ROCKY MOUNTAIN CHOCOLATE FACTORY INC (Form: 10-Q, Received: 10/13/2009 16:26:54)

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

(Registrant)

Date: October 13, 2009

/s/ Bryan J. Merryman

Bryan J. Merryman, Chief Operating Officer,

Chief Financial Officer, Treasurer and Director

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-14749

Rocky Mountain Chocolate Factory, Inc.

(Exact name of registrant as specified in its charter)

Colorado
(State of incorporation)
84-0910696
(I.R.S. Employer Identification No.)

265 Turner Drive, Durango, CO 81303
(Address of principal executive offices)

(970) 259-0554
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ .

On September 30, 2009 the registrant had outstanding 6,025,938 shares of its common stock, $.03 par value.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

FORM 10-Q

TABLE OF CONTENTS


	Page No.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3-11

Statements of Income		3

Balance Sheets		4

Statements of Cash Flows		5

Notes to Interim Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3. Quantitative and Qualitative Disclosures About Market Risk		18

Item 4. Controls and Procedures		18

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		18

Item 1A. Risk Factors		19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		19

Item 3. Defaults Upon Senior Securities		19

Item 4. Submission of Matters to a Vote of Security Holders		19

Item 5. Other Information		19

Item 6. Exhibits		20

SIGNATURES		20

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

STATEMENTS OF INCOME
(unaudited)


	Three Months Ended August 31,					Six Months Ended August 31,
	2009		2008			2009		2008
Revenues
Sales	$	4,597,519	$	4,673,977		$	9,984,402	$	10,124,262
Franchise and royalty fees		1,489,386		1,615,538			2,771,690		3,225,728
Total revenues		6,086,905		6,289,515			12,756,092		13,349,990

Costs and Expenses
Cost of sales, exclusive of depreciation and amortization expense of $84,040, $94,831, $168,924 and $191,783, respectively		2,858,301		3,101,653			6,466,226		6,798,607
Franchise costs		401,627		498,290			771,762		817,818
Sales and marketing		339,448		315,687			677,761		706,312
General and administrative		535,989		599,903			1,202,936		1,225,034
Retail operating		384,277		234,581			708,313		446,635
Depreciation and amortization		175,657		194,042			354,688		392,553
Total costs and expenses		4,695,299		4,944,156			10,181,686		10,386,959

Income from Operations		1,391,606		1,345,359			2,574,406		2,963,031

Other Income (Expense)
Interest expense		—		(4,207	)		—		(8,075	)
Interest income		7,275		4,470			12,380		12,599
Total other, net		7,275		263			12,380		4,524

Income Before Income Taxes		1,398,881		1,345,622			2,586,786		2,967,555

Provision for Income Taxes		516,554		512,680			956,710		1,130,640

Net Income	$	882,327	$	832,942		$	1,630,076	$	1,836,915

Basic Earnings per Common Share	$	.15	$	.14		$	.27	$	.31
Diluted Earnings per Common Share	$	.14	$	.14		$	.26	$	.30

Weighted Average Common Shares Outstanding		6,005,891		5,984,919			5,999,277		5,983,180
Dilutive Effect of Stock Options		204,839		156,286			201,182		141,782
Weighted Average Common Shares Outstanding, Assuming Dilution		6,210,730		6,141,205			6,200,459		6,124,962

The accompanying notes are an integral part of these financial statements.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

BALANCE SHEETS


	August 31,		February 28,
	2009		2009
	(unaudited)
Assets
Current Assets
Cash and cash equivalents	$	2,100,717	$	1,253,947
Accounts receivable, less allowance for doubtful accounts of $464,221 and $332,719 respectively		3,528,346		4,229,733
Notes receivable, current portion		34,166		—
Inventories, less reserve for slow moving inventory of $255,759 and $251,922 respectively		4,133,322		4,064,611
Deferred income taxes		364,051		369,197
Other		335,329		224,378
Total current assets		10,495,931		10,141,866

Property and Equipment, Net		5,134,766		5,253,598

Other Assets
Notes receivable, less current portion		260,711		124,452
Goodwill, net		1,118,414		1,046,944
Intangible assets, net		146,580		183,135
Other		93,863		91,057
Total other assets		1,619,568		1,445,588

Total assets	$	17,250,265	$	16,841,052

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	873,962	$	1,074,643
Accrued salaries and wages		412,168		423,789
Other accrued expenses		583,912		531,941
Dividend payable		602,594		598,986
Deferred income		107,500		142,000

Total current liabilities	$	2,580,136	$	2,771,359

Deferred Income Taxes		837,341		827,700

Commitments and Contingencies

Stockholders’ Equity
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding
Series A Junior Participating Preferred Stock, authorized 50,000 shares		—		—
Undesignated series, authorized 200,000 shares		—		—
Common stock, $.03 par value, 100,000,000 shares authorized, 6,025,938 and 5,989,858 issued and outstanding		180,778		179,696
additional paid-in capital		7,472,796		7,311,280
Retained earnings		6,179,214		5,751,017
Total stockholders’ equity		13,832,788		13,241,993

Total liabilities and stockholders’ equity	$	17,250,265	$	16,841,052

The accompanying notes are an integral part of these financial statements.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

STATEMENTS OF CASH FLOWS
(unaudited)


	Six Months Ended
	August 31,
	2009			2008
Cash Flows From Operating activities
Net income	$	1,630,076		$	1,836,915
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization		354,688			392,553
Provision for obsolete inventory		30,000			50,000
Provision for loss on accounts and notes receivable		150,000			83,000
Loss (gain) on sale of property and equipment		(38,416	)		16,871
Expense recorded for stock compensation		162,598			77,351
Deferred income taxes		14,787			—
Changes in operating assets and liabilities:
Accounts receivable		512,516			81,906
Inventories		(98,711	)		(238,987	)
Other current assets		(114,752	)		(244,260	)
Accounts payable		(200,681	)		(606,680	)
Accrued liabilities		40,349			(68,598	)
Deferred income		(34,500	)		(93,000	)
Net cash provided by operating activities		2,407,954			1,287,071

Cash Flows From Investing Activities
Addition to notes receivable		(170,425	)		—
Proceeds received on notes receivable		—			1,798
Proceeds from sale or distribution of assets		5,000			8,910
Purchases of property and equipment		(197,883	)		(112,957	)
(Increase) decrease in other assets		394			(116,526	)
Net cash used in investing activities		(362,914	)		(218,775	)

Cash Flows From Financing Activities
Net change in line of credit		—			(150,000	)
Dividends paid		(1,198,270	)		(1,197,964	)
Net cash used in financing activities		(1,198,270	)		(1,347,964	)

Net Increase (Decrease) in Cash and Cash Equivalents		846,770			(279,668	)

Cash and Cash Equivalents, Beginning of Period		1,253,947			675,642

Cash and Cash Equivalents, End of Period	$	2,100,717		$	395,974

The accompanying notes are an integral part of these financial statements.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

NOTES TO INTERIM FINANCIAL STATEMENTS

NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

Rocky Mountain Chocolate Factory, Inc. (the “Company”) is an international franchisor, confectionery manufacturer and retail operator in the United States, Canada and the United Arab Emirates. The Company manufactures an extensive line of premium chocolate candies and other confectionery products. The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates and other confectionery products. The following table summarizes the number of Rocky Mountain Chocolate Factory stores at August 31, 2009:


	Sold, Not Yet Open		Open		Total
Company owned stores		—		7		7
Franchise stores – Domestic stores		5		256		261
Franchise stores – Domestic kiosks		—		9		9
Franchise units – International		—		48		48
Cold Stone Creamery – co branded		4		9		13
Total		9		329		338

Basis of Presentation

The accompanying financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the six months ended August 31, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2009.

Subsequent Events

The Company has performed an evaluation of subsequent events through October 13, 2009, the date the Company issued these financial statements. Based on our evaluation, the Company is not aware of any subsequent events which would require recognition or disclosure.

Stock-Based Compensation

At August 31, 2009, the Company had stock-based compensation plans for employees and nonemployee directors that authorized the granting of stock awards.

The Company recognized $74,759 and $162,598 of equity-based compensation expense during the three and six month periods ended August 31, 2009 compared with $30,271 and $77,351 during the three and six month periods, ended August 31, 2008. Compensation costs related to share-based compensation are generally amortized over the vesting period.

NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION — CONTINUED

Stock-Based Compensation — Continued

On February 21, 2006, the Company accelerated the vesting of all outstanding stock options and recognized a share-based compensation charge related to this acceleration. Adjustments in future periods may be necessary as actual results could differ from these estimates and assumptions related to employee turnover since the acceleration date.

There were no stock options or restricted stock units granted to employees during the three and six month periods ended August 31, 2009 compared with 170,400 shares of restricted common stock units granted during the three and six month periods ended August 31, 2008. During the six month period ended August 31, 2009, the Company issued 3,000 unrestricted shares of stock to non-employee directors compared with 4,000 unrestricted shares issued to non-employee directors in same period of the prior fiscal year. There were no unrestricted shares issued during the three month period ended August 31, 2009 or 2008. Associated with these non-employee director stock issuances, the Company recognized $13,080 and $47,080 during the six month periods ended August 31, 2009 and 2008, respectively.

During the three and six month periods ended August 31, 2009, the Company recognized $74,759 and $149,518 of equity-based compensation expense related to non-vested, non-forfeited restricted stock unit grants. The restricted stock unit grants vest 20% annually over a period of five years. During the three months ended August 31, 2009, 33,080 restricted stock units vested and were issued as common stock. Total unrecognized compensation expense of non-vested, non-forfeited shares granted, as of August 31, 2009, was $1,166,300, which is expected to be recognized over the weighted average period of 3.9 years

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. For the three months ended August 31, 2009 and 2008, 129,381 and 140,640 stock options, respectively, were excluded from the computation of earnings per share because their effect would have been anti-dilutive. For the six months ended August 31, 2009 and 2008, 216,699 and 141,132 stock options, respectively, were excluded from the computation of earnings per share because their effect would have been anti-dilutive. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.

NOTE 3 — INVENTORIES

Inventories consist of the following:


	August 31, 2009		February 28, 2009
Ingredients and supplies	$	2,265,107	$	2,461,020
Finished candy		1,868,215		1,603,591
Total inventories	$	4,133,322	$	4,064,611

NOTE 4 — PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:


	August 31, 2009		February 28, 2009
Land	$	513,618	$	513,618
Building		4,697,134		4,707,381
Machinery and equipment		6,837,913		6,977,006
Furniture and fixtures		700,766		676,970
Leasehold improvements		353,357		347,124
Transportation equipment		356,209		350,714
		13,458,997		13,572,813

Less accumulated depreciation		8,324,231		8,319,215
Property and equipment, net	$	5,134,766	$	5,253,598

NOTE 5 — STOCKHOLDERS’ EQUITY

Shareholder Rights Plan

On May 19, 2009, the Company and Computershare Trust Company, N.A. entered into an Amended and Restated Shareholder Rights Agreement (“Rights Agreement”) which amended and restated the existing Shareholder Rights Agreement dated May 28, 1999, (“Existing Rights Plan”). In connection with the Existing Rights Plan the Company’s Board of Directors declared a dividend of one right to purchase one one-hundredth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.10 per share, for each outstanding share of the Company’s common stock, par value $0.03 per share, of the Company that was outstanding on May 28, 1999. Each share of Series A Junior Participating Preferred Stock originally entitled the holder to one hundred votes and dividends equal to one hundred times the aggregate per share amount of dividends declared per common share. There are no shares of Series A Junior Participating Preferred Stock outstanding. The Existing Rights Plan was set to expire on May 28, 2009 and, through board declaration, was replaced in its entirety by the Rights Agreement on May 18, 2009 when the Board of Directors of the Company authorized and declared a dividend of one Right (a “Right”) for each outstanding share of Common Stock of the Company (the “Common Shares”). The dividend was paid on May 19, 2009 (the “Record Date”) to the holders of record of the Common Shares at the close of business on that date. The Rights will become exercisable and detachable only following the earlier of 10 days following a public announcement that a person or group has acquired beneficial ownership of 15 percent or more of the outstanding Common Shares or 10 business days following the announcement of a tender offer or exchange offer for 15 percent or more of the outstanding Common Shares. In addition, the Company has authorized the issuance of one Right with respect to each share of Common Stock that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date. When exercisable, each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.10 per share, of the Company (the “Preferred Shares”), at a price of $30 per one one-thousandth of a Preferred Share (the “Purchase Price”), subject to adjustment. Each share of Series A Junior Participating Preferred Stock entitles the holder to one thousand votes and dividends equal to one thousand times the aggregate per share amount of dividends declared per common share.

Cash Dividend

The Company paid a quarterly cash dividend of $0.10 per common share on March 13, 2009 to shareholders of record on February 27, 2009. The Company paid a quarterly cash dividend of $0.10 per common share on June 12, 2009 to shareholders of record on June 1, 2009. On August 24, 2009 the Company declared a quarterly cash dividend of $0.10 per common share payable on September 18, 2009 to shareholders of record on September 8, 2009.

Future declaration of dividends will depend on, among other things, the Company’s results of operations, capital requirements, financial condition and on such other factors as the Company’s Board of Directors may in its discretion consider relevant and in the best long term interest of the shareholders.

NOTE 6 — SUPPLEMENTAL CASH FLOW INFORMATION


	Six Months Ended
	August 31,
	2009		2008
Cash paid (received) for:
Interest		—	$	8,225
Income taxes	$	911,555	$	1,127,643

Non-Cash Financing Activities Dividend Payable	$	3,608	$	400
Fair value of assets acquired in business combination
Store assets	$	6,693	$	19,021
Inventory	$	—	$	3,398
Goodwill	$	71,470	$	87,870

NOTE 7 — OPERATING SEGMENTS

The Company classifies its business interests into two reportable segments: Franchising and Manufacturing. The Company’s retail stores provide an environment for testing consumer behavior, various pricing strategies, new products and promotions, operating and training methods and merchandising techniques. All Company-owned retail stores are evaluated by management in relation to their contribution to franchising efforts and are included in the Franchising segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Company’s financial statements included in the Company’s annual report on Form 10-K for the year ended February 28, 2009. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:


Three Months Ended
August 31, 2009	Franchising		Manufacturing			Other			Total
Total revenues	$	2,160,296	$	4,349,208		$	—		$	6,509,504
Intersegment revenues		—		(422,599	)		—			(422,599	)
Revenue from external customers		2,160,296		3,926,609			—			6,086,905
Segment profit (loss)		859,684		1,153,571			(614,374	)		1,398,881
Total assets		2,977,336		10,348,688			3,924,241			17,250,265
Capital expenditures		75,950		71,978			29,349			177,277
Total depreciation & amortization		40,450		89,754			45,453			175,657

Three Months Ended August 31, 2008
Total revenues	$	2,081,714	$	4,545,838		$	—		$	6,627,552
Intersegment revenues		—		(338,037	)		—			(338,037	)
Revenue from external customers		2,081,714		4,207,801			—			6,289,515
Segment profit (loss)		886,696		1,111,274			(652,348	)		1,345,622
Total assets		2,584,527		11,037,805			2,320,155			15,942,487
Capital expenditures		4,409		24,026			9,349			37,784
Total depreciation & amortization		42,646		100,200			51,196			194,042


Six Months Ended
August 31, 2009	Franchising		Manufacturing			Other			Total
Total revenues	$	3,948,174	$	9,667,092		$	—		$	13,615,266
Intersegment revenues		—		(859,174	)		—			(859,174	)
Revenue from external customers		3,948,174		8,807,918			—			12,756,092
Segment profit (loss)		1,407,649		2,502,723			(1,323,586	)		2,586,786
Total assets		2,977,336		10,348,688			3,924,241			17,250,265
Capital expenditures		78,962		89,572			29,349			197,883
Total depreciation & amortization		80,786		179,896			94,006			354,688

Six Months Ended August 31, 2008
Total revenues	$	4,070,566	$	9,940,944		$	—		$	14,011,510
Intersegment revenues		—		(661,520	)		—			(661,520	)
Revenue from external customers		4,070,566		9,279,424			—			13,349,990
Segment profit (loss)		1,794,836		2,478,101			(1,305,382	)		2,967,555
Total assets		2,584,527		11,037,805			2,320,155			15,942,487
Capital expenditures		30,376		43,403			39,178			112,957
Total depreciation & amortization		88,301		202,508			101,744			392,553

NOTE 8 — GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:


		August 31, 2009				February 28, 2009
		Gross				Gross
	Amortization	Carrying		Accumulated		Carrying		Accumulated
	Period	Value		Amortization		Value		Amortization
Intangible assets subject to amortization
Store design	10 Years	$	205,777	$	158,980	$	205,777	$	148,425
Packaging licenses	3-5 Years		120,830		116,664		120,830		114,164
Packaging design	10 Years		430,973		335,356		430,973		311,856
Total			757,580		611,000		757,580		574,445

