Q3 2012 Rocky Mountain Chocolate Factory Earnings Conference Call

Jan 10, 2012 AM EST
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

RMCF - Rocky Mountain Chocolate Factory Inc
Q3 2012 Rocky Mountain Chocolate Factory Earnings Conference Call
Jan 10, 2012 / 09:15PM GMT 

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Corporate Participants
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   *  Frank Crail
      Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President
   *  Bryan Merryman
      Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director

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Conference Call Participants
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   *  George Whiteside
      SWS Financial Services - Analyst
   *  Jeff Geygan
      Milwaukee Private Wealth Management - Analyst
   *  Steve Shaw
      Sidoti & Company - Analyst
   *  Bob Atley
      Strategic Capital Partners - Analyst
   *  Ralph Obencane
      - Private Investor

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Presentation
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Operator   [1]
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 Hello, and welcome to the Rocky Mountain Chocolate Factory third-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

 Some of the statements made during this call may be considered forward-looking statements, that involve a 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 financing, the availability of suitable locations for new stores, and the 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 public announcements and in Rocky Mountain Chocolate Factory's SEC 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 at 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?

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [2]
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 Thank you, operator. Good afternoon, ladies and gentlemen, and welcome to Rocky Mountain Chocolate Factory's third-quarter of fiscal 2012 conference call. I'm Frank Crail, President of Rocky Mountain Chocolate Factory, and with me here today is Bryan Merryman, the Company's Chief Operating Officer. We are going to start the call this afternoon with Bryan giving you a summary of both our third quarter and nine months' operating results, and at the conclusion of his presentation, we will be happy to answer any questions that you may have. So at this time, I will turn the call over to Bryan.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [3]
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 Thanks, Frank. I would also like to thank everybody for attending the call today. I'm going to first talk about the nine months, the first nine months of the fiscal year, and then I'll get into a little more detail on the third quarter. The first nine months of fiscal 2012 was characterized by moderate revenue growth, driven by Aspen Leaf Yogurt retail sales, and increased specialty market factory sales. In a still tight credit environment for small businesses, we managed to open 18 new domestic franchise locations, which included seven stand-alone Rocky Mountain Chocolate Factory stores, seven co-branded Cold Stone Creamery stores, and four Aspen Leaf Yogurt locations.

 Excluding the Aspen Leaf Yogurt start-up losses, the core Rocky Mountain Chocolate Factory business was basically flat in the first nine months of fiscal 2012. Total revenues were up 10.5%. Specialty market sales increased 25.9%, when compared with the nine-month period ended November 30th, 2010. Royalty and marketing fees were basically unchanged from the prior year. Our franchise fees decreased 6.3%, although we had 11 franchise openings in the current year, versus eight in the prior year, the increase was more than offset by a decrease in the franchise fee for Aspen Leaf Yogurt stores, and by a decline in Cold Stone Creamery openings from 19 to seven.

 Retail sales increased 50.7%. This was due to an increase in Company-owned units, 13 in the current year versus 12 in the prior year. We opened four Company-owned Aspen Leaf Yogurt locations between December 2010 and April 2011. We also had a 4.4% increase in Company-owned same-store retail sales. Our franchise same-store sales were basically unchanged. We had a 1% increase in the third quarter, offset by a 0.6% decrease in the first six months of the year. Same-store pounds purchased by the franchise system was down 3.1%. Our factory margins decreased slightly, 70 basis points. This was due to increased fuel costs and a little higher commodity costs.

 Our net income was $2.556 million versus $2.749 million. If you exclude the loss from Aspen Leaf Yogurt, which was $281,000 in the first nine months, net income would have been basically flat with the prior year. Our fully diluted earnings per share for the first nine months was $0.41 versus $0.44 last year. During the first nine months, we've continued to generate excess cash flow. On December 9th, the Company paid its 34th consecutive quarterly cash dividend of $0.10 per share. And despite the lackluster recovery, the Company is in excellent financial condition, a 3.9 to 1 current ratio, and we remain free of long-term debt.

