NOBLE ROMANS INC - Quarter Report: 2017 June (Form 10-Q)
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2017
Commission file number: 0-11104
NOBLE ROMAN’S, INC.
(Exact name of registrant as specified in its charter)
Indiana
|
35-1281154
|
(State or other jurisdiction of organization)
|
(I.R.S. Employer Identification No.)
|
One
Virginia Avenue, Suite 300
Indianapolis,
Indiana
|
46204
|
(Address of
principal executive offices)
|
(Zip Code)
|
(317)
634-3377
(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 X No ___
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 (§232.405 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 _X_
No ___
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definition of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large Accelerated
Filer __
|
Accelerated Filer
__
|
Non-Accelerated
Filer __ (do not check if smaller reporting company)
|
Smaller Reporting
Company X
|
Emerging Growth
Company __
|
|
If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ____
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes___ No _X_
As of
August 8, 2017, there were 20,783,032 shares of Common Stock, no
par value, outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The
following unaudited condensed consolidated financial statements are
included herein:
Condensed consolidated balance sheets as of December 31,
2016 and June 30, 2017
(unaudited)
|
Page
3
|
|
|
Condensed consolidated statements of operations for the
three-month and six-month periods ended June 30, 2016 and
2017 (unaudited)
|
Page
4
|
|
|
Condensed
consolidated statements of changes in stockholders' equity
for the six-month period ended June 30,
2017 (unaudited)
|
Page
5
|
|
|
Condensed consolidated statements of cash flows for the
six-month periods ended June 30, 2016 and
2017 (unaudited)
|
Page
6
|
|
|
Notes
to condensed consolidated financial statements
(unaudited)
|
Page
7
|
2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
Assets
|
December
31,
2016
|
June
30,
2017
|
Current
assets:
|
|
|
Cash
|
$477,928
|
$223,192
|
Accounts
receivable - net
|
1,828,534
|
2,191,043
|
Inventories
|
754,418
|
744,233
|
Prepaid
expenses
|
568,386
|
765,108
|
Deferred
tax asset - current portion
|
925,000
|
-
|
Total
current assets
|
4,554,266
|
3,923,576
|
|
|
|
Property and
equipment:
|
|
|
Equipment
|
1,963,957
|
2,238,470
|
Leasehold
improvements
|
88,718
|
271,697
|
Construction
and equipment in progress
|
351,533
|
-
|
|
2,404,208
|
2,510,167
|
Less
accumulated depreciation and amortization
|
1,194,888
|
1,280,116
|
Net
property and equipment
|
1,209,320
|
1,230,051
|
Deferred tax asset
(net of current portion)
|
8,696,870
|
9,329,392
|
Goodwill
|
278,466
|
278,466
|
Other assets
including long-term portion of receivables - net
|
5,159,937
|
5,740,129
|
Total
assets
|
$19,898,859
|
$20,501,614
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
Current
liabilities:
|
|
|
Current
portion of term loan payable to bank
|
$655,725
|
$1,038,591
|
Current
portion of loan payable to Super G
|
1,130,765
|
1,483,270
|
Accounts
payable and accrued expenses
|
339,125
|
354,010
|
Total
current liabilities
|
2,125,615
|
2,875,871
|
|
|
|
Long-term
obligations:
|
|
|
Term
loan payable to bank (net of current portion)
|
710,729
|
-
|
Loan
payable to Super G (net of current portion)
|
718,175
|
-
|
Notes
payable to officers
|
310,000
|
910,000
|
Notes
payable to Kingsway America
|
600,000
|
-
|
Convertible
notes payable
|
769,835
|
956,427
|
Derivative
warrant liability
|
210,404
|
344,178
|
Derivative
conversion liability
|
435,671
|
613,224
|
Total
long-term liabilities
|
3,754,814
|
2,823,829
|
|
|
|
Stockholders'
equity:
|
|
|
Common
stock – no par value (40,000,000 shares authorized,
20,783,032
issued
and outstanding as of December 31, 2016 and June 30,
2017)
|
24,308,297
|
24,318,165
|
Accumulated
deficit
|
(10,289,867)
|
(9,516,251)
|
Total
stockholders' equity
|
14,018,430
|
14,801,914
|
Total
liabilities and stockholders’ equity
|
$19,898,859
|
$20,501,614
|
See accompanying notes to condensed consolidated financial
statements (unaudited).