Intangible assets not subject to amortization
Franchising segment-
Company stores goodwill			1,170,798		267,020		1,099,328		267,020
Franchising goodwill			295,000		197,682		295,000		197,682
Manufacturing segment-Goodwill			295,000		197,682		295,000		197,682
Trademark			20,000		—		20,000		—
Total Goodwill			1,780,798		662,384		1,709,328		662,384

Total intangible assets		$	2,538,378	$	1,273,384	$	2,466,908	$	1,236,829

Amortization expense related to intangible assets totaled $36,555 and $36,556 during the six months ended August 31, 2009 and 2008, respectively. The aggregate estimated amortization expense for intangible assets remaining as of August 31, 2009 is as follows:


Remainder of fiscal 2010	$	36,600
2011		64,400
2012		40,200
2013		4,700
2014		680
Total	$	146,580

NOTE 9 — STORE PURCHASE

Effective August 1, 2008 the Company took possession of a previously financed franchise store and related inventory in satisfaction of $110,289 of notes, accrued interest, and accounts receivable. The Company currently intends to retain and operate the store. The following table summarizes the allocation of the purchase price:


Fair value of assets acquired in business combination
Store assets	$	19,021
Inventory	$	3,398
Goodwill	$	87,870
Total fair value of business combination:	$	110,289

Effective July 9, 2009 the Company took possession of a previously franchise operated store and related assets in satisfaction of $38,872 of accounts receivable. The Company currently intends to retain and operate the store upon completion of fixed asset upgrades. The Company Adopted SFAS No. 141 (revised 2007), Business Combinations, as of March 1, 2009. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. In accordance with SFAS 141 (revised 2007) the Company recorded the business acquisition using the acquisition method. The Company recorded the value of the business acquisition at fair value and recorded a gain of $39,292 associated with the business acquisition. The following table summarizes the allocation of fair value on the date of acquisition:


Fair value of assets acquired in business combination
Store assets, inclusive of $91,836 of improvements made by the Company:	$	98,530
Goodwill, $32,179 expected to be amortized for income tax purposes:	$	71,470
Total fair value of business combination:	$	170,000

Effective March 1, 2008, the Company adopted the fair value measurement and disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities that are already subject to fair value measurements under current accounting rules. The Company determined the fair value of the business combination using transaction information for historical sales of Rocky Mountain Chocolate Factory locations. These inputs to the valuation methodology are unobservable and significant to the fair value measurement (Level 3 of the SFAS 157 value hierarchy).

Note 11 — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, which replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS No. 162 identified the sources of accounting principles and the framework for selecting the principles used in preparing financial statements that are presented in conformity with GAAP. It arranged these sources of GAAP in a hierarchy for users to apply. Once SFAS No. 168 is in effect, all of its contents will carry the same level of authority, effectively superseding SFAS No. 162. Thus, the GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and non-authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The provisions of SFAS 168 will not have a material impact on the Company’s financial statements.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

A Note About Forward-Looking Statements

The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the unaudited financial statements and related Notes of the Company included elsewhere in this report. The nature of the Company’s operations and the environment in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as “will,” “intend,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate” and “potential,” or similar expressions. Factors which could cause results to differ include, but are not limited to: changes in the confectionery business environment, seasonality, consumer interest in the Company’s products, general economic conditions, consumer trends, costs and availability of raw materials, competition, the success of the Company’s agreement with Cold Stone Creamery Brands to open co-branded stores, including but not limited to new store openings and the effect of government regulation. Government regulation which the Company and its franchisees either are or may be subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause the Company’s actual results to differ from the forward-looking statements contained herein, please see the “Risk Factors” contained in the Company’s 10-K for the fiscal year ended February 28, 2009 which can be viewed at the SEC’s website at www.sec.gov or through our website at www.rmcf.com. These forward-looking statements apply only as of the date of this report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, the Company is not obligated to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this report or those that might reflect the occurrence of unanticipated events.

The Company is a product-based international franchisor. The Company’s revenues and profitability are derived principally from its franchised system of retail stores that feature chocolate and other confectionery products. The Company also sells its candy in selected locations outside its system of retail stores to build brand awareness. The Company operates seven retail units as a laboratory to test marketing, design and operational initiatives.

The Company is subject to seasonal fluctuations in sales because of the location of its franchisees, which are located in street fronts, tourist locations, factory outlets and regional centers. Seasonal fluctuation in sales cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s products have occurred during the Christmas holiday and summer vacation seasons. Additionally, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of the Company’s business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.

The most important factors in continued growth in the Company’s earnings are ongoing unit growth, increased same store sales and increased same store pounds purchased from the factory. Historically, unit growth has more than offset decreases in same store sales and same store pounds purchased.

The Company’s ability to successfully achieve expansion of its Rocky Mountain Chocolate Factory franchise system depends on many factors not within the Company’s control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion.

Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depends on many factors not within the Company’s control including the receptivity by its franchise system of its product introductions and promotional programs. Same store pounds purchased from the factory by franchised stores declined approximately 6% in the first quarter, declined approximately 9% in the second quarter and declined approximately 7% in the first six months of fiscal 2010 as compared to the same periods in fiscal 2009.

As a result, the actual results realized by the Company could differ materially from the results discussed in or contemplated by the forward-looking statements made herein. Readers are cautioned not to place undue reliance on the forward-looking statements in this Quarterly Report on Form 10-Q.

Results of Operations

Three Months Ended August 31, 2009 Compared to the Three Months Ended August 31, 2008

Basic earnings per share increased 7.1% from $.14 for the three months ended August 31, 2008 to $.15 for the three months ended August 31, 2009. Revenues decreased 3.2% for the three months ended August 31, 2009 compared to the three months ended August 31, 2008. Operating income increased 3.4% from $1.3 million in the second quarter of fiscal 2009 to $1.4 million in the second quarter of fiscal 2010. Net income increased 5.9% from $833,000 in the second quarter of fiscal 2009 to $882,000 in the second quarter of fiscal 2010. The increase in operating income, and net income for the second quarter of fiscal 2010 versus the same period in fiscal 2009 was due primarily to a decrease in operating expenses.


	Three Months Ended
	August 31,							%
($’s in thousands)	2009		2008		Change			Change
Factory sales	$	3,926.6	$	4,207.8	$	(281.2	)		(6.7	%)
Retail sales		670.9		466.2		204.7			43.9	%
Franchise fees		44.0		105.0		(61.0	)		(58.1	%)
Royalty and Marketing fees		1,445.4		1,510.5		(65.1	)		(4.3	%)
Total	$	6,086.9	$	6,289.5	$	(202.6	)		(3.2	%)

Factory Sales

The decrease in factory sales for the three months ended August 31, 2009 versus the same period in the prior year was primarily due to a 9% decrease in same store pounds purchased by franchised stores, a 40.1% decrease in product shipments to customers outside our system of franchised retail stores and a 1.5% decrease in the average number of franchised stores in operation to 320 in the second quarter of fiscal 2010 from 325 in the second quarter of fiscal 2009.

Retail Sales

The increase in retail sales resulted primarily from an increase in the average number of Company-owned stores in operation from 4 during the second quarter of fiscal 2009 to 7 in the second quarter of fiscal 2010. Same store retail sales increased 2.6% in the second quarter of fiscal 2010 compared to the same period in fiscal 2009.

Royalties, Marketing Fees and Franchise Fees

Royalties and marketing fees decreased 4.3% in the three months ended August 31, 2009 compared with the three months ended August 31, 2008. The decrease in royalty and marketing fees resulted from a decrease in same store sales at franchise locations and a decrease in the average number of domestic units in operation from 283 in the three months ended August 31, 2008 to 266 in the three months ended August 31, 2009, partially offset by an increase in the effective royalty rate, related to the Company’s factory purchase based royalty structure. Same store sales decreased 4.8% in the three months ended August 31, 2009 compared with the same period in the prior year. Franchise fee revenue decreased as a result of a decrease in the number of new domestic franchise store openings from 5 in the three months ended August 31, 2008 to 2 openings in the three months ended August 31, 2009.

Costs and Expenses


	Three months ended							%
($’s in thousands)	2009		2008		Change			Change
Cost of sales — factory adjusted	$	2,620.7	$	2,935.6	$	(314.9	)		(10.7	%)
Cost of sales — retail		237.6		166.1		71.5			43.0	%
Franchise costs		401.6		498.3		(96.7	)		(19.4	%)
Sales and marketing		339.5		315.7		23.8			7.5	%
General and administrative		536.0		599.9		(63.9	)		(10.7	%)
Retail operating		384.3		234.6		149.7			63.8	%
Total	$	4,519.7	$	4,750.2	$	(230.5	)		(4.9	%)

Adjusted gross margin


	Three months ended									%
($’s in thousands)	2009			2008			Change			Change
Factory adjusted gross margin	$	1,305.9		$	1,272.2		$	33.7			2.6	%
Retail		433.3			300.1			133.2			44.4	%
Total	$	1,739.2		$	1,572.3		$	166.9			10.6	%

(Percent)
Factory adjusted gross margin		33.3	%		30.2	%		3.1	%		10.3	%
Retail		64.6	%		64.3	%		0.3	%		0.5	%
Total		37.8	%		33.6	%		4.2	%		12.5	%

Adjusted gross margin is equal to gross margin minus depreciation and amortization expense. We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin and other performance measures calculated in conformity with accounting principles generally accepted in the United States (“GAAP”). We believe that adjusted gross margin is useful to investors because it provides a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin rather than gross margin to make incremental pricing decisions. Adjusted gross margin has limitations as an analytical tool because it excludes the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin as a measure of performance only in conjunction with GAAP measures of performance such as gross margin. The following table provides a reconciliation of adjusted gross margin to gross margin, the most comparable performance measure under GAAP:


	Three Months Ended
	August 31,
($’s in thousands)	2009		2008
Factory adjusted gross margin	$	1,305.9	$	1,272.2
Less: Depreciation and Amortization		84.0		94.8
Factory GAAP gross margin	$	1,221.9	$	1,177.4

Costs and Expenses

Cost of Sales

Factory margins increased 310 basis points from the second quarter of fiscal 2009 compared to the second quarter of fiscal 2010 due primarily to lower transportation related costs resulting from a decrease in fuel costs during the second quarter of fiscal 2010 compared with the same period in fiscal 2009.

Franchise Costs

The decrease in franchise costs for the second quarter of fiscal 2010 compared to the same period in fiscal 2009 is primarily due to a decrease in professional fees. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 27.0% in the second quarter of fiscal 2010 from 30.8% in the second quarter of fiscal 2009. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of lower franchise costs relative to revenues.

Sales and Marketing

The increase in sales and marketing for the second quarter of fiscal 2010 compared to the same period in fiscal 2009 is due primarily to a temporary difference in expenditures related to promotional materials.

General and Administrative

The decrease in general and administrative costs for the second quarter of fiscal 2010 compared to the same period in fiscal 2009 is due primarily to decreased professional fees, partially offset by an increase in the allowance for doubtful accounts. As a percentage of total revenues, general and administrative expense decreased to 8.8% in the second quarter of fiscal 2010 compared to 9.5% in the second quarter of fiscal 2009.

Retail Operating Expenses

The increase in retail operating expenses during the second quarter of fiscal 2010 versus the second quarter fiscal 2009 was due primarily to an increase in the average number of Company-owned stores from 4 during the three months ended August 31, 2008 to 7 during the three months ended August 31, 2009. Retail operating expenses, as a percentage of retail sales, increased from 50.3% in the second quarter of fiscal 2009 to 57.3% in the second quarter of fiscal 2010.

Depreciation and Amortization

Depreciation and amortization of $176,000 in the second quarter of fiscal 2009 decreased 9.3% from $194,000 incurred in the second quarter of fiscal 2009 due to certain assets becoming fully depreciated.

Other, Net

Other, net of $7,275 realized in the second quarter of fiscal 2010 represents an increase of $7,012 from the $263 realized in the second quarter of fiscal 2009 due to higher average outstanding cash balances and an increase in interest income realized related to notes receivable.

Income Tax Expense

The Company’s effective income tax rate decreased 1.2% in the second quarter of fiscal 2010 compared to the second quarter of the prior year. The Company’s effective income tax rate was 36.9% for the three month period ended August 31, 2009 compared with the 38.1% for the same period in the prior year. The change in the effective tax rate is primarily the result of a non- taxable gain recognized on the acquisition of a previously franchised store.

Six Months Ended August 31, 2009 Compared to the Six Months Ended August 31, 2008

Basic earnings per share decreased 12.9% from $.31 for the six months ended August 31, 2008 to $.27 for the six months ended August 31, 2009. Revenues decreased 4.4% for the six months ended August 31, 2009 compared to the same period in the prior fiscal year. Operating income decreased 13.1% from $3.0 million in the six months ended August 31, 2008 to $2.6 million in the six months ended August 31, 2009. Net income decreased 11.3% from $1.8 million in the six months ended August 31, 2008 to $1.6 million in the six months ended August 31, 2009. The decrease in earnings per share, operating income, and net income for the first six months of fiscal 2010 versus the same period in fiscal 2009 was due primarily to a decrease in same store pounds purchased by Franchise locations, partially offset by an increase in specialty market sales.

Revenues


	Six Months Ended
	August 31,							%
($’s in thousands)	2009		2008		Change			Change
Factory sales	$	8,807.9	$	9,279.4	$	(471.5	)		(5.1	%)
Retail sales		1,176.5		844.9		331.6			39.2	%
Franchise fees		54.0		273.5		(219.5	)		(80.3	%)
Royalty and marketing fees		2,717.7		2,952.2		(234.5	)		(7.9	%)
Total	$	12,756.1	$	13,350.0	$	(593.9	)		(4.4	%)

Factory Sales

The decrease in factory sales for the six months ended August 31, 2009 versus the six months ended August 31, 2008 was primarily due to a 7% decrease in same store pounds purchased by franchised stores and a 1.2% decrease in the average number of franchised stores in operation to 322 in the first six months of fiscal 2010 from 326 in the first six months of fiscal 2009 partially offset by a 9.5% increase in shipments to customers outside our system of franchised retail stores in the six months ended August 31, 2009, compared with the same period in the prior fiscal year.

Retail Sales

The increase in retail sales resulted primarily from an increase in the average number of Company-owned stores in operation from 4 in the first six months of fiscal 2009 to 7 in the same period of fiscal 2010. Same store retail sales decreased 0.6% in the first six months of fiscal 2010 compared to the same period in the prior year.

Royalties, Marketing Fees and Franchise Fees

The decrease in royalties and marketing fees resulted from a decrease of 5.5% in same store sales in the six months ended August 31, 2009 compared with the same period in the prior fiscal year. The average number of domestic franchise units in operation decreased 5.6% from 285 in the first six months of fiscal 2009 to 269 in the same period of fiscal 2010. Franchise fee revenue decreased 80.3% in the first six months of fiscal 2010 as a result of a decrease in the number of franchise store openings from 16 in the first six months of fiscal 2009 to 8 openings in the first six months of fiscal 2010.

Costs and Expenses


	Six months ended							%
($’s in thousands)	2009		2008		Change			Change
Cost of sales — factory adjusted	$	6,037.2	$	6,484.4	$	(447.2	)		(6.9	%)
Cost of sales — retail		429.0		314.2		114.8			36.5	%
Franchise costs		771.8		817.8		(46.0	)		(5.6	%)
Sales and marketing		677.8		706.3		(28.5	)		(4.0	%)
General and administrative		1,202.9		1,225.0		(22.1	)		(1.8	%)
Retail operating		708.3		446.6		261.7			58.6	%
Total	$	9,827.0	$	9,994.3	$	(167.3	)		(1.7	%)

Adjusted gross margin


	Six months ended									%
($’s in thousands)	2009			2008			Change			Change
Factory	$	2,770.7		$	2,795.0		$	(24.3	)		(0.9	%)
Retail		747.5			530.7			216.8			40.9	%
Total	$	3,518.2		$	3,325.7		$	192.5			5.8	%

(Percent)
Factory		31.5	%		30.1	%		1.4	%		4.7	%
Retail		63.5	%		62.8	%		0.7	%		1.1	%
Total		35.2	%		32.8	%		2.4	%		7.3	%


	Six Months Ended
	August 31,
($’s in thousands)	2009		2008
Factory adjusted gross margin	$	2,770.7	$	2,795.0
Less: Depreciation and Amortization		168.9		191.8
Factory GAAP gross margin	$	2,601.8	$	2,603.2

Costs and Expenses

Cost of Sales

Factory margins increased 140 basis points from the first six months of fiscal 2009 compared to the same period in fiscal 2010 due primarily to lower transportation related costs resulting from a decrease in fuel costs during the second quarter of fiscal 2010 compared with the same period in fiscal 2009.