 During the first nine months we opened 24 new locations. Seven of those were Cold Stone co-branded stores, three international stores, seven domestic Rocky Mountain Chocolate Factory franchise openings, four Aspen Leaf Yogurt openings, and three Company-owned Aspen Leaf Yogurt openings. We also opened our first side-by-side Rocky Mountain Chocolate Factory and Aspen Leaf Yogurt store in December in St. Joseph, Missouri. That store was off to great start in December, and performed very well. We expect to open four additional Company-owned Aspen Leaf Yogurt locations by the end of our fiscal year.

 And now I will get into a little bit more detail on the quarter. For the quarter, our total revenues were up 4.6%. Factory revenues increased 5.6%. This was due to an increase in specialty market sales of 29.4%, and an increase in sales to franchised and licensed locations. Our retail sales were up 21.4%. This was due to the Company-owned Aspen Leaf Yogurt locations now in operation, partially offset by the sale of three Company-owned Rocky Mountain Chocolate Factory stores. Our Company-owned stores had a 4.2% increase in same-store sales for the quarter. Royalty and marketing fees were up slightly, at 0.8%. This was due to a 1% increase in same-store sales, and an increase in the average number of licensed locations in operation. This was partially offset by a decline in average domestic franchise locations and operations.

 Franchise fees decreased 119% in the quarter. We had two domestic franchise openings in the current year versus four in the prior year. We also had two Cold Stone Creamery co-branded locations opened in the current year quarter versus eight in the prior year. Also, we decreased the franchise fee for Aspen Leaf Yogurt. We are going to have -- that fee is going to be much lower on a go-forward basis, and what we did for all of our existing franchisees, is we gave them a credit between the new franchise fee and the old franchise fee, and that caused franchise fee revenue from Aspen Leaf Yogurt to actually be negative for the quarter. Our factory margins decreased 10 basis points from 30.9%, versus 31%. Again, that was due to higher commodity costs, including, primarily fuel.

 Operating expenses increased 11.4% in the quarter. This was due to the development and operating personnel associated with the new Aspen Leaf Yogurt initiative. Also, it was due to an increase in the reserve for uncollectible notes and accounts receivable. Net income for the quarter was $725,000 versus $873,000 in the prior-year quarter. Our basic and diluted earnings per share was $0.12 this year versus $0.14 last year. During the quarter, we opened four domestic stores, one Aspen Leaf franchise store, two Cold Stone stores, and one domestic Rocky Mountain Chocolate Factory. During the quarter, we continued to generate excess cash flow. We finished the quarter with approximately $3.2 million in cash.

 We also continued our investment in the development of Aspen Leaf Yogurt. During the quarter, Aspen Leaf Yogurt incurred an operating loss of approximately $225,000. Excluding this loss, net income would have been basically flat in the quarter. Also, we had our first unit open in Japan just before Christmas. It's an exciting development for us. The store has been open for just under a month right now, and the sales -- it's a kiosk, and the sales so far are very, very encouraging. We're very excited about what this might mean for expansion in Japan for the future given our sales level of our first unit there. With that, I'll turn it back to Frank.

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [4]
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 Thanks, Bryan. At this time, we would be happy to answer any questions you may have.

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Questions and Answers
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Operator   [1]
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 Thank you, Mr. Crail. (Operator Instructions). We will pause momentarily to assemble our roster. And our first question will come from George Whiteside of SWS Financial Services. Please go ahead.

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 George Whiteside,  SWS Financial Services - Analyst   [2]
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 Good afternoon, and congratulations on the quarter. I know that it's a tough environment, and you seem to be doing well in spite of it. You had commented on the fact that you had opened a Rocky Mountain Chocolate Factory and an Aspen Leaf store side-by-side. Have you given any consideration of co-branding the two, similar to [Coldstream] or are there some contractual limits in doing so?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [3]
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 No, we have no contractual limits, and we will test that same sort of presentation with Aspen Leaf Yogurt and Rocky Mountain Chocolate Factory. So that's definitely in our development plans.