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
Three-Months
Ended
June
30,
|
Six-Months
Ended
June
30,
|
||
|
2016
|
2017
|
2016
|
2017
|
Revenue:
|
|
|
|
|
Royalties
and fees
|
$1,874,235
|
$1,715,674
|
$3,590,546
|
$3,328,594
|
Administrative
fees and other
|
10,635
|
11,871
|
21,709
|
23,941
|
Restaurant
revenue - Craft Pizza & Pub
|
-
|
459,907
|
-
|
766,217
|
Restaurant
revenue - non-traditional
|
55,554
|
279,034
|
107,047
|
560,352
|
Total
revenue
|
1,940,424
|
2,466,486
|
3,719,302
|
4,679,104
|
Operating
expenses:
|
|
|
|
|
Salaries
and wages
|
232,601
|
242,187
|
483,909
|
481,894
|
Trade
show expense
|
130,441
|
123,456
|
258,877
|
245,112
|
Travel
expense
|
34,407
|
48,134
|
95,674
|
108,428
|
Broker
commissions
|
21,821
|
-
|
21,821
|
-
|
Other
operating expenses
|
179,971
|
229,044
|
375,284
|
427,734
|
Restaurant
expenses - Craft Pizza & Pub
|
-
|
341,971
|
-
|
555,117
|
Restaurant
expenses - non-traditional
|
44,173
|
275,023
|
89,905
|
548,396
|
Depreciation and
amortization
|
31,675
|
59,870
|
61,087
|
111,763
|
General and
administrative
|
384,666
|
407,615
|
790,475
|
812,087
|
Total
expenses
|
1,059,755
|
1,727,300
|
2,177,032
|
3,290,531
|
Operating
income
|
880,669
|
739,186
|
1,542,270
|
1,388,573
|
|
|
|
|
|
Interest
|
82,735
|
298,759
|
137,941
|
619,753
|
Loss on restaurant
discontinued
|
-
|
-
|
36,776
|
-
|
Adjust valuation of
receivables
|
750,659
|
-
|
750,659
|
-
|
Change in fair
value of derivatives
|
-
|
(314,900)
|
-
|
(297,273)
|
Income
before income taxes
|
47,275
|
755,327
|
616,894
|
1,066,093
|
|
|
|
|
|
Income tax
expense
|
15,877
|
174,255
|
235,699
|
292,477
|
Net
income
|
$31,398
|
$581,072
|
$381,195
|
$773,616
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share – basic:
|
|
|
|
|
Net
income
|
$.00
|
$.03
|
$.02
|
$.04
|
Weighted average
number of common shares outstanding
|
20,483,091
|
20,783,032
|
20,780,727
|
20,783,032
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
Net
income
|
$.00
|
$.02
|
$.02
|
$.03
|
Weighted average
number of common shares outstanding
|
20,974,419
|
25,774,314
|
20,972,114
|
25,569,895
|
See accompanying notes to condensed consolidated financial
statements (unaudited).
4
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in
Stockholders' Equity
(Unaudited)
|
Common Stock
|
Accumulated
|
|
|
|
Shares
|
Amount
|
Deficit
|
Total
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
20,783,032
|
$24,308,297
|
$(10,289,867)
|
$14,018,430
|
|
|
|
|
|
Net
income for six months ended June
30, 2017
|
-
|
-
|
773,616
|
773,616
|
|
|
|
|
|
Amortization
of value of employee stock
options
|
-
|
9,868
|
-
|
9,868
|
|
|
|
|
|
Balance
at June 30, 2017
|
20,783,032
|
$24,318,165
|
$(9,516,251)
|
$14,801,914
|
See accompanying notes to condensed consolidated financial
statements (unaudited).