Franchise Costs

The decrease in franchise costs during the first six months of fiscal 2010 compared to the same period in fiscal 2009 is due primarily to decreased professional fees related to franchise operations. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.8% in the first six months of fiscal 2010 from 25.4% in the first six months of fiscal 2009. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of lower franchise costs relative to revenues.

Sales and Marketing

General and Administrative

The decrease in general and administrative costs for the first six months of fiscal 2010 versus the same period in fiscal 2009 is due primarily to decreased professional fees mostly

offset by an increase in the allowance for doubtful accounts receivable from the first six months of fiscal 2010 compared with the same period in fiscal 2009. As a percentage of total revenues, general and administrative expenses increased to 9.4% in the first six months of fiscal 2010 compared to 9.2% in the first six months of fiscal 2009.

Retail Operating Expenses

The increase in retail operating expenses was due primarily to an increase in the average number of Company-owned stores in operation from 4 in the six months ended August 31, 2008 to 7 in the six months ended August 31, 2009. Retail operating expenses, as a percentage of retail sales, increased from 52.9% in the first six months of fiscal 2009 to 60.2% in the first six months of fiscal 2010.

Depreciation and Amortization

Depreciation and amortization of $355,000 in the first six months of fiscal 2010 decreased 9.7% from $393,000 incurred in the first six months of fiscal 2009 due to certain assets becoming fully depreciated.

Other, Net

Other, net of $12,380 realized in the first six months of fiscal 2010 represents an increase of $7,856 from the $4,524 realized in the first six months of fiscal 2009 due to due to higher average outstanding cash balances and an increase in interest income realized related to notes receivable.

Income Tax Expense

The Company’s effective income tax rate in the six months ended August 31, 2009 was 37.0% which is a decrease of 1.1% compared to 38.1% during the same period in the prior year. The decrease in the effective tax rate is primarily due to an increase in allowable deductions.

Liquidity and Capital Resources

As of August 31, 2009, working capital was $8.0 million, compared with $7.4 million as of February 28, 2009, an increase of $600,000. The change in working capital was due primarily to operating results.

Cash and cash equivalent balances increased from $1.3 million as of February 28, 2009 to $2.1 million as of August 31, 2009 as a result of cash flows provided by operating activities greater than cash flows used by financing and investing activities. The Company’s current ratio was 4.1 to 1 at August 31, 2009 in comparison with 3.7 to 1 at February 28, 2009. The Company monitors current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

The Company has a $5 million ($5 million available as of August 31, 2009) working capital line of credit collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. The line is subject to renewal in July, 2010.

The Company believes cash flows generated by operating activities and available financing will be sufficient to fund the Company’s operations at least through the end of fiscal 2010.

Impact of Inflation

Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company’s operations. Most of the Company’s leases provide for cost-of-living adjustments and require the Company to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally the Company’s future lease costs for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.

Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.

Seasonality

The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s products have occurred during the Christmas holiday and summer vacation seasons. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of the Company’s business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrument transactions for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price and interest rate risks.

The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract.

As of August 31, 2009, the Company had no long-term debt. The Company has a $5.0 million bank line of credit that bears interest at a variable rate. As of August 31, 2009, no amount was outstanding under the line of credit. The Company does not believe that it is exposed to any material interest rate risk related to the line of credit.

The Chief Financial Officer and Chief Operating Officer of the Company has primary responsibility over the Company’s long-term and short-term debt and for determining the timing and duration of commodity purchase contracts and negotiating the terms and conditions of those contracts.


Item 4.		Controls and Procedures

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, and, based on their evaluation, the Company’s principal executive officer and principal financial officer have concluded that these controls and procedures are effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in the Company’s internal controls, financial or otherwise, or in other factors that have affected, or are reasonably likely to materially affect these controls. Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Company’s internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.		Legal Proceedings

The Company is not currently involved in any legal proceedings other than routine litigation incidental to its business.


Item 1A.		Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

None


Item 3.		Defaults Upon Senior Securities

None


Item 4.		Submission of Matters to a Vote of Security Holders

The 2009 Annual Meeting of the Shareholders of the Company was held in Durango, Colorado on July 17, 2009.

Election of six Directors. Messrs. Franklin E. Crail, Bryan J. Merryman, Gerald A. Kien, Lee N. Mortenson, Clyde Wm. Engle and Scott G. Capdevielle were elected to the Company’s Board of Directors. The results of the voting were as follows: 4,405,223 votes in favor of Franklin E. Crail, with 1,157,374 votes withheld; 4,399,962 votes in favor of Bryan J. Merryman, with 1,157,635 votes withheld; 4,367,513 votes in favor of Gerald A. Kien, with 1,190,084 votes withheld; 4,366,977 votes in favor of Lee N. Mortenson, with 1,190,620 votes withheld; 4,242,601 votes in favor of Clyde Wm. Engle, with 1,314,996 votes withheld and 5,489,294 votes in favor of Scott G. Capdevielle with 68,303 votes withheld.


Item 5.		Other Information

The Company executed a Promissory Note and Commercial Security Agreement dated July 31, 2009 with Wells Fargo Bank. These documents were executed to renew the existing $5 million line of credit and extend the maturity date from July 2009 to July 2010. The line is collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. Draws may be made under the line at 75% of eligible accounts receivable plus 50% of eligible inventories. Interest on borrowings is at prime less 50 basis points, however, at no time will the rate be below 5.00% per annum. Terms of the line require that the line be rested (that is, that there be no outstanding balance) for a period of 30 consecutive days during the term of the loan. Additionally, the line of credit is subject to various financial ratio and leverage covenants. Copies of the Promissory Note and Commercial Security Agreement are filed as an Exhibits 10.1 and 10.2, respectively, to this report and are incorporated herein by reference. The description of these agreements is qualified in its entirety by reference to such documents.


Item 6.		Exhibits


3.1		Articles of Incorporation of the Registrant, as amended, incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K of the Registrant for the year ended February 28, 2009

3.2		By-laws of the Registrant, as amended on November 25, 1997, incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended February 28, 2007

10.1		*Promissory Note dated July 31, 2009 in the amount of $5,000,000 between Wells Fargo Bank and the Registrant.

10.2		*Commercial Security Agreement dated July 31, 2009 between Wells Fargo Bank and the Registrant.

10.3		*Master License Agreement between Kahala Franchise Corp. and the Registrant. (Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Commission)

31.1		*Certification Filed Pursuant To Section 302 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer

31.2		*Certification Filed Pursuant To Section 302 Of The Sarbanes-Oxley Act of 2002, Chief Financial Officer

32.1		**Certification Furnished Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer

32.2		**Certification Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002, Chief Financial Officer


*		Filed herewith.

**		Furnished herewith.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Exhibit 10.1

PROMISSORY NOTE

Principal

Loan Date

Maturity

Loan No

Call / Coll

Account

Officer

Initials

$5,000,000.00

07-31-2009

07-28-2010

7657418442-26

750313

K0096

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.


Borrower:	Rocky Mountain Chocolate Factory, Inc.	Lender: Wells Fargo Bank, National Association
	265 Turner Drive	Durango Main
	Durango, CO 81303-7941	200 West College Drive
		Durango, CO 81301



Principal Amount: $5,000,000.00		Date of Note: July 31, 2009

PROMISE TO PAY. Rocky Mountain Chocolate Factory, Inc. (“Borrower”) promises to pay to Wells Fargo Bank, National Association (“Lender”), or order, in lawful money of the United States of America, the principal amount of Five Million & 00/100 Dollars ($5,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance.

PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on July 28, 2010. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning August 28, 2009, with all subsequent interest payments to be due on the same day of each month after that. Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; and then to any late charges. Borrower will pay Lender at Lender’s address shown above or at such other place as Lender may designate in writing.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the floating rate equal to the Prime Rate set from time to time by Lender that serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto (the “Index”). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each time the Index changes. Each change in the Prime Rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Lender. The “initial rate” is the rate which Borrower and Lender agree shall be the initial rate of this Note, and the “Index currently” is the Index amount upon which said initial rate is based; they do not necessarily reflect the Index in effect on the date of this Note. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 3.250% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be calculated as described in the “INTEREST CALCULATION METHOD” paragraph using a rate of 0.500 percentage points under the Index, adjusted if necessary for any minimum and maximum rate limitations described below, resulting in an initial rate of 5.000%. NOTICE: Under no circumstances will the interest rate on this Note be less than 5.000% per annum or more than the maximum rate allowed by applicable law.

INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method.

PREPAYMENT . Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Wells Fargo Bank, National Association Ann: Commercial Loan Research Department, PO Box 659713 San Antonio, TX 78265.

LATE CHARGE . If a payment is 15 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $15.00, whichever is greater.

INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, at Lender’s option, and if permitted by applicable law, Lender may add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). Upon default, the interest rate on this Note shall be increased by adding a 4.000 percentage point margin (“Default Rate Margin”). The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no default. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.

DEFAULT . Each of the following shall constitute an event of default (“Event of Default”) under this Note:

Payment Default . Borrower fails to make any payment when due under this Note.

Other Defaults . Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties . Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s property or Borrower’s ability to repay this Note or perform Borrower’s obligations under this Note or any of the related documents.

False Statements . Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency . The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if

PROMISSORY NOTE


Loan No: 7657418442-26		(Continued)		Page 2

there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor . Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note.

Change In Ownership . Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change . A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.

Insecurity . Lender in good faith believes itself insecure.

LENDER’S RIGHTS . Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.

ATTORNEYS’ FEES; EXPENSES . Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender the reasonable costs of such collection. This includes, subject to any limits under applicable law, Lender’s attorneys’ fees and Lender’s legal expenses, whether or not there is a lawsuit, including without limitation attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.

GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of Colorado.

RIGHT OF SETOFF . To the extent permitted by applicable law. Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

LINE OF CREDIT . This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender’s office shown above. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower’s accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender’s internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (A) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor’s guarantee of this Note or any other loan with Lender; (D) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (E) Lender in good faith believes itself insecure.

PAYMENT DUE DATE DEFERRAL . Payment invoices will be sent on a date (the “billing date”) which is prior to each payment due date. If this Note is booked near or after the billing date for the first scheduled payment, Lender may, in itlEs sole discretion, defer each scheduled payment date and/or the maturity date by one or more months. .

FINANCIAL STATEMENTS . Borrower agrees to provide to Lender, upon request, financial statements prepared in a manner and form acceptable to Lender, and copies of such tax returns and other financial information and statements as may be requested by Lender. Borrower shall also furnish such information regarding Borrower or the Collateral as may be requested by Lender. Borrower warrants that all financial statements and information provided to Lender are and will be accurate, correct and complete.

EXTENSION AND RENEWAL . Lender may, at Lender’s discretion, renew or extend this Note by written notice (“Renewal Notice”) to Borrower. Such renewal or extension shall be effective as of the maturity date of this Note, and may be conditioned among other things on modification of Borrower’s obligations hereunder, including but not limited to a decrease in the amount available under this Note, an increase in the interest rate applicable to this Note and/or payment of a fee for such renewal or extension. In addition, Lender may increase the principal amount available under the Note at any time. Borrower shall be deemed to have accepted the terms of each Renewal Notice, including any notice of an increase in availability, if Borrower does not deliver to Lender written rejection of such renewal or extension within 10 days following receipt of such Renewal Notice, or if Borrower draws additional funds following the date of notification. After any renewal or extension of Borrower’s obligations under this Note, the term “maturity date” as used in this Note shall mean the new maturity date set forth in the Renewal Notice. This Note may be renewed and extended repeatedly in this manner.

LINE ADVANCES . Notwithstanding anything to the contrary, requests for advances communicated to any office of Lender by any person believed by Lender in good faith to be authorized to make the request, whether written, verbal, telephonic or electronic, may be acted upon by Lender, and Borrower will be liable for sums advanced by Lender pursuant to such request. Such requests for advances shall be deemed authorized by Borrower, and Lender shall not be liable for such advances made in good faith, and with respect to advances deposited to the credit of any deposit account of Borrower, such advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. Borrower agrees to indemnify and hold Lender harmless from and against all damages, liabilities, costs and expenses (including attorney’s fees) arising out of any claim by Borrower or any third party against Lender in connection with Lender’s performance of transfers as described above.

CREDIT BUREAU INQUIRIES . The parties hereto, and each individual signing below in a representative capacity, agree that Lender may obtain business and/or personal credit reports and tax returns on each of them in their individual capacities.

APPLICATION OF PAYMENTS . Notwithstanding the application of payment provided in the Payment section of this Note, unless otherwise agreed, all sums received from Borrower may be applied to interest, fees, principal, or any other amounts due to Lender in any order at Lender’s sole discretion. If a final payment amount is set out in the Payment section of this Note, Borrower understands that it is an estimate, and that the actual final payment amount will depend upon when payments are received and other factors.

ADDITIONAL EVENTS OF DEFAULT . In addition to the Events of Default described above, the following shall be an Event of Default, if applicable ~~: (i) any change in ownership of an aggregate of twenty-five percent (25%) or more of the common stock, members’ equity or other ownership interest in Borrower~~ (ii) the withdrawal, resignation or expulsion of any one or more of the general partners in Borrower with an If aggregate ownership

PROMISSORY NOTE


Loan No: 7657418442-26		(Continued)		Page 3

interesT7 Borrower of twenty-five percent (25%) or more, or (iii) any of the preceding events occurs with respect to any general partner of Borrower or guarantor of any indebtedness of Borrower under this Note.

DEFAULT RATE . At Lender’s option and without prior notice, upon default or at any time during the pendency of any event of default under the Note or any related loan documents, Lender may impose a default rate of interest (the “Default Rate”) equal to the pre-default interest rate plus four percent per annum, not to exceed the maximum lawful rate. If the pre-default rate is a floating or adjustable rate based upon an Index, it will continue to float or adjust on the same periodic schedule, and the Default Rate will be a variable rate per annum equal to the applicable Index plus the pre-default margin plus four percent, not to exceed the maximum lawful rate. The Default Rate shall remain in effect until the default has been cured and that fact has been communicated to and confirmed by Lender. Lender shall give written notice to Borrower of Lender’s imposition of the Default Rate, except that if the Note is not paid at maturity, Lender may impose the Default Rate from the maturity date to the date paid in full without notice. Lender’s imposition of the Default Rate shall not constitute an election of remedies or otherwise limit Lender’s rights concerning other remedies available to Lender as a result of the occurrence of an event of default. In the event of a conflict between the provisions of this paragraph and any other provision of the Note or any related agreement, the provisions of this paragraph shall control. If a default rate is prohibited by applicable law, then the pre-default rate (including periodic rate adjustments for floating or adjustable rates) shall continue to apply after default or maturity.

FURTHER ASSURANCES . The parties hereto agree to do all things deemed necessary by Lender in order to fully document the loan evidenced by this Note and any related agreements, and will fully cooperate concerning the execution and delivery of security agreements, stock powers, instructions and/or other documents pertaining to any collateral intended to secure the Indebtedness. The undersigned agree to assist in the cure of any defects in the execution, delivery or substance of the Note and related agreements, and in the creation and perfection of any liens, security interests or other collateral rights securing the Note.

CONSENT TO SELL LOAN . The parties hereto agree: (a) Lender may sell or transfer all or part of this loan to one or more purchasers, whether related or unrelated to Lender; (b) Lender may provide to any purchaser, or potential purchaser, any information or knowledge Lender may have about the parties or about any other matter relating to this loan obligation, and the parties waive any rights to privacy it may have with respect to such matters; (c) the purchaser of a loan will be considered its absolute owner and will have all the rights granted under the loan documents or agreements governing the sale of the loan; and (d) the purchaser of a loan may enforce its interests irrespective of any claims or defenses that the parties may have against Lender.

FACSIMILE AND COUNTERPART . This document may be signed in any number of separate copies, each of which shall be effective as an original, but all of which taken together shall constitute a single document. An electronic transmission or other facsimile of this document or any related document shall be deemed an original and shall be admissible as evidence of the document and the signer’s execution.

SECURITY INTEREST AND RIGHT OF SETOFF. In addition to all liens upon and rights of setoff arising by law, Borrower pledges and grants to Lender as security for Borrower’s indebtedness and obligations under the Note (excluding any consumer obligations subject to the Federal Truth In Lending Act) a security interest and lien upon all monies, securities, securities accounts, brokerage accounts, deposit accounts and other property of Borrower now or hereafter in the possession of or on deposit with Lender or any Wells Fargo Affiliate, whether held in a general or special account or for safekeeping or otherwise, excluding however all IRA and Keogh accounts. No security interest, lien or right of setoff will be deemed to have been waived by any act or conduct on the part of Lender, or by any neglect to exercise such right, or by any delay in so doing, and every right of setoff, lien and security interest will continue in full force and effect until specifically waived or released by Lender in writing.