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 George Whiteside,  SWS Financial Services - Analyst   [4]
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 Excellent. You mentioned the negative franchise fees, and I presume that, in effect, you are refunding the difference between the two fee schedules, and that's what created your negative franchise fee number.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [5]
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 That's correct. It was negative in the quarter. It's still positive on the year. But we did give our franchisees, our existing franchisees, a credit for the difference between our original franchise fee and our new franchise fee.

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 George Whiteside,  SWS Financial Services - Analyst   [6]
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 I don't know whether you want to comment on this publicly, but what is the difference in the two fee schedules?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [7]
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 We're not going to comment on it publicly today. Once it's announced, and our FDD is updated and we start advertising - of course, everybody will know then, but for the yogurt companies that are on the call today, we're not going to run it, we're going to wait.

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 George Whiteside,  SWS Financial Services - Analyst   [8]
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 Totally understandable that you wouldn't do so for competitive reasons. Thank you, and I will get back in line.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [9]
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 Thanks, George.

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Operator   [10]
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 And our next question will come from Jeff Geygan of Milwaukee Private Wealth Management. Please go ahead.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [11]
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 In your press release, you talk about Aspen Leaf stores, that you're going to, quote, launch an aggressive franchise marketing initiatives, end quote, for the upcoming fiscal year. What does that mean?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [12]
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 It means that we're to going budget a substantial amount of money to advertise the concept, to go to trade shows, and try to get the franchise sales for the concept going.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [13]
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 Can you quantify that in any way?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [14]
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 I could, but I'm not going to.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [15]
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 All right. In the same paragraph, you talked about the merit of the Aspen Leaf franchise strategy, and then, I quote, believe the long-term return on investments for the Company and its franchisees will justify such expenditures, end quote. What type of return on investment should we as shareholders expect from this initiative?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [16]
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 Well, I don't want you to expect any specific rate of return. We are going to do our best to generate the kind of returns from the concept -- the Aspen Leaf Yogurt concept -- as we have from the Rocky Mountain Chocolate Factory concept, which are very high, of course, in a franchise model, where capital expenditures are limited. We are not publicly disclosing some kind of target rate of return.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [17]
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 And then, Frank, I don't think I have spoken to you in the past, but with respect to the Japanese initiative, Bryan somewhat led me to believe that you are really the front end on some of the franchise development. Is that your idea to go to Japan, and if so, what are your expectations in being there?

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [18]
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 Well, we thought about going to Japan for many years, but you obviously need a partner over there. Doesn't make a lot of sense for us to be opening Company stores in Japan, and so we currently have a partner that has the resources to build out the market, that knows the real estate over there, and has the ability to distribute our product. And so, our first store is a test store. It's doing very, very, well, and we're very hopeful that we're going to be able to expand Rocky Mountain Chocolate Factory in that market.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [19]
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 That's pretty exciting. You may have seen the article that I'm about to reference in The Financial Times on November 14, talking about, and I'll quote, the article says, chocolatiers savor sales to emerging markets' new rich, end quote, however, they do reference countries like China, Russia, and so on. Japan's not mentioned in there. Could this be a stepping stone to further expansion into emerging markets for you?

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [20]
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 It could. We'll see how this one goes. But the partners we have over there have connections in China, and a lot of the markets over there, so we're just going to take it a step at a time. So far so good. The first store is doing exceedingly well. It looks like it's being very well-received over there. And if the opportunity presents itself, we will definitely expand Rocky Mountain Chocolate Factory into those regions.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [21]
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 And I'm curious. Do you manufacture that chocolate in Durango and ship it overseas? And if so, how does that work for you, cost, quality, et cetera?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [22]
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 Well, in some markets, that's been a challenge internationally, but not in Japan. The yen is very strong, given the retail market over there. It has not been an issue to ship a container to Japan, and I think that our partner is very happy with cost structure and the margins that they are able to command. So in Japan, definitely, the business model is going to include us shipping product from Durango.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [23]
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 I appreciate it. I will get back in the queue. Thank you.