5
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
Six
Months
Ended June
30,
|
|
OPERATING
ACTIVITIES
|
2016
|
2017
|
Net
income
|
$381,195
|
$773,616
|
Adjustments
to reconcile net income to net cash provided (used) by
operating activities:
|
|
|
Depreciation
and amortization
|
37,466
|
262,540
|
Deferred
income taxes
|
163,824
|
292,477
|
Non-cash
expenses
|
-
|
24,526
|
Change
in fair value of derivative
|
-
|
(297,273)
|
Changes
in operating assets and liabilities:
|
|
|
(Increase)
decrease in:
|
|
|
Accounts
receivable
|
(215,090)
|
(362,509)
|
Inventories
|
(147,928)
|
10,185
|
Prepaid
expenses
|
(197,139)
|
(93,013)
|
Other
assets
|
(674,176)
|
(580,190)
|
Increase
(decrease) in:
|
|
|
Accounts
payable and accrued expenses
|
(588,392)
|
152,396
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
(1,240,240)
|
182,755
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
Purchase
of property and equipment
|
(5,354)
|
(209,194)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(5,354)
|
(209,194)
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
Payment
of principal on bank term loans
|
(273,219)
|
(327,863)
|
Payment
of principal on Super G Funding, LLC loan
|
(29,000)
|
(415,670)
|
Payment
of Kingsway America loan
|
-
|
(600,000)
|
Proceeds
from Super G Funding, LLC
|
1,902,917
|
-
|
Proceeds
from officers loan
|
135,000
|
600,000
|
Proceeds
from convertible notes payable
|
-
|
652,746
|
NET
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES
|
1,735,698
|
(90,787)
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
Payment
of obligations from discontinued operations
|
(58,603)
|
(137,510)
|
|
|
|
Increase (decrease)
in cash
|
431,501
|
(254,736)
|
Cash at beginning
of period
|
194,021
|
477,928
|
Cash at end of
period
|
$625,522
|
$223,192
|
|
|
|
Supplemental
schedule of investing and financing activities
|
|
|
|
|
|
Cash paid for interest
|
$129,013
|
$416,254
|
See accompanying notes to condensed consolidated financial
statements (unaudited).
6
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - The accompanying unaudited interim condensed consolidated
financial statements, included herein, have been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations. These condensed consolidated statements have been
prepared in accordance with the Company’s accounting policies
described in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2016 and should be read in conjunction with
the audited consolidated financial statements and the notes thereto
included in that report. Unless the context indicates otherwise,
references to the “Company” mean Noble Roman’s,
Inc. and its subsidiaries.
In the opinion of the management of the Company, the information
contained herein reflects all adjustments necessary for a fair
presentation of the results of operations and cash flows for the
interim periods presented and the financial condition as of the
dates indicated, which adjustments are of a normal recurring
nature. The results for the three-month and six-month periods ended
June 30, 2017, respectively, are not necessarily indicative of the
results to be expected for the full year ending December 31,
2017.
Note 2
– Royalties and fees include initial franchise fees of
$77,000 and $128,000 for the three-month and six-month periods
ended June 30, 2016, and $66,000 and $122,000 for the three-month
and six-month periods ended June 30, 2017, respectively. Royalties
and fees included equipment commissions of $6,000 and $10,000 for
the three-month and six-month periods ended June 30, 2016, and
$10,000 and $18,000 for the three-month and six-month periods ended
June 30, 2017, respectively. Royalties and fees including interest
per franchise agreements, less initial franchise fees and equipment
commissions, were $1.8 million and $3.5 million for the respective
three-month and six-month periods ended June 30, 2016, and $1.6
million and $3.2 million for the respective three-month and
six-month periods ended June 30, 2017. Most of the cost for the
services required to be performed by the Company are incurred prior
to the franchise fee income being recorded, which is based on a
contractual liability of the franchisee.