LOAN FEE AUTHORIZATION . Borrower shall pay to Lender any and all fees as specified in the “Disbursement Request and Authorization” executed by Borrower in connection with this Note. Such fees are non-refundable and shall be due and payable in full immediately upon Borrower’s execution of this Note.

TRADE FINANCE SUBFEATURE . Borrower shall have available a Letter of Credit Subfeature and a Foreign Exchange Subfeature as described in this section, in a total amount not to exceed the available principal amount of the line of credit evidenced by this Note.

A. Letters of Credit Subfeature . As a subfeature of this Note, Lender may from time to time issue or cause to be issued by a Wells Fargo Affiliate (such Lender or Wells Fargo Affiliate being referred to herein as the “Issuer”) for your account, commercial and/or standby letters of credit (each individually, a “Letter of Credit” and collectively “Letters of Credit”); provided however, that the form and substance of each Letter of Credit shall be subject to approval by the Issuer in its sole discretion. Each Letter of Credit shall be issued for a term designated by Borrower; provided however, that no Letter of Credit shall have an expiration subsequent to the maturity of the Note unless otherwise agreed to by Issuer and Lender. Each Letter of Credit shall be subject to the terms and conditions of a Letter of Credit Agreement and related documents, if any, required by Issuer in connection with the issuance of such Letter of Credit (each individually a “Letter of Credit Agreement” and collectively, the “Letter of Credit Agreements”). Each draft paid by Issuer under a Letter of Credit and reimbursed by Lender shall be paid with an advance under the Note and shall be repaid by Borrower in accordance with the terms and conditions of the Note applicable to such advances; provided however, that if advances under the Note are not available, for any reason whatsoever, at the time any amount is paid by Lender, then the full amount of such advance shall be immediately due and payable, together with interest thereon, from the date such amount is paid by Issuer or Lender to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Note. In such event, Borrower agrees that Issuer or Lender, at Issuer’s or Lender’s sole discretion, may debit Borrower’s deposit account(s) with Lender or a Wells Fargo Affiliate for the amount of any such draft. Upon the issuance of an amendment to a Letter of Credit, upon the reimbursement by Lender of a draft under any Letter of Credit, and otherwise as agreed by Borrower and Issuer pursuant to the Letter of Credit Agreements, Borrower shall pay to Issuer or Lender fees determined in accordance with Issuer’s/Lender’s standard fees and charges at such time.

B. Foreign Exchange Subfeature . As a subfeature of this Note, Lender or a Wells Fargo Affiliate (such Lender or Wells Fargo Affiliate being referred to herein as the “Exchanger”) may make available to Borrower a foreign exchange facility under which Exchanger, from time to time up to and including the maturity date of the Note, will enter into foreign exchange contracts for the account of Borrower for the purchase and/or sale by Borrower in United States Dollars of the foreign currency or currencies specified in the foreign exchange agreement establishing the foreign exchange facility. Each foreign exchange transaction shall be subject to the terms and conditions of the foreign exchange agreement, the form and substance of which must be acceptable to the Exchanger in all respects in its sole discretion.

C. Subfeature Limits. The amount available for drawing under all Letters of Credit, plus the amount drawn under the Letters of Credit but not yet reimbursed, plus 120% of the amount of all outstanding foreign exchange contracts, shall be reserved under the Note and shall not be available for Note advances. The amount available for drawing under all Letters of Credit, plus the amount drawn under such letters of credit but not yet reimbursed, plus 120% of the amount of all outstanding foreign exchange contracts, plus the principal amounts of any advances outstanding under the Note, shall not at any time exceed the principal amount of the Note, unless allowed by Lender at Lender’s full discretion. Any excess amount shall be fully due and payable immediately without notice. As used herein, Wells Fargo Affiliate means any present or future subsidiary of Wells Fargo & Company, any subsidiary thereof, and any successors of such financial service companies.

ARBITRATION AGREEMENT. Arbitration — Binding Arbitration. Lender and each party to this agreement hereby agree, upon demand by any party, to submit any Dispute to binding arbitration in accordance with the terms of this Arbitration Program. A “Dispute” shall include any dispute, claim

PROMISSORY NOTE


Loan No: 7657418442-26		(Continued)		Page 4

or controversy of any kind, whether in contract or in tort, Legal or equitable, now existing or hereafter arising, relating in any way to this Agreement or any related agreement incorporating this Arbitration Program (the “Documents”), or any past, present, or future loans, transactions, contracts, agreements, relationships, incidents or injuries of any kind whatsoever relating to or involving Business Banking, Regional Banking, or any successor group or department of Lender. DISPUTES SUBMITTED TO ARBITRATION ARE NOT RESOLVED IN COURT BY A JUDGE OR JURY.

A. Governing Rules. Any arbitration proceeding will (i) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (ii) be conducted by the American Arbitration Association (“AAA”), or such other administrator as the parties shall mutually agree upon, in accordance with the AAA’s commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall he conducted in accordance with the AAA’s optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to herein, as applicable, as the “Rules”). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Arbitration proceedings hereunder shall be conducted at a location mutually agreeable to the parties, or if they cannot agree, then at a location selected by the AAA in the state of the applicable substantive law primarily governing the Note. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. Arbitration may be demanded at any time, and may be compelled by summary proceedings in Court. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. The arbitrator shall award all costs and expenses of the arbitration proceeding. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law.

B. No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any Dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph.

C. Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any Dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. Every arbitrator must be a neutral practicing attorney or a retired member of the state or federal judiciary, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the Dispute. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator’s discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all Disputes in accordance with the applicable substantive law and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the applicable state rules of civil procedure, or other applicable law. Judgment upon the award rendered by the arbitrator may he entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.

D. Discovery. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the Dispute being arbitrated and must be completed no later than 20 days before the hearing date. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party’s presentation and that no alternative means for obtaining information is available.

E. Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. The resolution of any Dispute shall be determined by a separate arbitration proceeding and such Dispute shall not be consolidated with other disputes or included in any class proceeding. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the documents between the parties or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the documents or any relationship between the parties.

F. State-Specific Provisions.

If California law governs the Dispute , the following provision is included:

Real Property Collateral; Judicial Reference: Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA’s selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645.

Small Claims Court. Any party may require that a Dispute be resolved in Small Claims Court if the Dispute and related claims are fully within that court’s jurisdiction.

PROMISSORY NOTE


Loan No: 7657418442-26		(Continued)		Page 5

If Idaho law governs the Dispute , the following provision is included:

Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Disputeconcerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of Idaho, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.

If Montana law governs the Dispute , the following provision is included:

Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of Montana, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.

If Nevada law governs the Dispute , the following provision is included:

Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ill all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of Nevada, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.

If South Dakota law governs the Dispute , the following provision is included:

Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of South Dakota, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.

If Utah law governs the Dispute , the following provision is included:

Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of Utah, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a master in accordance with Utah Rule of Civil Procedure 53, and this general reference agreement is intended to be specifically enforceable. A master with the qualifications required herein for arbitrators shall be selected pursuant to the AAA’s selection procedures. Judgment upon the decision rendered by a master shall be entered in the court in which such proceeding was commenced in accordance with Utah Rule of Civil Procedure 53(e).

ADDITIONAL PROVISION FOR FINANCIAL DERIVATIVES. However, if any financial derivative is provided by Lender with respect to this Note, the following rules apply: (a) if a floating to fixed interest rate swap (whether documented by an ISDA Master Agreement or a Rate Management Agreement) is currently effective, the Floor Rate shall not apply, unless the interest rate swap is documented pursuant to an ISDA Master Agreement and contains an embedded floor; and (b) if a rate cap is currently effective, the Floor Rate shall apply.

ELECTRONIC TRANSMISSION OF DOCUMENTS. . Lender may, in its sole discretion, rely upon any document, report, agreement or other communication (“Document”) you send by email, facsimile or other electronic means, treating the Document as genuine and authorized to the same extent as if it was an original document executed by you or your authorized representative. Lender may from time to time in its sole discretion reject any such electronic Document and require a signed original, or require you to provide acceptable authentication of any such Document before accepting or relying on same. You understand and acknowledge that there is a risk that Documents sent by electronic means may be viewed or received be unauthorized persons, and you agree that by sending Documents by electronic means, you shall be deemed to have accepted this risk and the consequences of any such unauthorized disclosure.

SUCCESSOR INTERESTS . The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.

GENERAL PROVISIONS . If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OP THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

BORROWER:

PROMISSORY NOTE


Loan No: 7657418442-26		(Continued)		Page 6

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.


		By:		/s/ Bryan Merryman Bryan Merryman, CFO/COO of Rocky Mountain
				Chocolate Factory, Inc.

Exhibit 10.2

COMMERCIAL SECURITY AGREEMENT

Principal

Loan Date

Maturity

Loan No

Call / Coll

Account

Officer

Initials

$5,000,000.00

07-31-2009

07-28-2010

7657418442-26

750313

K0096


Borrower:	Rocky Mountain Chocolate Factory, Inc.	Lender: Wells Fargo Bank, National Association
	265 Turner Drive	Durango Main
	Durango, CO 81303-7941	200 West College Drive
		Durango, CO 81301

THIS COMMERCIAL SECURITY AGREEMENT dated July 31, 2009, is made and executed between Rocky Mountain Chocolate Factory, Inc. (“Grantor”) and Wells Fargo Bank, National Association (“Lender”).

GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law.

COLLATERAL DESCRIPTION. The word “Collateral” as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement:

All Inventory, Chattel Paper, Accounts and General Intangibles

In addition, the word “Collateral” also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located:

(A) All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether added now or later.

(B) All products and produce of any of the property described in this Collateral section.

(C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Collateral section.

(D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party’s insurer, whether due to judgment, settlement or other process.

(E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor’s right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media.

CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

GRANTOR’S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that:

Perfection of Security Interest. Grantor agrees to take whatever actions are requested by Lender to perfect and continue Lender’s security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender.

Notices to Lender. Grantor will promptly notify Lender in writing at Lender’s address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (31 change in the management of the Corporation Grantor; (41 change in the authorized signer(s); (5) change in Grantor’s principal office address; (6) change in Grantor’s state of organization; (71 conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor’s name or state of organization will take effect until after Lender has received notice.

No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.

Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and


	COMMERCIAL SECURITY AGREEMENT
Loan No: 7657418442-26	(Continued)	Page 2

regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender’s prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing.

Location of the Collateral. Except in the ordinary course of Grantor’s business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor’s address shown above or at such other locations as are acceptable to Lender. Upon Lender’s request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor’s operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located.

Removal of the Collateral. Except in the ordinary course of Grantor’s business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender’s prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Colorado, without Lender’s prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral.

Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor’s business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor’s business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to he subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender.

Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender’s rights in the Collateral against the claims and demands of all other persons.

Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral.

Inspection of Collateral. Lender and Lender’s designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located.

Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized in Lender’s sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys’ fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized.

Compliance with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender’s interest in the Collateral, in Lender’s opinion, is not jeopardized.

Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor’s due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify and defend shall survive the payment of the Indebtedness and the satisfaction of this Agreement.

Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days’ prior written notice to Lender and not including any disclaimer of the insurer’s liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other


	COMMERCIAL SECURITY AGREEMENT
Loan No: 7657418442-26	(Continued)	Page 3

endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so choos “single interest insurance,” which will cover only Lender’s interest in the Collateral.

Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral exceeding $50,000, whether or not such casualty or loss is covered by insurance. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness.

Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor’s sole responsibility.

Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral.

Financing Statements. Grantor authorizes Lender to file a UCC financing statement, or alternatively, a copy of this Agreement to perfect Lender’s security interest. At Lender’s request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender’s security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement. If Grantor changes Grantor’s name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify the Lender of such change.

GRANTOR’S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor’s right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender’s security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender’s sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor’s failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default . Grantor fails to make any payment when due under the Indebtedness.

Other Defaults. Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor.

Default in Favor of Third Parties. Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor’s property or ability to perform Grantor’s obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.


	COMMERCIAL SECURITY AGREEMENT
Loan No: 7657418442-26	(Continued)	Page 4

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Insolvency. The dissolution or termination of Grantor’s existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Grantor’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the Indebtedness or guarantor, endorser, surety, or accommodation party dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.

Adverse Change. A material adverse change occurs in Grantor’s financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired.

Insecurity. Lender in good faith believes itself insecure.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Colorado Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies:

Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor.

Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession.

Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person’s right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid.

Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender’s right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver. Receiver may be appointed by a court of competent jurisdiction upon ex parte application and without notice, notice being expressly waived

Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender’s discretion transfer any Collateral into Lender’s own name or that of Lender’s nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender.

Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.

Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise.

Election of Remedies. Except as may be prohibited by applicable law, all of Lender’s rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by


	COMMERCIAL SECURITY AGREEMENT
Loan No: 7657418442-26	(Continued)	Page 5

Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor’s failure to perform, shall not affect Lender’s right to declare a default and exercise its remedies.

FURTHER ASSURANCES. The parties hereto agree to do all things deemed necessary by Lender in order to fully document the loan evidenced by this Note and any related agreements, and will fully cooperate concerning the execution and delivery of security agreements, stock powers, instructions and/or other documents pertaining to any collateral intended to secure the Indebtedness. The undersigned agree to assist in the cure of any defects in the execution, delivery or substance of the Note and related agreements, and in the creation and perfection of any liens, security interests or other collateral rights securing the Note.

CONSENT TO SELL LOAN. The parties hereto agree: (a) Lender may sell or transfer all or part of this loan to one or more purchasers, whether related or unrelated to Lender; (b) Lender may provide to any purchaser, or potential purchaser, any information or knowledge Lender may have about the parties or about any other matter relating to this loan obligation, and the parties waive any rights to privacy it may have with respect to such matters; (c) the purchaser of a loan will be considered its absolute owner and will have all the rights granted under the loan documents or agreements governing the sale of the loan; and (d) the purchaser of a loan may enforce its interests irrespective of any claims or defenses that the parties may have against Lender.

FACSIMILE AND COUNTERPART. This document may be signed in any number of separate copies, each of which shall be effective as an original, but all of which taken together shall constitute a single document. An electronic transmission or other facsimile of this document or any related document shall be deemed an original and shall be admissible as evidence of the document and the signer’s execution.

ARBITRATION AGREEMENT. Arbitration — Binding Arbitration. Lender and each party to this agreement, hereby agree, upon demand by any party, to submit any Dispute to binding arbitration in accordance with the terms of this Arbitration Program. A “Dispute” shall include any dispute, claim or controversy of any kind, whether in contract or in tort, legal or equitable, now existing or hereafter arising, relating in any way to any aspect of this agreement, or any related agreement incorporating this Arbitration Program (the “Documents”), or any renewal, extension, modification or refinancing of any indebtedness or obligation relating thereto, including without limitation, their negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination. DISPUTES SUBMITTED TO ARBITRATION ARE NOT RESOLVED IN COURT BY A JUDGE OR JURY.

A. Governing Rules. Any arbitration proceeding will (i) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (ii) be conducted by the American Arbitration Association (“AAA”), or such other administrator as the parties shall mutually agree upon, in accordance with the AAA’s commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA’s optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to herein, as applicable, as the “Rules”). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Arbitration proceedings hereunder shall be conducted at a location mutually agreeable to the parties, or if they cannot agree, then at a location selected by the AAA in the state of the applicable substantive law primarily governing the Note. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. Arbitration may be demanded at any time, and may be compelled by summary proceedings in Court. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. The arbitrator shall award all costs and expenses of the arbitration proceeding. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law.

C. Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any Dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. Every arbitrator must be a neutral practicing attorney or a retired member of the state or federal judiciary, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the Dispute. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator’s discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all Disputes in accordance with the applicable substantive law and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the applicable state rules of civil procedure, or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.


	COMMERCIAL SECURITY AGREEMENT
Loan No: 7657418442-26	(Continued)	Page 6

E. Class Proceedings and Consolidations. No party shall be entitled to join or consolidate disputes by or against others who are not parties to this agreement in any arbitration, or to include in any arbitration any dispute as a representative or member of a class, or to act in any arbitration in the interest of the general public or in a private attorney general capacity.

F. Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the documents between the parties or the subject matter of the Dispute shall control. This arbitration provision shall survive the repayment of the Note and the termination, amendment or expiration of any of the documents or any relationship between the parties.