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Operator   [24]
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 And our next question will come from Steve Shaw of Sidoti & Company. Please go ahead.

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 Steve Shaw,  Sidoti & Company - Analyst   [25]
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 Bryan, I'm just curious, do you guys have it pinpointed when that Aspen Yogurt loss might turn into profit as you expand the brand? Whether it's a month, a quarter, or a half or a year?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [26]
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 Well, it's going to really depend on our franchise sales effort. Right now, at store level, it doesn't cash flow in October or November, we don't expect positive cash flow in December or January. Maybe break even in February, and then, again, positive cash flow starting in March at store level. And so, it really depends on the franchise sales effort to offset kind of the administrative structure that we have around the concept. So don't expect to -- expect to have positive cash flow at store level next year. So it's not a store-level issue. It's just how fast we can get the franchise sales to cover the development cost.

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 Steve Shaw,  Sidoti & Company - Analyst   [27]
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 Okay, all right. Thanks, Bryan.

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Operator   [28]
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 And our next question is a follow-up from George Whiteside of SWS Financial Services.

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 George Whiteside,  SWS Financial Services - Analyst   [29]
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 In the release, you mentioned some margin pressure brought about by increases in costs of transportation and fuel. Are you experiencing further cost pressures in ingredients, such as chocolate?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [30]
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 We're not -- we've been fortunate with chocolate. There's not much difference in our contract prices in the first nine months of this fiscal year versus last fiscal year. We did catch the market low and have contracted for next fiscal year. So we're in good shape in chocolate. Some nuts continue to be high, dairy prices continue to be high, and sugar continues to be high. Transportation continues to be high. So while commodities are still up there, we did catch a break on chocolate.

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 George Whiteside,  SWS Financial Services - Analyst   [31]
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 Thank you. Another question as it relates to Cold Stone Creamery. It appears as though the openings for that part of your business have slowed down a bit. Do you believe this is a longer-term trend or are you expecting a pick-up in that segment of your business?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [32]
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 I think the only way we see a pickup that in program is if we're able to put together some financing mechanism for their system. It does cost $50,000 to $70,000 to convert a store. Most franchisees don't have that kind of cash laying around. We helped with the initial growth in that concept by providing $1 million of financing, minus some financing vehicle being made available to that system. We will see slower openings in the future. I think we'll continue to open and convert locations, but it won't be at the rate we did the last 18 months or so, but there still is a chance that some kind of financing program could be put together for their system. We're still working on it.

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 George Whiteside,  SWS Financial Services - Analyst   [33]
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 Certainly understandable. Back to the decrease in your Aspen Leaf franchise fees. I presume that there was a reason for your doing that? Perhaps it might have been a competitive factor?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [34]
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 Well, we decreased the franchise fees and the royalty fees and the marketing fees; lowered the cost for our franchisees, with the hope that anyone that was considering potentially going on their own as a mom and pop versus a franchise -- that was maybe having a hard time deciding between the two, that we would lower the cost to go with us as a franchisor considerably, and convince them to have the strength of the franchise system behind them. So the idea was to make Aspen Leaf a very low entry cost for someone considering the opportunity -- make us as low or lower than any of the competition.

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 George Whiteside,  SWS Financial Services - Analyst   [35]
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 Do you anticipate that this will be a permanent situation, or is this a short-term special deal, so to speak?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [36]
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 I'd rather not even speculate on that. Mostly, we'd just really like to see some franchise sales happen for Aspen Leaf Yogurt, and if we were lucky enough to see some really large numbers of units going up, we may consider, in the future, changing that again, but right now we're focused on getting franchise sales started up.

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 George Whiteside,  SWS Financial Services - Analyst   [37]
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 Totally understandable. Thank you.

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Operator   [38]
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 Our next question will come from [Bob Atley] of Strategic Capital Partners. Please go ahead.

