embellishment?

No it's not.

But how is that returning money to shareholders?

By buying back stock and paying dividends is definitely returning money to shareholders.

Well if you owe $5 million on a revolving credit and you use $4 million to buyback stock, how is that -- just being the devil's advocate, how is that returning money to shareholders?

I don’t understand your question, the 5 million, the $6 million term loan that we did in prior years the proceeds of that went to expand the U-Swirl subsidiary and it's being repaid out of operating cash flow, also out of excess cash and operating cash flow we’re paying dividends and buying back stock which is definitely returning to shareholders. So I just don’t understand your question.

Well wouldn’t we have been better off had we take that 4 million and paid down the loan, what kind of interest rate you’re paying on loan?

3.75.

Okay. Well one of them a lot more conservative to take that 4 million instead of taking a chance in the stock market is to take that money and pay that down that 5 million dollar revolver and then you save that, you know you would have instead of $5 million debt outstanding you would have only $1 million in debt and you wouldn’t be paying all that interest to the banks.

Well of course if we knew the future we would never pay more than the price of the stock is now. We think that prospects of Rocky Mountain Chocolate Factory are strong and not going to look back on what we could have done or should have done. We have a policy of buying back stock, we’re going to continue to do that. We still have almost zero net debt in our company and completely unleveraged working capital stand 100% behind our dividends and our buy backs and we will continue to do that.

Okay. And then my second question revolves around competition. I'm a little bit concerned because I saw where we see is -- can be is -- I know like about two years ago they opened up the location I believe in a Dallas shopping center and now they're opening up a unit in the new Nebraska furniture market, the reason I guess -- I mean how do you feel about that? Do you think that that you can compete against See's Candy?

We don’t really compete against See's Candy, except for during the holiday season. Rocky Mountain Chocolate Factory is an everyday chocolatier, See's is primarily given as a gift, 90% of their volume during holidays. We’re way, way less seasonal of a concept, we co-exist nicely with See's in California. See's is definitely the gift of choice and chocolate in the West Coast less so in the rest of the country and so we have many customers that will buy a gift of See's to give away as a gift and buy our product for themselves at our stores in California. So we’ve coexisted with See's, we have more stores in California than in any other state that's where See's is strongest. We’ve coexisted with See's for really the whole 35 year history of Rocky Mountain Chocolate Factory.

Is there anything that you can do to become better at shipping out chocolates for gifts during the holiday season, you know like See's is doing?

Absolutely. We can definitely get better out of it, I think we’re constantly working with our stores so they get better at it. We are really concentrating on that strategy in future. Like I said we started the year with almost no exposure to food drug mass [ph], we’re already in 1600 units. Before this year we did not really own the internet, we had outsourced the Internet to our franchisees so that they could use internet to drive sales out of their stores. We helped them fulfill in many cases with their internet sales but the Rocky Mountain Chocolate Factory stores didn't really do a lot of sales through the Internet and so we take a nap back. Next year we expect to have a large increase in sales through rmcf.com start advertising and over the next five years think we can really build that into a much, much larger business than it is today. So there is a lot of things that we can do and are doing.

Right. The thing I believe there is also a lot of business through mail order around the holiday season. Were they [indiscernible] and then asked people to call in their order so on that seems pretty effective.

We do that as well and we will even more focus on this going forward.

Okay, good. I do love you chocolate covered caramel candy and I think it's better chocolate candy that See's puts out but have you tried peanut brittle?

Of course I’ve.

Do you think your peanut brittle is better than See's peanut brittle?

Of course I think all of our products are better than See's.

Okay. I know they sell a tremendous amount of peanut brittle especially in holiday season, it's in a 10s of millions I'm sure. But anyway I just wanted to ask -- I certainly do appreciate your time and that I certainly home that we can get the earnings turned around in the near future and going back up again.

The next question comes from Nathan McKinley, a Private Investor. Please go ahead.

My primary question has already been asked but I will ask you a secondary one. U-Swirl, you said you got a 39% ownership stake in it, looks like they owe I guess a north of 5 million. It's got a market cap of less than a 1 million. You know at what point do you just buy them and eliminate some of the incremental G&A expense?

Well right now we are owed about 7.2 million actually on a senior secured note and that note is in default. The note matures January 22nd, and the Board of Directors of Rocky Mountain Chocolate Factory will meet and decide appropriate course of action in the near future that relates to that note, that’s really all I can say.

I understand that. Certainly when you go through the U-Swirl financials at least it appears to me they are throwing off enough EBITDA to cover something reasonable from an interest expense perspective. I know you probably couldn’t comment on it. My primary question was already asked. Thank you and congratulations on a decent year so far.

The next question is a follow-up from [indiscernible]. Please go ahead.

Similar kind of questions along the lines of U-Swirl, they got before stock how they looked like they generate cash, I kind of had same question, are they generating cash but just shows them not to pay off the note what are the terms of that note being?

It's a fairly complicated agreement and several -- I reference you to the actual public disclosures as it relates to terms of the note. Again all I can really say is it relates to note is that it owed approximately $7.2 million, the note is in default and it matures here in the very, very near future and the actions that were taped as a secured credit or senior secured note will be determined in the near future.

And you're the only creditor?

We’re the only secured creditor, but there is no other secured creditor.

And completing the capital structure, I guess you guys have been involved in this business for a couple of years now, I mean what are your views on the actual fundamentals of the business?