G. State-Specific Provisions.

If California law governs the Dispute, the following provision is included:

Real Property Collateral; Judicial Reference . Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA’s selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645.

Small Claims Court. Any party may require that a Dispute be resolved in Small Claims Court if the Dispute and related claims are fully within that court’s jurisdiction.

If Idaho law governs the Dispute, the following provision is included:

Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of Idaho, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.

If Montana law governs the Dispute, the following provision is included:

Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of Montana, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.

If Nevada law governs the Dispute, the following provision is included:

Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of Nevada, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.

If South Dakota law governs the Dispute, the following provision is included:

Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of South Dakota, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.

If Utah law governs the Dispute, the following provision is included:

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments . This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses . Grantor agrees to pay upon demand all of Lender’s reasonable costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone


	COMMERCIAL SECURITY AGREEMENT
Loan No: 7657418442-26	(Continued)	Page 7

else to help enforce this agreement, and Grantor shall pay the reasonable costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the State of Colorado.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender’s rights or of any of Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor’s current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.

Power of Attorney. Grantor hereby appoints Lender as Grantor’s irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender’s security interest in the Collateral.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Successors and Assigns . Subject to any limitations stated in this Agreement on transfer of Grantor’s interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor’s successors with reference to this Agreement and the indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness.

Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor’s Indebtedness shall be paid in full.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code:

Agreement . The word “Agreement” means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time.

Borrower . The word “Borrower” means Rocky Mountain Chocolate Factory, Inc. and includes all co-signers and co-makers signing the Note and all their successors and assigns.

Collateral . The word “Collateral” means all of Grantor’s right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement.

Default . The word “Default” means the Default set forth in this Agreement in the section titled “Default”.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.


	COMMERCIAL SECURITY AGREEMENT
Loan No: 7657418442-26	(Continued)	Page 8

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

Grantor . The word “Grantor” means Rocky Mountain Chocolate Factory, Inc..

Guaranty . The word “Guaranty” means the guaranty from guarantor, endorser, surety, or accommodation party to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness . The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Specifically, without limitation, Indebtedness includes all amounts that may be indirectly secured by the Cross-Collateralization provision of this Agreement.

Lender . The word “Lender” means Wells Fargo Bank, National Association, its successors and assigns.

Note . The word “Note” means the Note executed by Rocky Mountain Chocolate Factory, Inc. in the principal amount of $5,000,000.00 dated July 31, 2009, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Property . The word “Property” means all of Grantor’s right, title and interest in and to all the Property as described in the “Collateral Description” section of this Agreement.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.

GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JULY 31, 2009.

GRANTOR:

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.



	By:	/s/ Bryan Merryman
		Bryan Merryman, CFO/COO of Rocky Mountain
		Chocolate Factory, Inc.

Exhibit 10.3

KAHALA FRANCHISE CORP.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

MASTER LICENSE AGREEMENT

TABLE OF CONTENTS


1. DEFINITIONS			1
1.1 AD			1
1.2 Affiliate			2
1.3 Amendment			2
1.4 Co-Branded Store			2
1.5 Cold Stone			2
1.6 Cold Stone Business			2
1.7 Cold Stone Franchisee			2
1.8 Cold Stone Operating Manual			2
1.9 Cold Stone System			2
1.10 Commencement Date			2
1.11 Confidential Information			3
1.12 Converted Store			3
1.13 Dispute			3
1.14 Dispute Resolution Committee			3
1.15 Equipment			3
1.16 Franchise Agreement			3
1.17 Greenfield Store			3
1.18 Information			3
1.19 Intellectual Property Rights			3
1.20 Inventory			4
1.21 Joint Operating Manual			4
1.22 Marks			4
1.23 Offending Portion			4
1.24 Operational Support			4
1.25 Premises			4
1.26 Premises Specifications			4
1.27 RDO			4
1.28 RMCF			4
1.29 RMCF Business			5
1.30 RMCF Operating Manual			5
1.31 RMCF System			5
1.32 Sales Report			5
1.33 Services			5
1.34 System			5
1.35 Term			5
1.36 Transfer			5
1.37 UFDD			5
2. TERM AND RIGHTS GRANTED			6
2.1 Grant			6
2.2 License to Use Marks			6
2.3 Amendment to Franchise Agreement			6
2.4 Term			7
3. CO-BRANDED STORES			7
3.1 Grant of Rights for Co-Branded Stores			7
3.2 Approval of Locations for Co-Branded Stores			7
3.3 Greenfield Stores			7


3.4 Development of Premises			8
3.5 Equipment and Inventory			8
3.6 Obligations			9
3.7 Employees and Contractors			9
4. TRAINING AND GUIDANCE			9
4.1 Training			9
4.2 Operating Assistance			10
5. SYSTEM STANDARDS			10
5.1 Operational Oversight			10
5.2 Approval of Vendors and Suppliers			11
5.3 Compliance with System and Conflict of Systems			11
5.4 Conflict of Products			11
5.5 Confidentiality			12
5.6 Non-competition			13
6. ADVERTISING			14
6.1 Advertising and Marketing Materials Prepared by Cold Stone			14
6.2 Advertising and Marketing by Cold Stone Franchisees			14
6.3 Promotions Conflict			14
7. ROYALTY PAYMENTS; SALES REPORTS			14
7.1 Royalties			14
7.2 Franchise Fees			15
7.3 Royalty Relief			15
7.4 Transfer of Funds			15
7.5 Amounts Exclusive of Taxes			15
7.6 Currency			15
7.7 Sales Reports			16
7.8 Sharing of Sales			16
7.9 Indemnification for Sharing of Sales			16
8. TRANSFER			17
8.1 Master License Agreement			17
8.2 Co-Branded Store			17
9. DEFAULT AND TERMINATION			17
9.1 Events of Default			17
10. DISPUTE RESOLUTION			18
10.1 Store Level Operational Dispute Resolution Process			18
11. REPRESENTATIONS AND WARRANTIES			19
11.1 Cold Stone Representations, Warranties and Covenants			19
11.2 RMCF Representations, Warranties and Covenants			20
11.3 Survival of Representations, Warranties and Covenants			21
11.4 Limited Warranties			21
12 MISCELLANEOUS			22
12.1 Legal Relationship			22
12.2 Indemnification			22
12.3 Limitation of Liability			22
12.4 Waiver and Severability			22
12.5 Force Majeure			23
12.6 Binding Effect			23
12.7 Applicable Law			23

iii


12.8 Insurance			23
12.9 Reasonable Cooperation and Assistance			24
12.10 Survival			24
12.11 Notice			24
12.12 Entire Agreement			25
12.13 Test Stores			25
12.14 Receipt of Disclosure			25
12.15 Joint and Several			26
12.16 Limited Right of Set-Off			26
12.17 Counterparts			26
12.18 Legal Counsel			26
12.19 Remedies Cumulative			26
12.20 Amendment and Supplement			26
12.21 Execution of Agreement			26
12.22 Time of Essence			26

EXHIBITS:

Schedule A: -List of Pre-Approved locations for Co-Branded Stores
Schedule B: -Amendment to Cols Stone Franchise Agreement
Schedule C: -Sales Report

MASTER LICENSE AGREEMENT

This Agreement dated the 17th of August, 2009.

BETWEEN:

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

(hereafter “RMCF”)

- a n d -

KAHALA FRANCHISE CORP.

(hereafter “Cold Stone”)

WHEREAS, RMCF franchises gourmet chocolate and confections stores and manufactures an extensive line of premium chocolates and other confectionery products under the Rocky Mountain Chocolate Factory E: name and associated trademarks and service marks; and

WHEREAS, Cold Stone owns, operates and has developed a system for the sale of ice cream, frozen yogurt, cakes, pies, smoothies, shakes, specialty beverage products and other frozen dessert products under the Cold Stone Creamery ^® name and associated trademarks and service marks; and

WHEREAS, Cold Stone and RMCF are desirous of co-branding together to permit Cold Stone stores to be developed or modified to offer the RMCF brand and RMCF has agreed to license its respective trademarks as more particularly described in this Agreement.

NOW, THEREFORE, in consideration of the foregoing and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. DEFINITIONS

Except as otherwise provided herein, the following terms shall have the meanings set forth below:

1.1 AD

“AD” means a Cold Stone Area Developer

1.2 Affiliate

“Affiliate” means any corporation, company or entity that controls, is controlled by or is under common control with either Cold Stone or RMCF, as the context indicates.

1.3 Amendment

“Amendment” means that certain amendment to the Franchise Agreement executed by a Cold Stone Franchisee in order to offer the Services and operate a RMCF Business at the Premises. The form Amendment to a Cold Stone Franchisee’s Franchise Agreement is attached hereto as Schedule B .

1.4 Co-Branded Store

“Co-Branded Store” means a combined RMCF/Cold Stone store open for business to the public and may be either a Converted Store or a Greenfield Store.

1.5 Cold Stone

“Cold Stone” means Kahala Franchise Corp., a Delaware corporation.

1.6 Cold Stone Business

“Cold Stone Business” means the business operated by Cold Stone (or its duly authorized affiliate, franchisee, licensee or sublicensee) at the Premises within which the RMCF Business is to be operated by Cold Stone or a Cold Stone Franchisee.

1.7 Cold Stone Franchisee

“Cold Stone Franchisee” means a franchisee who has entered into a franchise agreement with Cold Stone, and an Amendment pursuant to which the franchisee was granted the right to operate a Co-Branded Store at the Premises. Cold Stone Franchisee may include, without limitation, Cold Stone or its respective Affiliates, acting as the owner/operator or licensee of a Co-Branded Store.

1.8 Cold Stone Operating Manual

“Cold Stone Operating Manual” means the Operating Manual utilized by Cold Stone in the capacity as Franchisor, as amended from time to time, provided to each Cold Stone Franchisee as part of their operation of the Cold Stone Business.

1.9 Cold Stone System

“Cold Stone System” is the system developed by Cold Stone, or its affiliate, for the sale of ice cream, frozen yogurt, cakes, pies, smoothies, shakes, specialty beverage products and other frozen dessert products under the Cold Stone Creamery ^® name and associated trademarks and service marks.

1.10 Commencement Date

“Commencement Date” means the date upon which both parties have executed this Agreement.

1.11 Confidential Information

“Confidential Information” shall have the meaning set forth in Section 5.5.3.

1.12 Converted Store.

“Converted Store” means a store which was initially opened as a Cold Stone store, but which is subsequently renovated pursuant to the terms of this Agreement to sell the RMCF Products and which following such conversion may also be referred to herein as a Co-Branded Store.

1.13 Dispute

“Dispute” means any dispute or question that arises during the term of this Agreement between the parties concerning the manner in which to resolve a perceived operational default by a Cold Stone Franchisee.

1.14 Dispute Resolution Committee

“Dispute Resolution Committee” means Cold Stone’s Chief Operating Officer or such other senior operations manager of Cold Stone designated by Cold Stone from time to time to serve in such capacity and RMCF’s Chief Operating Officer or such other senior operations manager of RMCF designated by RMCF from time to time to serve in such capacity.

1.15 Equipment

“Equipment” means the System standard fixtures, furnishings, equipment, smallwares and signage required to commence operation of the RMCF Business.

1.16 Franchise Agreement

“Franchise Agreement” means that certain franchise agreement between Cold Stone and a Cold Stone Franchisee regarding the operation of the Cold Stone Business at the Premises.

1.17 Greenfield Store.

“Greenfield Store” means a store which pursuant to the terms of this Agreement is developed and constructed to include both RMCF and Cold Stone products and which opens and operates as a Co-Branded Store from its first date of operation.

1.18 Information

“Information” shall have the meaning set forth in Section 5.5.3.

1.19 Intellectual Property Rights

“Intellectual Property Rights” means: (a) any and all proprietary rights provided under: (1) patent law; (2) copyright law; (3) trade-mark law; (4) design patent or industrial design law; and (5) any other statutory provision or common law principle applicable to this Agreement, including trade secret law, which may provide a right in either ideas, formulae, algorithms, concepts, inventions or know-how generally, or the expression or use of such ideas, formulae, algorithms, concepts, inventions or know-how; and (b) any and all applications, registrations, licenses, sublicenses, agreements or any other evidence of a right in any of the foregoing.

1.20 Inventory

“Inventory” means any and all ongoing inventory required to offer and sell the Services in accordance with the RMCF Operating Manual as may be adapted by the consent of both parties for particular Premises.

1.21 Joint Operating Manual

“Joint Operating Manual” means all books, bulletins, notices, correspondence, training sessions, video or audio tapes, computer media, web casts, online training modules or other materials jointly prepared by or on behalf of Cold Stone and RMCF jointly for use by the Cold Stone Franchisees, setting out information, advice, standards, requirements, procedures, instructions or policies relating to the offering, sale and performance of the Services. Until such Joint Operating Manual is created, Cold Stone Franchisees shall be required to operate the RMCF Business pursuant to the guidelines set forth in the RMCF Operating Manual.

1.22 Marks

“Marks” means the trade-marks, trade names, design marks, service marks, designs, logos, and/or brand names, domain names, and other intellectual property, adopted by RMCF or Cold Stone in connection with their respective Systems. For purposes of this Agreement, Cold Stone’s Marks shall include those Marks listed in its current Franchise Disclosure Document, which are incorporated herein by reference, as such list may be amended from time to time. RMCF’s Marks shall include those Marks listed in its current Franchise Disclosure Document, which are incorporated herein by reference, as such list may be amended from time to time.

1.23 Offending Portion

“Offending Portion” shall have the meaning set forth in Section 12.4.

1.24 Operational Support

“Operational Support” means collectively the AD, RDO and any RMCF personnel providing training and operational support to the Cold Stone Franchisee.

1.25 Premises

“Premises” means the premises within which the Co-Branded Store is located.

1.26 Premises Specifications

“Premises Specifications” shall have the meaning set forth in Section 3.4.

1.27 RDO

“RDO” means a Cold Stone Regional Director of Operations.

1.28 RMCF

“RMCF” means Rocky Mountain Chocolate Factory, Inc., a Colorado corporation.

1.29 RMCF Business

“RMCF Business” means the business operated at the Premises by Cold Stone, or its duly authorized affiliate, franchisee, licensee, or sublicensee, pursuant to the RMCF System, the Amendment and in accordance with the terms of this Agreement.

1.30 RMCF Operating Manual

“RMCF Operating Manual” means the Operating Manual utilized by RMCF and as amended from time to time, provided to each Cold Stone Franchisee as part of their operation of the RMCF Business or until such time as the Joint Operating Manual has been prepared and approved for use by Cold Stone Franchisees.

1.31 RMCF System

“RMCF System” means the system developed by RMCF, or its affiliate, for the sale of gourmet chocolate and confections and other products under the Rocky Mountain Chocolate Factory ^® name and associated trademarks and service marks and RMCF’ s proprietary methods of doing business.

1.32 Sales Report

“Sales Report” shall have the meaning set forth in Section 7.7.

1.33 Services

“Services” means the RMCF program of services and products to be offered from the Premises, as mutually agreed upon by the parties and will include such chocolate, confections, foods, merchandise, supplies, and other items sold, handled, used or otherwise offered by the RMCF Business, as agreed upon between the parties and as permitted by the Joint Operating Manual (if applicable).

1.34 System

“System” means either the Cold Stone System or the RMCF System, as the case may be.

1.35 Term

“Term” shall have the meaning set forth in Section 2.4.

1.36 Transfer

“Transfer” shall have the meaning set forth in Section 8.1

1.37 UFDD

“UFDD” shall mean the current standard franchise disclosure document prepared in accordance with the Federal Trade Commission rules regulating the offer and sale of franchises and used by the respective parties or their Affiliates to offer franchises.

2. TERM AND RIGHTS GRANTED

2.1 Grant

2.1.1 Subject to terms of this Agreement, RMCF grants to Cold Stone, and its affiliates, the non-exclusive right during the Term, and in accordance with the terms of this Agreement, the RMCF Operating Manual (as amended from time to time) and the Joint Operating Manual (as applicable) to operate the RMCF Business and offer the Services or to allow its Cold Stone Franchisees to do the same, using each of their Systems and Marks. Both parties hereby acknowledge and agree that the grant herein is site specific, non-exclusive, solely for use at the Premises, and that no territory or other protected area is provided to either party or the Cold Stone Franchisees by this Agreement. Cold Stone represents to RMCF that it has full power and authority to bind Cold Stone Creamery, Inc., which as of the Commencement Date of this Agreement may be a party to certain Franchise Agreements, as if it were a named party herein.