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 Bob Atley,  Strategic Capital Partners - Analyst   [39]
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 Just a follow-up on the George question. So to summarize, what made you decrease the franchise fee for Aspen Leaf Yogurt to go after the mom and pop shops to change their mind, pretty much; to go after that segment of the market? Am I understanding that right?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [40]
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 Yes, that's part of it. Part of it is to go after that segment of the market. I think we're seeing very few really super high net worth multi-unit operators in yogurt right now. When we originally got into it, we thought that the landscape would be dominated by that kind of operator, but what we're really seeing is mostly mom and pop openings, and we're seeing a couple of franchise systems that have low fees opening a fair number of stores, as well.

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 Bob Atley,  Strategic Capital Partners - Analyst   [41]
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 Right, Orange Leaf, are you familiar with Orange Leaf?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [42]
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 We're very familiar with Orange Leaf.

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 Bob Atley,  Strategic Capital Partners - Analyst   [43]
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 They're very local.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [44]
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 Yes.

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 Bob Atley,  Strategic Capital Partners - Analyst   [45]
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 Okay. That was just to summarize -- just to understand what are your thoughts behind that.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [46]
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 Thank you.

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 Bob Atley,  Strategic Capital Partners - Analyst   [47]
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 The second question that I have, it's about -- to refer to Aspen Leaf, and to some of the past quarter and annual reports. One of the main reasons for slow growth, or slow opening of new stores is the tight credit condition. You guys have been repeating this many, many times, and everybody knows the conditions are not very pleasant. What is the main obstacle or the main difficulty for approving the franchisee? Is it the amount of down payment, or not good enough credit, or no financial institutions willing to extend credit? Because -- what is the main reason that you're seeing the tight credit?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [48]
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 Well, I think the main reason on the Rocky Mountain Chocolate Factory side is, historically, we would see 50%, 60% of our growth from our existing franchise system and then 40%, 50% from new franchises. For new franchisees, unless you have the cash, or a substantial portion of the cash, there is no financing available. The SBA rule --

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 Bob Atley,  Strategic Capital Partners - Analyst   [49]
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 So what are your options? Like 30% down payment, or 50%, or what is the financial institution asking for? Or is that they don't have good credit, or--?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [50]
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 You can borrow from the SBA right now $250,000, if you don't have substantial experience in a business, and still -- but they'll only guarantee -- you still have to come up with 30% down. So if a concept costs $400,000 to operate, you are going to -- you max out at $250,000, so you are still going to have to have $150,000 in cash, you're going to have a final (multiple speakers) $400,000, and you are going to have to have a secondary source of repayment of the loan. And so that just -- we are, for lack of a better term, a mom and pop franchisee, and so financing is just not available for that type of individual. There is some press on that small business credit is improving and small businesses have better access to credit right now, and that's true for companies like Rocky Mountain Chocolate Factory. But it is not true for mom-and-pop business operators. So you have to have the funds yourself, if you want to open a store and try a new business. So that's the main reason on --

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 Bob Atley,  Strategic Capital Partners - Analyst   [51]
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 I see. (multiple speakers) But according to some of the interviews from the major financial institutions like CEOs from JPMorgan and Wells Fargo the last couple of months, I've been listening to their interviews on CNBC or any other financial -- they're mentioning that they're extending credit to small business, and this blah blah and that blah blah. But from the other side, I'm listening from small companies like Rocky Mountain and other companies that the franchisee can not obtain credit, and I say, what's going on? Some of -- one side saying, oh we're extending credit, the other side say that credit is tight and there is no way to obtain credit, so they both don't adapt. That's why I'm asking this question.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [52]
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 I think that what they're talking, when they say small business, they're talking about like Rocky Mountain Chocolate Factory corporate. I mean, we do have access to credit, and it's better now than it has been in the past. So if you're a small business like Rocky Mountain Chocolate Factory corporate, I think the markets have improved. But if you are an individual that wants to quit their job and start a new business, it hasn't improved at all. I mean, basically, before the recession, the Small Business Administration subsidized a lot of business failures by providing capital to people that didn't have experience to start a new business and create jobs. That isn't happening right now.