There
were 2,768 franchises/licenses in operation on December 31, 2016
and 2,811 franchises/licenses in operation on June 30, 2017. During
the six-month period ended June 30, 2017, there were 64 new outlets
opened and 21 outlets closed. In the ordinary course, grocery
stores from time to time add our licensed products, remove them and
may subsequently re-offer them. Therefore, it is unknown how many
licensed grocery store units included in the count above have left
the system.
Note 3
- The following table sets forth the calculation of basic and
diluted earnings per share for the three-month and six-month
periods ended June 30, 2016:
7
|
Three
Months Ended June 30, 2016
|
||
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
Net
income
|
$31,398
|
20,783,032
|
$.00
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
Options
|
-
|
191,387
|
-
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
Net income per
share with assumed conversions
|
$31,398
|
20,974,419
|
$.00
|
|
Six Months
Ended June 30, 2016
|
||
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
Net
income
|
$381,195
|
20,780,727
|
$.02
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
Options
|
-
|
191,387
|
-
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
Net
income
|
$381,195
|
20,972,114
|
$.02
|
The
following table sets forth the calculation of basic and diluted
earnings per share for the three-month and six-month periods ended
June 30, 2017:
|
Three Months Ended
June 30, 2017
|
||
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
Net
income
|
$581,072
|
20,783,032
|
$.03
|
Effect
of dilutive securities
|
|
|
|
Options
and warrants
|
-
|
191,282
|
|
Convertible
notes
|
37,174
|
4,800,000
|
-
|
Dilutive
earnings per share
|
|
|
|
Net
income
|
$618,246
|
25,774,314
|
$.02
|
|
Six Months Ended
June 30, 2017
|
||
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
Net
income
|
$773,616
|
20,783,032
|
$.04
|
Effect
of dilutive securities
|
|
|
|
Options
and warrants
|
-
|
191,282
|
|
Convertible
notes
|
71,303
|
4,595,580
|
-
|
Dilutive
earnings per share
|
|
|
|
Net
income
|
$844,919
|
25,569,895
|
$.03
|
8
Note 4
- . The Financial Accounting Standards Board (the
“FASB”) recently issued Accounting Standards Update
(“ASU”) 2015-17 as part of its Simplification
Initiative. The amendments eliminate the guidance in Topic 740,
Income Taxes, that required an entity to separate deferred tax
liabilities and assets between current and non-current amounts in a
classified balance sheet. Rather, deferred taxes are now presented
as non-current under the new standard. In the balance sheet as of
December 31, 2016, under the previous guidance, $925,000 of the
deferred tax asset was shown in current assets and with the current
guidance, the deferred tax asset is all presented as
non-current.
Note 5
- The accounting treatment of derivative financial instruments
requires that the Company record these instruments at their fair
values as of the inception date of the agreement and at fair value
as of each subsequent balance sheet date. Any change in fair value
is recorded as non-operating, non-cash income or expense for each
reporting period at each balance sheet date. The Company reassesses
the classification of its derivative instruments at each balance
sheet date. If the classification changes as a result of events
during the period, the contract is reclassified as of the date of
the event that caused the reclassification.
As
described in Note 3 to the consolidated financial statements
included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2016, in 2016 and the first quarter of
2017, the Company conducted a private placement (the
“Offering”) of Units with each Unit consisting of a
convertible promissory note (collectively, the “Notes”)
and a warrant to purchase shares of the Company’s common
stock (collectively, the “Warrants”) for which Divine
Capital Markets, LLC served as the placement agent (the
“Placement Agent”). The Company issued in the Offering
a total of $2.4 million principal amount of Notes and Warrants to
purchase up to 2.4 million shares of the Company’s common
stock.
The
fair value of the derivative instruments, along with the cash
Placement Agent fees, are deducted from the carrying value of the
Notes, as original issue discount (“OID”). The OID is
amortized over the term of the Notes using the effective interest
rate method.