2.2 License to Use Marks

2.2.1 RMCF grants to Cold Stone an irrevocable (subject to the termination provisions contained in this Agreement) non-exclusive, non-transferable (save in accordance with the provisions of Section 8 of this Agreement) license to use the Marks, in accordance with the terms of this Agreement, the RMCF Operating Manual (as amended from time to time), and the Joint Operating Manual (as applicable), solely in connection with the sale and performance of the Services. Subject to this limited license, neither party shall have any right, title or interest in the Marks of the other party. Neither party may use the Marks of the other party in any manner calculated to represent that it is the owner of the Marks of the party. Neither party will, during the Term nor at any time thereafter, dispute or contest the validity or enforceability of the Marks of the other party, attempt any registration thereof, worldwide, or attempt to dilute the value of any goodwill attaching to the Marks of the other party. Any goodwill associated with the Marks shall belong exclusively to the party that is the owner of the Marks. This grant includes the right of Cold Stone to sublicense or otherwise grant to its respective authorized Cold Stone Franchisee (and only to such person or entity) the rights under this Agreement to operate the RMCF Business at the Premises included in and subject to the sublicense, provided that each party complies with all applicable laws and further provided that RMCF has first approved the form of Amendment to the Franchise Agreement to be executed between Cold Stone and a Cold Stone Franchisee, and has otherwise provided the requisite approvals for the Co-Branded Store.

2.3 Amendment to Franchise Agreement

2.3.1. The parties hereto acknowledge that it is not intended that RMCF shall be a franchisor with respect to a Cold Stone Franchisee. It is the expectation of the parties that old Stone shall, pursuant to its Franchise Agreement with its Cold Stone Franchisee, sublicense the RMCF Business and enforce the standards of the RMCF Business directly with its Cold Stone Franchisee. In order to implement such agreement, the parties shall cooperate from time to time to amend the form of amendment to franchise agreement that Cold Stone will use with its Cold Stone Franchisees, a copy of the initial Amendment is attached hereto as Schedule B . The parties further understand that in no event shall the Cold Stone Franchisee receive any rights, license or permission to operate the RMCF Business for a period greater than the lesser of (i) the remaining term of the Cold Stone Franchisee’s term under their Franchise Agreement plus renewals or (ii) the Term of this Agreement, without the express written consent of RMCF. In the event a Co-Branded Store is operated by either party, or by an Affiliate of either party, no Amendment will be required but the Co-Branded

Store will be operated in accordance with the terms of this Agreement, the RMCF Operating Manual (as amended from time to time) and the. Joint Operating Manual (as applicable).

2.4 Term

2.4.1. The Term of this Agreement will commence on the Commencement Date and continue until the date upon which the last Co-Branded Store ceases to be open for business pursuant to the provisions of the Amendment.

3. CO-BRANDED STORES

3.1 Grant of Rights for Co-Branded Stores

Cold Stone shall offer the rights to execute the Amendment and develop or convert to a Co-Branded Store, to the Cold Stone Franchisees whose locations are listed on Schedule A , attached to this Agreement, and to prospective Cold Stone Franchisees through inclusion of informational disclosures regarding the RMCF Business, together with the Amendment, in its Cold Stone UFDD, which shall be prepared and used in a manner consistent with Cold Stone’s representations, warranties and covenants contained in Section 11.1.7.

3.2 Approval of Locations for Co-Branded Stores

The parties agree that only locations that have been approved by both parties may be converted by Cold Stone to a Co-Branded Store or developed as a Greenfield Store. Attached to this Agreement as Schedule A is a preliminary list of locations approved by the parties for development or conversion to Co-Branded Stores as of the Commencement Date. Additional locations may be designated and approved for development of or conversion to Co-Branded Stores by agreement of the parties evidenced in writing. Cold Stone will promptly forward to RMCF a copy of the Franchise Agreement and the Amendment upon full execution of the Amendment, together with such type of information regarding the Cold Stone Franchisee, the Co-Branded Store location and such additional information regarding development of the Co- Branded Store as the parties may from time to time agree upon. Cold Stone may at its sole discretion remove a location from Schedule A , or withdraw its approval to convert, at any time prior to the execution of an Amendment by Cold Stone and the Cold Stone Franchisee., RMCF may at its sole discretion remove a location from Schedule A , or withdraw its appioval to develop or convert, at any time prior to Cold Stone commencing the development or conversion of the location to a Co-Branded Store, as the case may be.

3.3 Greenfield Stores.

Either party may propose a brand new location for a new or existing Franchisee to develop a Co-Branded Store. The parties agree that only franchisees and locations that have been approved by both parties may be opened as a Co-Branded Store; and upon such approval, such franchisee and location shall fall under the terms and conditions of this Agreement. Cold Stone will be the host Franchisor for all of the Greenfield Stores opened under this Agreement.

Section 7.2.2 below sets forth the initial franchise fees applicable to any Greenfield Stores opened under this Agreement.

3.4 Development of Premises

3.4.1. Cold Stone will ensure that the Cold Stone Franchisee constructs and equips the Premises in accordance with the timetable or schedule specified by, and in conformity with the RMCF System standard layout plans, specifications, design criteria and drawings (“ Premises Specifications ”) that RMCF will provide. If the final Premises Specifications differ from the RMCF System standard Premises Specifications, then the final Premises Specifications shall be forwarded to RMCF for its prior approval before construction commences. RMCF’ s approval of construction and development of the Premises will be required before the commencement of the RMCF Business. All cost of plans and specifications and all costs and expenses pertaining to the construction and equipping of the Premises will be borne exclusively by the Cold Stone Franchisee. Each party will work together to provide consultation or advice to the Cold Stone Franchisee in constructing and equipping the Premises. Cold Stone acknowledges that the Inventory, Equipment and development obligations as provided herein are necessary to properly sell and perform the Services. Cold Stone will ensure that its Cold Stone Franchisee uses the Premises in the operation of the Cold Stone Business and the RMCF Business only and for no other purpose without the prior written consent of RMCF at any time.

3.5 Equipment and Inventory

3.5.1. Equipment . Cold Stone agrees that it will purchase or otherwise acquire, or require the Cold Stone Franchisee to purchase or otherwise acquire, from vendors designated or otherwise approved by RMCF, or from RMCF, the Equipment needed to add the RMCF Business to the Cold Stone Franchisee’s Premises or to develop and equip a Greenfield Store, and for a price in accordance with RMCF’s standard pricing practices.

3.5.2. Inventory . Cold Stone agrees that throughout the Term it shall cause the Cold Stone Franchisee to purchase from RMCF or its authorized supplier(s) (as the case may be) the required Inventory. (This material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Commission.) A Cold Stone Franchisee is under no obligation to accept resale prices as may be suggested by RMCF and the Cold Stone Franchisee may offer the Services and sell the Inventory at any lower price it chooses. However, Cold Stone will use its best efforts to ensure that the Cold Stone Franchisee does not exceed the maximum suggested resale prices specified by the RMCF System. Cold Stone acknowledges that Inventory pricing may be changed by RMCF at any time.

3.6 Obligations

3.6.1. Best Efforts . Cold Stone will use best efforts to compel its Cold Stone Franchisee to: (a) comply with all laws, and adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct; (b) offer such Services and only such products in connection with the Services, as agreed to by the parties and as amended from time to time; (c) participate fully in all national, regional and local promotions initiated by either Cold Stone or RMCF; (d) cause on-site management to devote sufficient time and attention to the RMCF Business; (e) maintain a minimum quantity of Inventory items and the mix of Inventory as RMCF may specify for the RMCF Business products from time to time; (f) provide the other party with such written or other reports related to the RMCF Business as are specified in this Agreement, the Franchise Agreement, Amendment, Cold Stone Operating Manual, and RMCF Operating Manual from time to time including without limitation, regular sales reports confirming gross sales for the Cold Stone Business and the RMCF Business; (g) comply with the RMCF Operating Manual, as amended from time to time; (h) abide by and implement all changes to the System as the parties agree to from time to time; (i) adhere to the highest health and safety standards; and (j) maintain the Premises in a clean, orderly condition and in excellent repair (including adjacent public areas). Cold Stone will notify RMCF by telephone within twenty-four (24) hours of any investigation or violation, actual or alleged, concerning any health or sanitary laws or regulations and, thereafter, and will use best efforts to ensure that its Cold Stone Franchisee takes any actions directed by any government agency or required by RMCF or Cold Stone in order to remediate the situation. In any event, Cold Stone will provide prompt notice and ongoing information with respect to any such investigation or violation.

3.6.2. Health or Sanitary Violations . In the event that there is a health or sanitary violation within the knowledge of RMCF (eg. product recall), then RMCF will provide the same notice and ongoing information as required above.

3.7 Employees and Contractors

3.7.1. The parties agree that the Cold Stone Franchisee shall be responsible for all of its employees including but not limited to compliance with laws, employee training, and wages and commissions payable to any employee(s) or contractor(s) engaged to assist in carrying out the obligations to comply with the RMCF System and the provisions of the Amendment, and for all other legal obligations relating to the Services at and through the Co- Branded Stores.

4. TRAINING AND GUIDANCE

4.1 Training

4.1.1. Cold Stone Franchisees . Prior to operating the RMCF Business at the Premises, Cold Stone Franchisees must complete RMCF’s three (3) days of classroom and on- the-job training, conducted at RMCF’s training facility in Durango, Colorado, or such other location as designated or approved by RMCF, by RMCF or by Cold Stone’s employees or ADs who have completed RMCF’s training described in Section 4.1.2 and who have otherwise been approved by RMCF to conduct the RMCF training. If a Cold Stone Franchisee does not complete the RMCF training in a manner satisfactory to RMCF, RMCF may require such Cold Stone Franchisee to attend additional training as reasonably necessary at a location designated by RMCF. RMCF reserves the Tight to charge a Cold Stone Franchisee for its travel costs and living expenses incurred by its trainers and personnel and a per diem fee at its then current published rates, in the event it determines that additional

training conducted at the Premises is reasonably necessary for the Cold Stone Franchisee’s satisfactory completion of the training.

4.1.2. Cold Stone Employees . Cold Stone’s Operational Support must complete RMCF’s three (3) days of classroom and on-the-job training at RMCF’s training facility in Durango, Colorado, or such other location as designated by RMCF. If Cold Stone’s Operational Support does not complete the RMCF training in a manner satisfactory to RMCF, RMCF may require the Cold Stone Operational Support personnel to attend additional training as reasonably necessary at a location designated by RMCF. Cold Stone will bear all travel costs and living expenses incurred by its Operational Support personnel to attend the RMCF training.

4.1.3. Training of Transferees . Any transferee of a Co-Branded Store must attend training as set forth above prior to operating the RMCF Business at the Premises.

4.2 Operating Assistance

4.2.1. During the Term of this Agreement, each party shall provide the other with such advice and guidance, as may be reasonably necessary from time to time.

5. SYSTEM STANDARDS

5.1 Operational Oversight

5.1.1. The parties hereto acknowledge that the operational standards of each must be maintained to the greatest extent reasonably possible in order to maintain the highest standards of customer service, food safety, and food quality. The RDO or AD for the Cold Stone Business shall be the primary operational contact with the Cold Stone Franchisee. Notwithstanding same, the RMCF Operational Support will be permitted to enter the front of the house of the Premises on an informal basis in order to evaluate compliance with proper operational standards. If the RMCF Operational Support observes issues of significant concern, he/she shall promptly contact his/her counterpart with the other party to alert him/her of the concerns and request that the concerns be promptly addressed. If the RMCF Operational Support observes issues that create health or safety issues for the customers, employees, or other third parties at the location, the RMCF Operational Support will notify and request that his/her counterpart address the issue within twenty-four (24) hours of receipt of the concern.

5.1.2. The parties acknowledge that they will mutually work together to establish Cold Stone Operational Support as the primary Operational Support for the RMCF Business and may make joint visits to the Premises to evaluate the operations of the Cold Stone Franchisees, recognizing that the RMCF Operational Support is a key resource for advice and direction on the RMCF Business operational standards.

5.1.3. In the event of a conflict with respect to differing operational standards between the Cold Stone System and the RMCF System, the Cold Stone Business operational standards shall control.

5.2 Approval of Vendors and Suppliers

5.2.1. Cold Stone will, within seven (7) days of receipt of notice from its Cold Stone Franchisees of a request to purchase or lease goods or services from a vendor or supplier not approved by RMCF in the RMCF Operating Manual, notify RMCF of such request and provide RMCF with all relevant samples and specifications reasonably requested by RMCF (and provided by Cold Stone Franchisee) to evaluate such request and determine whether the equipment, supplies or products meet the quality standards of RMCF. RMCF Franchisor shall use reasonable efforts to evaluate such request within twenty-one (21) days, or such other time period upon notice to Cold Stone, and notify Cold Stone of its approval or disapproval of such vendor or supplier. Failure of RMCF to notify Cold Stone within such twenty-one (21) day period shall not be deemed as approval of the proposed vendor or supplier. RMCF shall be entitled to payment of all reasonable expenses it incurs in this evaluation, which shall be paid by Cold Stone to RMCF within ten (10) days of RMCF’s notice to Cold Stone of its approval or disapproval of the requested vendor or supplier, which notice shall include all expenses reasonably incurred.

5.3 Compliance with System and Conflict of Systems

5.3.1. Cold Stone agrees to use its best efforts to ensure that its Cold Stone Franchisees perform the Services associated with the RMCF Business in accordance with this Agreement and the RMCF Operating Manual, as amended from time to time. To the extent a conflict arises between the RMCF Operating Manual and the Cold Stone Operating Manual, the provisions of the Cold Stone Operating Manual shall control.

5.3.2. RMCF agrees to provide Cold Stone with written notice pursuant to Section 12.11 in the event a Cold Stone Franchisee fails to pay RMCF for purchases of RMCF Products. Cold Stone agrees to take all reasonably necessary steps to bring the Cold Stone Franchisee into compliance or otherwise terminate the Cold Stone Franchisee’s rights to operate a RMCF Business pursuant to the Amendment.

5.4 Conflict of Products

5.4.1. A Cold Stone Franchisee will not sell at the Premises a product of Cold Stone that is the same or similar to the following products offered by RMCF: caramel apples in all varieties, chocolate dipped fruit and confections (excluding waffle products), pre-packaged proprietary chocolate, and assorted factory bulk chocolate sold by the pound.

5.4.2. Where a product of RMCF is the same or substantially similar to a product of Cold Stone which is already sold by the Cold Stone Franchisee, the Cold Stone Franchisee may retain the Cold Stone product already being sold and is not required to sell such product of RMCF.

5.5 Confidentiality

5.5.1. Obligations . Each party will at all times, both during the term of this Agreement and thereafter, keep and hold all Confidential Information of the other party in the strictest confidence, and will not use such Confidential Information for any purpose, other than as may be reasonably necessary for the performance of its duties pursuant to this Agreement, without the other party’s prior written consent. Each party agrees:

5.5.1.1.1. that it will not disclose to any third party or use any Confidential Information disclosed to it by the other except as expressly permitted in this Agreement; and

5.5.1.1.2. that it will take all reasonable measures to maintain the confidentiality of all Confidential Information of the other party in its possession or control, which will in no event be less than the measures it uses to maintain the confidentiality of its own information of similar importance.

5.5.2. Exceptions. Notwithstanding the foregoing, each party may disclose Confidential Information:

5.5.2.1.1. to the extent required by a court of competent jurisdiction or other governmental authority or otherwise as required by law; or

5.5.2.1.2. on a “need-to-know” basis under an obligation of confidentiality to its affiliates and to its and its affiliates’ authorized agents, contractors, legal counsel, accountants, banks and other financing sources and their advisors, provided such third party are bound by a similar duty of confidentiality.

5.5.3. Definitions and Limitations . For purposes of this Agreement, Confidential Information shall include without limitation, all data, software, processes, recipes, procedures, know-how, documents, concepts, designs, improvements, inventions, materials, trade secrets and other information (collectively, “Information”) with respect to or relating to party’s business, business plans, marketing plans, financial information, products, personnel, suppliers, vendors, customers, policies and operational methods and manuals. For Cold Stone, Information shall include, without limitation, the formulation, research and development, and/or the manufacture of ice cream, yogurt, sorbet and other frozen dessert products, whether oral or written, whether textual, graphic or machine-readable form, regardless of whether the Information is marked or otherwise identified as “confidential”. For RMCF, Information shall include, without limitation, the formulation, research and development, and/or the manufacture of its chocolate and confection products, whether oral or written, whether textual, graphic or machine-readable form, regardless of whether the Information is marked or otherwise identified as “confidential”. The parties agree that any information marked by one party as “Confidential” shall be treated as such by the other party and shall be subject to the provisions of this Section 5.5.