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Operator   [53]
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 And our next question is a follow-up from Jeff Geygan of Milwaukee Private Wealth Management. Please go ahead.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [54]
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 Sure. In the spirit of the fellow before me, your press release talks about this tight credit environment for small businesses continuing to strip the ability of existing prospective Rocky Mountain franchisees; understood. Why wouldn't this also affect your Aspen Leaf yogurt franchisee?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [55]
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 Well, it does. It affects them. We don't have a system, significant system of franchisee, or significant sales, and there is a significant number of these units going up. So it's more than that on the Aspen Leaf side, than just a tight credit market. It's just -- it's that the field is very crowded. There's a ton of competition, and prior to the change in the structure that we just made, there is other companies you could go to and do it for much less money. So it's more factors than just a tight credit market, on where we're at with Aspen Leaf.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [56]
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 When you say much less money, do you mean the total start-up costs?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [57]
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 The franchise fee, and then the ongoing royalties.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [58]
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 You also say you have six new store locations as of November 30. Are those Rockys or Aspen Leafs?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [59]
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 As of -- you mean for the quarter?

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [60]
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 It's in your press release. As of November 30, six new store locations have been sold to franchisees who plan to open their units over the next few months.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [61]
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 Those are Rocky Mountain Chocolate Factories.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [62]
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 So at some level, guys can get financing.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [63]
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 We expect to open between eight and ten stand-alone Rocky Mountain Chocolate Factories this year.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [64]
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 All right. Back to Aspen Leaf. What have you noted in terms of customer traffic for the stores that have been open more than three months?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [65]
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 We've noted that it's highly seasonal, and that October was slow and November was slower, and December was even slower than that. And that the seasonality is very close to what you would expect from ice cream.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [66]
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 With the proliferation of new yogurt stores, what is your macro view or industry view of yogurt as a growing concern?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [67]
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 I think that we're observing some very positive and very negative things, depending on the market. I don't think Colorado's market is very good. I think it's highly saturated. It's a cold climate. I am not as optimistic about that as I am, say, the Midwest. The Midwest, we opened a store in St. Joseph that opened great. It's doing very well, even though it's December and January. So I think it's mixed. I think it depends on the market and it depends on saturation level in the market, of course.

 So I think it's a mixed view. I'm not excited about California. I think it's oversaturated. We're not excited about Colorado. We are very excited about the Midwest. Our location in San Antonio is doing well. It's starting to comp, and it started out slow, so we don't want to give too much weight to this, but it's comping very well in San Antonio. So we are still excited about certain markets in the country, for sure. There's other markets we think are way oversaturated.

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Operator   [68]
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 Our next question will come from [Ralph Obencane], a private investor. Please go ahead.

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 Ralph Obencane,  - Private Investor   [69]
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 I want you to know that my wife Elaine opened a two-pound box a couple of days ago, and we're pleased by the change. It seems to me you've upgraded the different pieces, and they taste better and look better. Have you been trying to do that?

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [70]
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 We made that change, Ralph, almost a year ago, and we think it's a better mix.

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 Ralph Obencane,  - Private Investor   [71]
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 I do, too.

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [72]
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 We've gotten a lot of good positive feedback from our customers on that.

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 Ralph Obencane,  - Private Investor   [73]
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 Very good. That's all I wanted to know. Thank you, and nice talking to you, Frank.

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [74]
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 Same here.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [75]
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 Nice hearing from you, Ralph.

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Operator   [76]
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 And we have another question from Jeff Geygan of Milwaukee Private Wealth Management.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [77]
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 Just a couple more here. Frank, this might be up your pipe here. When you started this organization in 1980, did you open this up as a franchising organization or a chocolate company?

