| Re: | Rocky Mountain Chocolate Factory, Inc. Form 10-K for the Fiscal Year Ended February 28, 2006 Filed May 5, 2006 Form 10-Q for the Quarter Period Ended November 30, 2006 Filed January 5, 2007 File No. 0-19514 |
| 1. | We note the calculation underlying your measure of gross margin presented on page 20 appears to exclude depreciation and amortization. This would generally require the measure to be characterized as a non-GAAP measure, when such amounts are attributable to cost of sales. Therefore, you may need to either recalculate the measures depicted as gross margin, to reflect all costs of sales; or choose an alternate label for your non-GAAP measure and provide the disclosures required under Item 10(e) of Regulation S-K. | |
| RESPONSE:In future filings the Company will note in its MD&A and other appropriate disclosures that costs of sales and gross margins is exclusive of depreciation and amortization expense. |
| 2. | We note that you classify your business interests into two reportable segments: Franchising and Manufacturing. Previously you segregated Retail as a third reportable segment but now include the Retail segment in the Franchising segment. We also note your disclosure on page 32, stating that revenues derived from franchising represent collection of initial franchise fees and royalties from franchisees’ sales. | |
| Since revenues from the company owned retail stores presumably represent sales of chocolates and other confectionery products directly to customers, please explain how you have met the aggregation criteria of SFAS 131, paragraph 17, to include activity of the Retail segment with that of the Franchising segment. | ||
| RESPONSE:In prior years, the Company had a business strategy that included retail operating units. Several years ago the Company changed its business strategy and no longer considers the holding of retail operating units as a separate, significant business strategy. The remaining stores provide an environment for testing new products and promotions, operating and training methods and merchandising techniques. Accordingly, the Company has discontinued the disclosure of retail operations as a separate business segment and includes them in franchise operations. In reviewing SFAS 131, Paragraph 10, the retail segments do not satisfy Criteria B in that the operating results of retail segments are not reviewed regularly by the Company to make a determination of how resources are to be allocated to the segment and assess its performance. Again, the operations are assessed in conjunction with franchise operations. The Company does not believe that the Staff’s reference to Paragraph 17 is appropriate because it does not consider this to be an operating segment and thus, should be aggregated with the franchising segment of its business. |
| 3. | In your Form 10-Q’s for the quarters ended August 31, 2006 and November 30, 2006, we note that the timing of your evaluation does not conform with the requirements set forth in Item 307 of Regulation S-K. In this regard, having the Evaluation Date within 90 days of filing the annual report is not correct. The effectiveness of the controls and procedures should be as of the end of the period covered by the report. | |
| RESPONSE:The statement in each Form 10-Q that the Company had evaluated the effectiveness of the design and operation of the disclosure controls and procedures within 90 days of the filing date of each quarterly report was incorrect. In fact, the Company evaluated the design and operation of the disclosure controls and procedures as of the end of the period covered by each report. The Company will ensure that disclosure in future reports properly states that the evaluation is as of the end of the period covered by the report. |
| • | the Company is responsible for the adequacy and accuracy of the disclosure in its filings; | ||
| • | Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and | ||
| • | the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
| Very truly yours, | ||||
| /s/ Sonny Allison | ||||
| Sonny Allison | ||||
| cc: | Nasreen Mohammed (US SEC, Division of Corporation Finance) Bryan Merryman (Rocky Mountain Chocolate Factory) John Moore (Rocky Mountain Chocolate Factory David Steiner (Ehrhardt Keefe Steiner & Hottman) |