Confidential Information does not include the following information:

5.5.3.1.1. information which is in the public domain when it is received by or becomes known to the recipient party or which subsequently enters the public domain through no fault of the recipient party (but only after it enters the public domain);

5.5.3.1.2. information which is already known to the recipient party at the time of its disclosure to the recipient party by the disclosing party and is not the subject of an obligation of confidence of any kind;

5.5.3.1.3. information which is independently developed by the recipient party without any use of or reference to the Confidential Information of the disclosing party where such independent development can be established by evidence that would be acceptable to a court of competent jurisdiction; and

5.5.3.1.4. information which is received by the recipient party in good faith without an obligation of confidence of any kind from a third party who the recipient party had no reason to believe was not lawfully in possession of such information free of any obligation of confidence of any kind, but only until the recipient party subsequently comes to have reason to believe that such information was subject to an obligation of confidence of any kind when originally received.

5.5.4. Remedies for Breach of Confidentiality Obligations. Each party acknowledges that its failure to comply with the provisions of this section may cause irreparable harm to the other party which cannot be adequately compensated for in damages, and accordingly acknowledges that the other party may be entitled to obtain, in addition to any other remedies available to it, interlocutory and permanent injunctive relief to restrain any anticipated, present or continuing breach of this Section.

5.5.5. Return of Confidential Information . Upon the termination of this Agreement, each party will return to the other all Confidential Information of the other which is then in its possession or control, and will remove all digital representations thereof in any form from all electronic storage media in its possession or under its control. Cold Stone also agrees to make reasonable efforts to require its Cold Stone Franchisees to return all Confidential Information of the other which is then in their possession or control, and to remove all digital representations thereof in any form from all electronic storage media in their possession or under their control.

5.6 Non-competition

The parties agree that they will not authorize or permit a competitor of either party, to operate or otherwise sell their products at any Co-Branded Store during the Term of this Agreement. Cold Stone will use its best efforts to ensure that its Cold Stone Franchisees do not during the Term, except with the RMCF’s prior written consent, directly or indirectly, carry on, license, franchise, or be engaged, employed or interested in or advise any business which may be considered a competitor of RMCF.

6. ADVERTISING

6.1 Advertising and Marketing Materials Prepared by Cold Stone

Any advertising or marketing materials prepared by Cold Stone or Cold Stone Franchisees that contains the Marks of RMCF must be approved in writing by RMCF prior to such use, with such approval not to be unreasonably withheld or unduly delayed. Cold Stone will use its best efforts to monitor its respective Cold Stone Franchisees to ensure compliance with this Section. Any grand opening cost for the opening of a Co-Branded Store shall be borne by the Cold Stone Franchisee.

6.2 Advertising and Marketing by Cold Stone Franchisees

RMCF shall include the Cold Stone Franchisees in all relevant marketing plans and promotions for the Services; provided, however: (1) Cold Stone Franchisees will have to pay the published charges for the production or printing of any advertising and marketing materials; and (2) Cold Stone Franchisees may not have access to, or may not necessarily directly benefit from, marketing plans and promotions paid for by the RMCF marketing fund for its standard store franchisees. RMCF may send such advertising and marketing materials directly to the Cold Stone Franchisees, with a copy to Cold Stone, and may collect related charges for the production or printing of materials and promotions directly from Cold Stone Franchisees. The parties will endeavor to reconcile their marketing calendars with respect to the Co-Branded Stores as soon as practicable after the Commencement Date.

6.3 Promotions Conflict

Each party will use their best efforts to ensure that a Cold Stone Franchisee will only participate in promotions of RMCF that relate to the RMCF products served at a Co-Branded Store. Both parties shall also endeavor to incorporate both of their respective primary promotional calendars at a Co-Branded Store from time to time. However, in the event of a conflict of promotional calendars, the parties agree that the Cold Stone Franchisee will not be required to follow any promotions of RMCF that conflict with similar or conflicting promotions of Cold Stone.

7. ROYALTY PAYMENTS; SALES REPORTS

7.1 Royalties

In return for the ongoing rights and privileges granted in this Agreement, Cold Stone agrees to pay a (This material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Commission.) royalty to RMCF on the “Net Sales” (as defined below) of RMCF Products and RMCF-branded items sold at Co-Branded Stores. “Net Sales” shall mean the total of all sales of RMCF Products and RMCF-branded items sold at each Co-Branded Store, including catering, Internet and off-site sales, but excluding (i) the amount of any state or local sales or use tax actually paid by Franchisee, (ii) refunds or returns and (iii) the discounted portions of goods sold, including but not limited to sales under coupon or promotion so long as such discounts are not provided in exchange for any rights, goods or services. Any payments based upon this Section shall be based upon amounts actually collected from the Cold Stone Franchisees and Cold Stone will not be liable to RMCF for royalties or other payments not actually collected from the Cold Stone Franchisees. Notwithstanding the foregoing,

Cold Stone agrees to use its best efforts to collect all amounts owed to it from the Cold Stone Franchisees in connection with the Co-Branded Stores but will have no liability to RMCF if such best efforts are unsuccessful in collecting amounts owed. To the extent that Cold Stone collects some, but not all, of royalties or other monies owed pursuant to the Franchise Agreement and Amendment from its Cold Stone Franchisee, the amount collected will be split between Cold Stone and RMCF proportionately based upon the total amount due to each party. Payments shall be made pursuant to this Agreement as long as any Co-Branded Store remains open for business. All payment amounts shall be made no later than the fifteenth (15th) of each month for the previous month’s collected royalties and fees.

7.2 Franchise Fees.

7.2.1. Converted Stores . In respect of Converted Stores, Cold Stone will pay to RMCF an initial franchise fee of * within ten (10) days of receiving such amount from the Cold Stone Franchisee.

7.2.2. Greenfield Stores . In respect of Greenfield Stores, Cold Stone will pay to RMCF an initial franchise fee as set forth below:

7.2.2.1. If RMCF initially identified the franchisee and the franchisee is then approved by Cold Stone as a Cold Stone Franchisee to open a Greenfield Store, then Cold Stone will pay to RMCF * of the franchise fee it collects from such franchisee within ten (10) days of receiving such amount from the franchisee.

7.2.2.2. If Cold Stone initially identified the franchisee and the franchisee is approved by RMCF to open a Greenfield Store, then Cold Stone will pay to RMCF * within ten (10) days of receiving such amount from the franchisee.

7.3 Royalty Relief

Cold Stone may in its sole discretion, provide relief to its Cold Stone Franchisee for the payment of royalties, advertising funds or other monies due under the Franchise Agreement for the Cold Stone Business. Cold Stone may not offer any such similar relief with respect to the RMCF Business without the prior written consent of RMCF.

7.4 Transfer of Funds

Each party agrees to cooperate fully and comply with any system implemented by the other party for the transfer of funds directly from each other’s bank account, including the execution of any pre-authorized payment forms required by either party or their respective bankers, from time to time.

7.5 Amounts Exclusive of Taxes

Any and all amounts expressed as being payable pursuant to this Agreement are exclusive of any applicable taxes.

7.6 Currency

All dollar amounts referred to in this Agreement or to be calculated pursuant to the terms hereof are in U.S. funds.


*		This material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Commission.

7.7 Sales Reports

Cold Stone will provide RMCF with sales reports for each Co-Branded Store containing the information set forth in Schedule C (the “ Sales Reports ”). Each Sales Report will cover a period of one week (i.e. seven (7) consecutive days) and will be delivered within four (4) business days following the end of Cold Stone’s normal sales reporting week. The parties may from time to time, by mutual written agreement, alter the form of the Sales Reports. Cold Stone will use best efforts to ensure the accuracy of the Sales Reports and will co-operate with RMCF in the event of an investigation or audit with respect to the Sales Reports. RMCF may, following at least two (2) days prior written notice, not more than one (1) time during each six (6) month period, cause an audit to be made of the applicable records and books of Cold Stone (and if reasonably necessary, its Cold Stone Franchisees) and prompt adjustment shall be made by Cold Stone to compensate for any errors or omission disclosed by such audit. The audit shall be conducted at the expense of RMCF performing such audit and by one of the major certified public accountancy firms; provided, however, that where any such audit reveals an error in excess of five percent (5%) below the amount actually owed, the entire cost of the audit shall be borne by Cold Stone.

7.7.1. Without limiting the generality of the foregoing, Cold Stone agrees to keep complete books and records reasonably necessary for the purpose of allowing RMCF to confirm the amount of royalties or other fees billed or collected by Cold Stone for a period of time as required by law.

7.8 Sharing of Sales

Cold Stone may share with its general franchisee community sales information relating to the sale of the RMCF products at the Premises operated by its Cold Stone Franchisee, provided such information:

7.8.1. Is presented in an anonymous fashion which does not identify the sites from which the sales information is derived;

7.8.2. Is an average of sales information at not less than five (5) locations;

7.8.3. Is gross sales information only and does not include product mix information;

7.8.4. Is disclosed in such a way as to not violate any local, state or federal law, including but not limited to the Federal Trade Commission’s Rule Governing Franchise Disclosure Documents; and

7.8.5. Does not constitute material non-public information pursuant to applicable securities law.

7.9 Indemnification for Sharing of Sales

Cold Stone will indemnify RMCF in respect of all claims that may be brought by current, future and potential franchisees in connection with the dissemination and sharing of such sales information pursuant to the terms of Section 12.2 herein.

8. TRANSFER

8.1 Master License Agreement

Neither party may transfer, assign or sub-license this Agreement, or any of its rights and obligations hereunder to an unaffiliated third party (each a “ Transfer ”) without the prior written consent of the other party, which consent may not be unreasonably or unduly withheld. Notwithstanding the foregoing, a Transfer does not require consent where such transfer forms part of the sale of all, or substantially all, of the transferor’s assets or business; however, transferor shall provide notice to the other party immediately upon such Transfer occurring. For clarity, a transfer to an Affiliate shall not require consent but the transferring party shall give the other party notice upon completion of the transfer to an Affiliate.

8.2 Co-Branded Store

The parties agree that any request by a Cold Stone Franchisee to transfer his/her Co- Branded Store shall be subject to the transfer process utilized by Cold Stone, with written notice forwarded to RMCF as soon after receipt of such notice from the Cold Stone Franchisee as practicable, but in any event prior to the proposed date of the transfer.

9. DEFAULT AND TERMINATION

9.1 Events of Default

Either party has the right to terminate this Agreement, without prejudice to any other legal right or remedy, if the other party is in material default of its obligations hereunder and fails to rectify the default to the reasonable satisfaction of the non-defaulting party within forty-five (45) days of receipt of written notice from the non-defaulting party detailing the default (in the case of a monetary default pursuant to Section 9.1.1, within fifteen (15) days). Default shall include, without limitation:

9.1.1. 9.1.1 Failure to pay any amounts due hereunder;

9.1.2. the party ceases to carry on business, or takes any action to liquidate its assets; makes a general assignment for the benefit of creditors or a bulk sale of its assets; is the subject of any proceeding under any law relating to insolvency or bankruptcy;

9.1.3. stops making payments in the usual course of business;

9.1.4. if there is Transfer of this Agreement in violation of Section 8;

9.1.5. a criminal act or act of moral turpitude committed by a senior level employee of one party during their employment or a public spokesperson associated with one party during the terms of association that materially adversely affects the other party’s System’s reputation, its intellectual property, the good will associated therewith, or its financial condition;

9.1.6. failure of the other party to comply with the covenants in Sections 5.5 and 5.6;

9.1.7. if any party knowingly submits any false reports or statements;

9.1.8. if any party defaults in paying any monies due to a third party for which the other party is or may become liable;

9.1.9. the habitual failure by Cold Stone to use its best efforts to enforce the operational standards of the RMCF Business, including, but not limited to, Cold Stone’s failure to terminate a Cold Stone Franchisee’s rights under an Amendment at RMCF’s reasonable request, following a Cold Stone Franchisee’s default and failure to cure such default, if curable, under the Amendment; or

9.1.10. if any party understates any payment due to the other by three percent (3%) or more.

9.2 Notwithstanding the foregoing, the parties agree to extend the cure periods referred to above, for a reasonable period of time, if the defaulting party is in the process of diligently rectifying such default and through no fault of its own, the default was not cured during such period.

9.3 The parties agree that Sections 9.1.2 and 9.1.4 will have no cure period and shall be subject to an immediate right of termination upon notice by the non-defaulting party.

9.4 “Cure” for purpose of Section 9.1.5 is defined as dissociation from the employee or spokesperson in question and/or otherwise addressing by way of public statement the impropriety of the alleged act.

10. DISPUTE RESOLUTION

10.1 Store Level Operational Dispute Resolution Process

If a Dispute arises during the term of this Agreement between the parties concerning the manner in which to resolve a perceived operational default by a Cold Stone Franchisee, the parties will in good faith attempt to resolve such Dispute promptly and in an amicable manner. If a Dispute arises which is not resolved by the operational personnel involved, the Dispute Resolution Committee will be notified by either party. The Dispute Resolution Committee will meet, which meeting may be held telephonically, within ten (10) calendar days of receipt of notice of a Dispute. If the Dispute Resolution Committee cannot resolve the Dispute within ten (10) calendar days after meeting, the dispute will be submitted to a limited arbitration hearing before a neutral third party arbitrator mutually agreed to by the parties with expertise in restaurant operations. If the parties cannot agree to an arbitrator within three (3) days, then each party will appoint an arbitrator, who together will appoint a third arbitrator, who will preside over the arbitration between the parties. The parties agree that very limited evidence may be presented and no discovery will be permitted to resolve a Dispute pursuant to this Section 10.1. Notwithstanding this Section 10.1, either party retains the right to seek injunctive relief before the Federal Courts of the United States where the other party’s United States headquarters is located if the alleged default is not compensable by monetary damages and/or may cause immediate irreparable harm to the party seeking such relief. In the event the Dispute involves a default of the Franchise Agreement or Amendment, the parties agree that the arbitrator has the jurisdiction to award any available remedies under the Franchise Agreement, including but not limited to compelling Cold Stone to terminate the Amendment and de-identify the Co-Branded Store. The arbitrator may also award the prevailing party its reasonable fees and costs. The non- prevailing party may not consider the Dispute as an event of default pursuant to Section 9.1.

11. REPRESENTATIONS AND WARRANTIES

11.1 Cold Stone Representations, Warranties and Covenants

Cold Stone represents, warrants and covenants to RMCF as follows and acknowledges that RMCF has relied upon the completeness and accuracy of such representations, warranties and covenants in entering into this Agreement:

11.1.1. it has the corporate capacity to enter into this Agreement and to perform each of its obligations hereunder;

11.1.2. it has duly authorized, executed and delivered this Agreement and this Agreement constitutes a legally valid and binding obligation of it enforceable against it in accordance with its terms except as such enforcement may be limited by applicable bankruptcy, insolvency and other laws of general application affecting the enforcement of creditors’ rights and subject to general equitable principles;

11.1.3. its performance of this Agreement will comply with and will neither contravene, breach nor infringe any laws or regulations applicable in the U.S.;

11.1.4. it has secured or will secure all consents required from the owners (or lessors, as applicable) of the Premises to permit the RMCF Business to be conducted in the Premises;

11.1.5. it will not issue a press release or make any other form of public announcement about any business relationship contemplated by this Agreement without the express prior written consent of RMCF, which consent may not he unreasonably withheld;

11.1.6. it has been engaged in the operation of retail stores for substantially in excess of two (2) years and anticipates that its incremental revenue attributable to its operation of the Co-Branded Stores pursuant hereto is likely to represent twenty percent (20%) or less of the aggregate revenues of Cold Stone during the first twelve (12) months of the Term of this Agreement (the purpose of such representation being to provide RMCF with the information to determine whether the arrangement provided for herein is an exempt “fractional franchise” within the meaning of franchise disclosure or registration laws or regulations under federal law and the laws of the several states).

11.1.7. its UFDD is accurate and does not contain any material omissions and, as used during the Term to disclose to Cold Stone Franchisees considering the development or conversion of a Co-Branded Store, will be and remain accurate and not contain any material omissions;

11.1.8. it is and will be the legal and beneficial owner or authorized licensor of all Cold Stone Intellectual Property Rights in the Cold Stone Marks;

11.1.9 it will not infringe upon any of the Intellectual Property Rights of the other party or its Affiliates or of any person or otherwise infringe, interfere with, breach, contravene, harm or damage any other rights (including any personality, confidentiality, privacy, equitable or statutory rights whatsoever) of any person in the performance of its obligations under this Agreement; and

11.1.10 it has not and will not grant any rights or licenses or enter into any agreement or understanding that would conflict with Cold Stone’s obligations or RMCF’s rights under this Agreement.