Well I think that the cost structure of the business has been really reduced this fiscal year down to a good level. There maybe future reductions that we can do in the cost structure there may, the same store sales have stabilized a lot this fiscal year. The entity is capable of positive cash flow and I still think that the industry is way over built and there are still lot of closures to come. But ultimately I think it is a decent business that will be there next year and beyond and so I think it's a good business. It's still facing a number of challenges and I think that at some point. After there has been an appropriate number of closures across the country we could see some organic unit growth in that business but I still think that's a couple years off.

And then just going back to you guys were talking about certain opportunities, you talked about the internet, you talked about food drug mass [ph]. What do you think your biggest opportunity is on the -- of the things you’ve listed, what you think is the one that’s kind of most likely be addict [ph] on earnings over the next couple of years?

Well I think that the biggest opportunity for expansion for the company over the next five years is going to be a combination of channels outside of our system of Rocky Mountain Chocolate Factory stores. I think that direct consumer rmcf.com has huge potential. I think specialty retail has a lot of potential. I think food drug mass [ph] has a lot of potential to really strengthen our brand and so I see those sales through a variety of channels really increasing over the next five years. Next fiscal year, we all will be focused on the infrastructure that's necessary to make that happen and really starting to investing in business to go that direction.

What it will be feel like distribution centers or what are you’re talking about in terms investments?

Investment and our ability just to be a world class chocolate manufacture to the variety of investments and information systems, equipment, facilities.

Is the factory itself need to be expanded or is that -- or improved upon or is it more kind of everything beyond the factory?

No I would expect that the factory it can be improved up. I think the equipment can be improved. I think that facility outside of Durango is in our future. And so you know all of the areas that I mentioned I think the company will be investing in the next five years.

The next question is from Jack Duras [ph], a Private Investor. Please go ahead.

Can you comment on -- in the most recent quarter can you comment on the earnings that U-Swirl contributed to Rocky Mountain Factory? Thank you.

U-Swirl was not a significant contributor in the current quarter. We have not disclosed that information in our 10Q, will be filed to-date and that information will be in our segment note. It was improved over last year, but we have not disclosed that information separately, but it will be in our 10Q which we filed today.

[Operator Instructions]. The next question comes from Bill Wolfenden with Cottonwood Investments. Please go ahead.

My primary question been answered, we kind of beat the note to death. Just on the food, drug and mass is that a licensing arrangement or are you guys actually making product I'm not quite sure what that is.

No, we’re making product and we’re working primarily through a broker network that we've set up.

Is it candy bars or?

It's tots [ph] which is that stand up box with a variety of product in it.

Okay. Regarding the frozen yogurt business, couple of years ago you guys were sort of optimistic on the business but said it was oversaturated due to lack of consolidation, it sounds like not much has changed and you’re still talking a couple of years out. Was there a reason with the optimism in the rest of the business? Why we are continuing to stay in yogurt business?

Well I think the yogurt business is very complementary as it relates to our franchising infrastructure and again I think that we've taken a lot of the cost structure of the yogurt business, and leveraged Rocky Mountain Chocolate Factory it's cost structure. I think there's maybe some more of that to do. I think it's what we have right now is a good business and while we're in discussions with some small other small younger yogurt players right now. We really couldn't get to any kind of valuation where we could expand that through acquisition in a bigger way this year that may change in the future, but I think what we have left of the yogurt business is in pretty good shape and it plugs right into Rocky Mountain Chocolate Factory franchise and infrastructure and it will be a contributor in future.

You commented that over the next five years you need to do investing in the business to make yourself a world class manufacture of chocolate. Can you comment on those investments will fit in with the continued payment and potentially growth of the dividend as well as share buybacks just effectively how you’re going to deploy free cash flow over the next few years?

I think that we have the free cash flow in the business to invest in our manufacturing infrastructure buyback stock and pay the dividend Rocky Mountain Chocolate Factory despite having a fairly challenging first nine months, still sits at 21% EBITDA margins, business is very good at generating cash and it's just a question of deploying that to support the strategy that we have to grow our chocolate business.

[Operator Instructions]. The next question comes from Vincent Rudisill, a Private Investor. Please go ahead.

Just a quick question, I'm trying to do the math you said you spent about $4 million on buybacks for a little over 233,000 shares, that would get your price of an average price of over 17. What am I doing wrong?

We purchased $4.3 million of common stock and that was over the past four months, I misspoke there, the 233,000 was in the first nine months. That was over the past 12 months that we spent the 4.3 million not in first nine months.

And are all those shares purchased in the open market?

They have been purchased in the open market or in blocked trades and also they've been purchased from management as well.

Okay. So there's private deal in there right?

Everything was purchased at market or a discount to market, but for instance it's a shareholder contacted the company and indicated they were interested in reducing their ownership position in the company which happened over the last 12 months. There has been block sales of this stock as well as in the open market. So there's been all about--

The next question is a follow-up from [indiscernible]. Please go ahead.

That last question now, it answered the previous caller's question. But now I'm confused about the [Technical Difficulty]. In last twelve months how many shares have you purchased?

I don't have that number right in front of me now, I have it in just a couple of minutes.

Okay. I guess I'm trying to figure out how much have you spent on buybacks and how many shares you bought so that I can figure out what you paid per share.

We spent $4.3 million and we paid an average of $13.23.

This concludes our question and answer session. I would like to turn the conference back over to Frank Crail for any closing remarks.

Thank you, Operator. Thank you again for attending our third quarter conference call. We look forward to talking to you at year-end. Have a great day. Thank you very much. Bye, bye.

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