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [78]
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 It started out with just, obviously, the one store, as a retail chocolate store. We started franchising, probably within about four or five months. And I would say the core competency of our Company is franchising. And our ability to put people in business and support them.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [79]
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 I agree with the fellow before that you guys make really good chocolate product, I've got to say. And I like chocolate, and I've tried a bunch of yours and it's good stuff.

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [80]
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 Thanks.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [81]
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 What I think is noteworthy in your release is that the real delta in growth, in revs, is coming from outside of your network. And that's to me real chocolate sales, not franchise sales. How do you react to that?

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [82]
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 I think that we have a little bit of a distribution model that's different than when we first started, and there are certain channels that we're now selling our products into, and, of course, there's probably a better -- a bigger ability to grow through those channels than there is right now through franchising just because of what we talked about earlier -- how tough it is for franchisees to get financing. But I think that, as we see, if they do, and the credit markets get better, that we're going to see an acceleration of growth in Rocky Mountain Chocolate Factory stores, because there is a demand. It's just that whether they're current franchisees or new franchisees, it's very difficult to get financing for them to open Rocky Mountain Chocolate Factory stores.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [83]
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 Do you have, during the interim period where financing is uncertain, and really I think it's a big unknown -- what type of strategy or plan do you have in place to drive revenue outside the franchise network?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [84]
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 Well, we're going to continue to grow with our existing customers. Most of the growth that we have in our specialty market sales are existing customers. We very selectively attract new customers, and that still is not our core business. Our core business is franchising, and selling chocolate to our franchise system.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [85]
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 And not long ago, you established a line of credit with Wells Fargo, to your point that credit-worthy people can get credit. So I forget, was that a $1 or $3 million line?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [86]
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 It was $2.5 million.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [87]
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 So why not turn around and finance your own growth during this interim period?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [88]
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 The concept -- the Rocky Mountain Chocolate Factory concept at retail averages about $360,000, and it is an owner/operator concept, and it does not provide the financial return for the Company to employ its own capital in that. And loaning money to franchisees also has not worked for us in the past, so we won't do that now or in the future.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [89]
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 Does that cause to you question your model?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [90]
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 I mean, our model is what we've always talked about, and that is it's an owner/operator concept. People get into it because they want to own a chocolate store. They're not getting into the business for the return on equity. If that was the case we would have sophisticated, well-capitalized multiple-unit operators.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [91]
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 I appreciate it. You two have done a brilliant job managing the company; profitability, return on equity, and so on. Zero debt, long and short term, plenty of available capital. If you could cherry-pick your franchisee, I think you would still have an acceptable return on equity if you employed a little bit of debt to boot-strap these guys to get started, though.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [92]
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 That has not been something that's been successful for us in the past. It's worked well so far with Cold Stone because those are existing locations. It might work well to co-brand an existing location that's doing well, but picking real estate and investing in a franchisee; historically the bad stores have wiped out the returns from the good stores. So we've tried it before. Maybe we could do it, but it's just not a strategy that we like, to be quite frank.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [93]
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 Understood. Last question, regarding your internal franchise development team and support. Who are these people, and how can you augment their efforts to try and bring in some of these mom and pop -- less sophisticated but financially able people?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory Inc - COO, CFO, Treasurer, Director   [94]
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 Well, they're the same people that we've had for the last 10 years or so that have been behind the growth of the Company when it was pre-recession, and hopefully we're giving them the tools and the budget to jump-start the Aspen Leaf side. I think that answers your question.

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Operator   [95]
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 And at this time, we show no further questions. I would like to turn the conference back over to management for any closing remarks.

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 Frank Crail,  Rocky Mountain Chocolate Factory Inc - Chairman, CEO, President   [96]
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 Okay, thank you, operator. Again, I would like to thank all of you that attended our conference call, and we look forward to talking to you at year end. All of you please have a good day, and we'll look forward to talking with you soon. Thank you.

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Operator   [97]
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 To access the digital replay of this conference, you may dial 1-877-344-7529, or 1-412-317-0088 beginning at 6.00 PM Eastern Time today. You will be prompted to enter a conference number, which will be 10008309. Please record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.




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