11.2 RMCF Representations, Warranties and Covenants

RMCF represents, warrants and covenants to Cold Stone as follows and acknowledges that Cold Stone has relied upon the completeness and accuracy of such representations, warranties and covenants in entering into this Agreement:

11.2.1 it has the corporate capacity to enter into this Agreement and to perform each of its obligations hereunder;

11.2.2 its UFDD is accurate and does not contain any material omissions and, as used during the Term to disclose to Cold Stone Franchisees considering the development or conversion of a Co-Branded Store, will be and remain accurate and not contain any material omissions;

11.2.3 the information regarding RMCF provided to Cold Stone for preparation of its Exhibit W to its UFDD is accurate and does not contain any material omissions;

11.2.4 it has duly authorized, executed and delivered this Agreement and this Agreement constitutes a legally valid and binding obligation of it enforceable against it in accordance with its terms except as such enforcement may be limited by applicable bankruptcy, insolvency and other laws of general application affecting the enforcement of creditors’ rights and subject to general equitable principles;

11.2.5 it is and will be the legal and beneficial owner or authorized licensor of all RMCF Intellectual Property Rights in the RMCF Marks free and clear of all liens, charges and encumbrances to the extent that the same may restrict or limit the ability of RMCF to perform its obligations or of Cold Stone to exercise its rights under this Agreement and RMCF has the full power and authority to grant the rights and perform the obligations herein contemplated without the consent of any other person;

11.2.6 the RMCF Marks and its use by Cold Stone as permitted herein does not and will not infringe on any Intellectual Property Rights whatsoever of any person and is not and will not: (a) be libelous, slanderous, defamatory, obscene, pornographic, abusive, or otherwise offensive, objectionable or unlawful; (b) give rise to civil liability; (c) constitute or encourage conduct that would constitute a criminal offense; or (d) otherwise fail to comply with any applicable laws, rules, regulations or court orders;

11.2.7 it will not infringe upon any of the Intellectual Property Rights of the other party or its Affiliates or of any person or otherwise infringe, interfere with, breach, contravene, harm or damage any other rights (including any personality, confidentiality, privacy, equitable or statutory rights whatsoever) of any person in the performance of its obligations under this Agreement;

11.2.8 it has not and will not grant any rights or licenses or enter into any agreement or understanding that would conflict with RCMF’s obligations or Cold Stone’s rights under this Agreement;

11.2.9 its performance of this Agreement (including without limitation the granting of all rights by RMCF to Cold Stone herein) will comply with and will neither contravene, breach nor infringe any laws or regulations applicable in the U.S;

11.2.10 it will not issue a press release or make any other form of public announcement about any business relationship contemplated by this Agreement without the express prior written consent of Cold Stone, which consent may not be unreasonably withheld; and

11.2.11 RMCF has been engaged in the operation of retail stores for substantially in excess of two (2) years and anticipates that its incremental revenue attributable to its operation of the Co-Branded Stores pursuant hereto is likely to represent twenty percent (20%) or less of the aggregate revenues of RMCF during the first twelve (12) months of the Term of this Agreement (the purpose of such representation being to provide Cold Stone with the information to determine whether the arrangement provided for herein is an exempt “fractional franchise” within the meaning of franchise disclosure or registration laws or regulations under federal law and the laws of the several states).

11.3 Survival of Representations, Warranties and Covenants.

The parties agree that the representations, warranties and covenants contained in subsections 11.1.3 through 11.1.5 and 11.1.7 through 11.1.10 inclusive, 11.2.2, 11.2.3, 11.2.5 through 11.2.10 inclusive herein are continuous covenants and shall apply throughout the Term of this agreement and for a period of one (1) year after a claim could have been validly brought in connection with any breach or misrepresentation of said representation, warranty, or covenant.

11.4 Limited Warranties

11.4.1 THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE GIVEN AND ACCEPTED IN LIEU OF ANY AND ALL OTHER REPRESENTATIONS, WARRANTIES, COVENANTS AND CONDITIONS, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY OTHER IMPLIED WARRANTIES OF MERCHANTABLE QUALITY, ANY IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE AND ANY IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.

12 MISCELLANEOUS

12.1 Legal Relationship

12.1.1 Except as expressly provided in this Agreement, each party is an independent contractor, neither party shall be considered to be the agent, representative, master or servant of any other party hereto for any purpose whatsoever, and neither party has any authority to enter into any contract, assume any obligations or to give any warranties or representations on behalf of any other party hereto. Nothing in this Agreement shall be construed to create a relationship of partners, joint venturers, fiduciaries, or any other similar relationship among the parties.

12.2 Indemnification

12.2.1 Notwithstanding any other provision hereof, each party agrees to defend, indemnify and hold the other party and its affiliates and their respective directors, shareholders, officers, employees and agents harmless from and against all claims, investigations, lawsuits, demands, allegations, governmental actions, losses, costs, damages, expenses and liabilities (including reasonable legal fees) which may be suffered or incurred by such party arising out of or as a result of or relating in any manner whatsoever to any breach or non-performance of any term of this Agreement (including without limitation any representations, warranties and covenants contained in Sections 11.1 and 11.2) or any injury to persons (including injuries resulting in death) or loss of or damage to property of others which may be or be alleged to be caused by or suffered as a result of or in connection with the performance by such party or any of its employees or permitted contractors of all or any part of such party’s obligations under this Agreement.

12.3 Limitation of Liability

EXCEPT FOR THE LIABILITY OF RMCF TO COLD STONE FOR BREACHES OF SECTION 11.2.6 OR THE LIABILITY OF EITHER PARTY FOR BREACH OF SECTIONS 2.1, 5.5, 5.6 AND 8, HEREOF, OR BASED EXCLUSIVELY UPON WILLFUL MISCONDUCT OR INTENTIONAL FRAUD OF A PARTY TOWARDS THE OTHER, WHICH IN ALL CASES WILL BE UNLIMITED, THE LIABILITY OF EACH PARTY TO THE OTHER PARTY IN RELATION TO THIS AGREEMENT WILL IN ALL CIRCUMSTANCES BE LIMITED TO DIRECT DAMAGES AND NEITHER PARTY WILL BE LIABLE FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL, EXEMPLARY OR PUNITIVE DAMAGES OR LOSS OF PROFIT, WHETHER IN CONTRACT, TORT OR OTHERWISE RESULTING FROM ANY CAUSE OF ACTION WHATSOEVER, INCLUDING NEGLIGENCE, GROSS NEGLIGENCE, NEGLIGENT MISREPRESENTATION AND/OR FUNDAMENTAL BREACH OR OTHER THEORY OF LAW, THE LIMITATIONS DESCRIBED IN THIS SECTION 12.3 SHALL NOT APPLY TO ANY REQUEST FOR INDEMNIFICATION RAISED PURSUANT TO SECTION 12.2 OF THIS AGREEMENT,

12.4 Waiver and Severability

No waiver hereunder may be granted except by a written instrument signed by RMCF and/or Cold Stone, as the case may be. No waiver shall be inferred from or implied by any failure to act or delay in acting by a party in respect of any default, breach, nonobservance or by anything done or omitted to be done by another party. The waiver by a party of any

default, breach or noncompliance under this Agreement shall not operate as a waiver of the party rights under this Agreement in respect of any continuing or subsequent default, breach or noncompliance (whether the same or of any other nature). Any provision of this Agreement which is invalid or unenforceable will be ineffective to the extent of such invalidity or unenforceability and will be severed from the balance of this Agreement, all without affecting the remaining provisions of this Agreement. In the event that any portion of this Agreement will have been so determined to be or become invalid or unenforceable (the “ Offending Portion ”), the Parties will negotiate in good faith such changes to this Agreement as will best preserve for the Parties the benefits and obligations of such Offending Portion.

12.5 Force Majeure

12.5.1 Unless continuing or anticipated to continue for a period of thirty (30) days, no delay or failure to perform on the part of either party will be considered a breach of this Agreement if such delay or failure to perform is shown to be due to any event or cause beyond the reasonable control of the party failing to perform, including without limitation, strikes, riots, civil disturbances, actions or inactions concerning governmental authorities, epidemics, wars, embargoes, severe weather, fire, earthquakes or acts of God or of the public enemy, power failure or failure of the internet, provided that the party failing to perform:

12.5.2 notifies the other party in writing as soon as it becomes aware of the fact and nature of the delay; and

12.5.3 establishes and implements a work-around plan for the delay which minimizes disruptions to the other party and to the Cold Stone Franchisees resulting from the delay or failure to perform.

12.6 Binding Effect

This Agreement will enure to the benefit of, and be binding upon, the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns.

12.7 Applicable Law

This Agreement will be construed in accordance with and governed by the laws of Delaware. The parties agree that each shall be required to file any lawsuit permitted by this Agreement or file any demand for arbitration permitted by this Agreement in the venue of the other (e.g. Cold Stone will be required to file any claims against RMCF in the District of Colorado and RMCF will be required to file any claims against Cold Stone in the District of Arizona.) Each of the parties hereby waives the right to trial by jury of any such suit, action or proceeding and hereby waives any right, claim or entitlement to any punitive or exemplary damages whatsoever.

12.8 Insurance

12.8.1 Cold Stone will require its Cold Stone Franchisees to add RMCF (and any other affiliates, parents, subsidiaries or other related parties of RMCF as it may reasonably require), as additional insureds under all insurance policies required by Cold

Stone in conjunction with the operation of the Cold Stone Business and to add additional policies or increase the policy limits of those policies as to satisfy RMCF’s standard requirements. Upon request, Cold Stone will provide RMCF with proof of its inclusion as an additional insured as to each Co-Branded Store.

12.9 Reasonable Cooperation and Assistance

12.9.1 Each party will, at its expense, provide the other party with reasonable cooperation and assistance in relation to the matters under this Agreement. Each party to this Agreement will, at the request of the other party and without charge (provided that the cost to the providing party is reasonable under the circumstances), execute and deliver all such further instruments and documents and take such further actions as may be reasonably requested to further confirm, carry out and otherwise accomplish the intent and purpose of this Agreement. Wherever consent or approval is required pursuant to any term of this Agreement, unless provided for to the contrary, such consent or approval shall not be unreasonably withheld or unduly delayed.

12.10 Survival

12.10.1 The termination of this Agreement will not affect or prejudice any rights or obligations which have accrued or arisen under this Agreement or such part thereof prior to the time of termination and those rights and obligations will survive the termination of this Agreement or part thereof. Notwithstanding any other provision of this Agreement, Sections 5.5 and 12.2 and all other provisions of this Agreement necessary to give effect thereto will survive the termination of all or any part of this Agreement.

12.11 Notice

12.11.1 All written notices and reports permitted or required to be delivered by the provisions of this Agreement shall be deemed so delivered on the earlier of: (a) the time delivered by hand; (b) two (2) business days after placement with a commercial courier service; for express delivery; (c) with regard to Cold Stone, ten (10) days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the other party at the respective address listed below; or (d) the date of actual receipt by a party with regard to any of the foregoing delivery methods.

12.11.2 For purposes of this Agreement, the parties agree that notice to Cold Stone shall be addressed as follows:

Kahala Franchise Corp.
9311 E Via de Ventura
Scottsdale, AZ 85258
Attn: General Counsel

With a copy to:

Kahala Franchise Corp.
9311 E Via de Ventura
Scottsdale, AZ 85258
Attn: Brand President of Cold Stone Creamery

And to RMCF shall be addressed as:

Rocky Mountain Chocolate Factory, Inc.
265 Turner Drive
Durango, CO 81303
Attn: Chief Operating Officer

With a copy to:

Rocky Mountain Chocolate Factory, Inc.
265 Turner Drive
Durango, CO 81303
Attn: Chief Executive Officer

The parties may change these addresses from time to time upon written notice to the other.

12.12 Entire Agreement

This Agreement and any schedules are the entire agreement between the parties, and supersedes all previous agreements and understandings between the parties, relating to the subject matter hereof. There are no conditions, representations, warranties or other agreements between the parties in connection with the subject matter of this Agreement, whether oral or written, express or implied, statutory or otherwise, except as specifically set out in this Agreement.

12.13 Test Stores

Notwithstanding any Section in this Agreement to the contrary, the parties agree that the test stores opened pursuant to that Test License Agreement between Cold Stone and RMCF dated April 4, 2009 will be governed by their respective test agreements and will not be subject to this Agreement unless and until the test agreement regarding these locations expire and the Cold Stone Franchisees at these locations execute an Amendment (where such locations are franchised) and at such time, these locations will be governed by the terms of this Agreement and the Amendment. In the event such locations are not franchised but are operated by either party, or by an Affiliate of either party, the parties shall at the expiration of the respective test agreement for such location confirm in writing their intention that such location be governed by this Agreement.

12.14 Receipt of Disclosure

Each party acknowledges receipt of a copy of the other party’s UFDD, at least fourteen (14) days prior to execution of this Agreement or payment of any consideration.

12.15 Joint and Several

If two or more individuals, corporations, partnerships or other entities (or any combination of two or more thereof) shall sign or be subject to the terms and conditions of this Agreement, the liability of each of them under this Agreement shall be deemed to be joint and several.

12.16 Limited Right of Set-Off

Except to the extent of the payments between the parties pursuant to Sections 3.5.2 and 7 of this Agreement, there shall be no right of set-off.

12.17 Counterparts

This Agreement may be executed by any party in one or more counterparts and when each party has executed at least one counterpart, each of such counterparts shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement.

12.18 Legal Counsel

The parties acknowledge that their respective legal counsel have reviewed and participated in settling the terms of this Agreement, and that any rule of construction to the effect that any ambiguity is to be resolved against the drafting party will not be applicable in the interpretation of this Agreement.

12.19 Remedies Cumulative

Notwithstanding any other provision of this Agreement, and unless otherwise expressly stated herein, all rights and remedies of any party under this Agreement are in addition to such party’s other rights and remedies and are cumulative, not alternative.

12.20 Amendment and Supplement

This Agreement, including each schedule to this Agreement, may not be amended or supplemented except by mutual written agreement of both parties. Any such agreement will expressly state that it is intended to amend or supplement, as the case may be, this Agreement.

12.21 Execution of Agreement

This Agreement may be executed in counterparts, each of which when executed and delivered shall be deemed an original, and such counterparts together shall constitute one and the same instrument.

12.22 Time of Essence

Time will be of the essence of this Agreement in all respects.

BY SIGNING BELOW, the Parties agree to be bound by the terms of this Agreement as of the date of this Agreement first Above mentioned.


ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

Per:	/s/ Bryan J. Merryman

	Name:	Bryan J. Merryman
	Title:	Chief Operating Officer

(I have authority to bind the corporation)

KAHALA FRANCHISE CORP.

Per:	/s/ Michael Reagan

	Name:	Michael Reagan
	Title:	EVP & General Council

(I have authority to bind the corporation)

Schedule A
List of Pre-Approved locations for Co-Branded Stores

(This material has been omitted pursuant to a request for confidential treatment and such
material has been filed separately with the Commission.)

Schedule B
Amendment to Cold Stone Franchise Agreement

(This material has been omitted pursuant to a request for confidential treatment and such
material has been filed separately with the Commission.)

Schedule C
Sales Reports

Sales Reports to RMCF:

RMCF Products and RMCF-branded items:

Gross RMCF Sales
Net RMCF Sales

Cold Stone Products:

Cold Stone Sales
Cold Stone Prior Year Sales

Exhibit 31.1

Certification Pursuant To Rules 13a-14(a) And 15d-14(a) Under The Securities Exchange Act Of
1934, As Adopted Pursuant To The Sarbanes-Oxley Act of 2002

I, Franklin E. Crail, certify that:

1. I have reviewed this report on Form 10-Q of Rocky Mountain Chocolate Factory, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: October 13, 2009	/s/ Franklin E. Crail
	Franklin E. Crail, President, Chief Executive Officer and Chairman of the Board of Directors

Exhibit 31.2

Certification Pursuant To Rules 13a-14(a) And 15d-14(a) Under The Securities Exchange Act Of
1934, As Adopted Pursuant To The Sarbanes-Oxley Act of 2002

I, Bryan J. Merryman, certify that:

1. I have reviewed this report on Form 10-Q of Rocky Mountain Chocolate Factory, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: October 13, 2009	/s/ Bryan J. Merryman
	Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer, Treasurer and Director

Exhibit 32.1

Certification of Chief Executive Officer

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of Rocky Mountain Chocolate Factory, Inc. (the “Company”) on Form 10-Q for the quarterly period ended August 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer certifies, in his capacity as such, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated: October 13, 2009	By	/s/ Franklin E. Crail
		Franklin E. Crail, President, Chief Executive Officer and Chairman of the Board of Directors

Exhibit 32.2

Certification of Chief Financial Officer

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated: October 13, 2009	By	/s/ Bryan J. Merryman
		Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer, Treasurer and Director