Activity
related to the Units during the first quarter of 2017 is as
follows:
Gross Proceeds
from additional convertible notes
|
$800,000
|
Placement Agent
Fees
|
104,000
|
Fair Value of
Warrants
|
106,363
|
Fair Value of
Conversion Features
|
447,586
|
Fair Value of
Placement Agent Warrants
|
54,650
|
Net Amount
Allocable to Notes
|
87,401
|
At June
30, 2017, the balance of the Notes is comprised of:
Face
Value
|
$2,400,000
|
Unamortized
OID
|
1,443,573
|
Carrying
Value
|
956,427
|
9
To
measure the fair value of derivative instruments, the Company
utilizes Monte Carlo models that value a warrant issued to Kingsway
America, Inc. (the “Kingsway Warrant”), the embedded
conversion feature in the Notes (the “Conversion
Feature”), the Warrants and the warrants issued to the
Placement Agent (the “Placement Agent Warrants”). The
Monte Carlo models are based on future projections of the various
potential outcomes of each instrument, giving consideration to the
terms of each instrument. A discounted average cash flow over the
various scenarios is completed to determine the value of the
instrument.
The
table below provides a summary of the changes in fair value, of all
financial assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3)
during the quarter ended June 30, 2017:
|
Kingsway
Warrant
|
Conversion
Feature
|
Warrants
|
Placement Agent
Warrants
|
Total
|
Balance December
31, 2016
|
$68,335
|
$435,672
|
$93,387
|
$48,684
|
$646,078
|
Issuance During
First Quarter
|
-
|
447,586
|
106,363
|
54,650
|
608,599
|
Change in Fair
Value of Derivative Liabilities
|
83,655
|
(270,034)
|
(74,143)
|
(36,751)
|
(297,273)
|
Balance - June 30,
2017
|
$151,990
|
$613,224
|
$125,607
|
$66,583
|
$957,404
|
Note 6
- The Company evaluated subsequent events through the date the
financial statements were issued and filed with SEC. Since June 30,
2017, the Company has entered into two new 10-year leases with
certain options to renew for two additional Craft Pizza & Pub
locations. There were no subsequent events that required
recognition or disclosure beyond what is disclosed in this
report.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations
General Information
Noble Roman’s, Inc., an Indiana corporation incorporated in
1972 with three wholly-owned subsidiaries, Pizzaco, Inc., N.R.
Realty, Inc. and RH Roanoke, Inc., sells and services franchises
and licenses for non-traditional foodservice operations and
stand-alone locations under the trade names “Noble
Roman’s Pizza,” “Noble Roman’s
Take-N-Bake,” "Noble Roman's Craft Pizza & Pub" and
“Tuscano’s Italian Style Subs.” The
concepts’ hallmarks include high quality pizza and sub
sandwiches, along with other related menu items, simple operating
systems, fast service times, labor-minimizing operations,
attractive food costs and overall affordability. Since 1997, the
Company has concentrated its efforts and resources primarily on
franchising and licensing for non-traditional locations and now has
awarded franchise and/or license agreements in 50 states plus
Washington, D.C., Puerto Rico, the Bahamas, Italy, the Dominican
Republic and Canada. During 2016, the Company created a new
stand-alone concept called “Noble Roman’s Craft Pizza
& Pub” with the first location opening on January 31,
2017. The Company recently signed leases for two additional
locations. The Company has focused its sales efforts on (1)
franchises/licenses for non-traditional locations primarily in
convenience stores and entertainment facilities and (2) license
agreements for grocery stores to sell the Noble Roman’s
Take-N-Bake Pizza. In 2017, the Company plans to franchise the
Noble Roman's Craft Pizza & Pub concept while maintaining its
efforts on franchising and licensing non-traditional locations.
Pizzaco, Inc. currently owns and operates two Company
non-traditional locations, RH Roanoke, Inc. operates a Company
non-traditional location and Noble Roman’s, Inc. owns and
operates a Craft Pizza & Pub location. The Company intends to
add three more such locations and to use those as a base to support
the franchising of that concept. References in this report to the
“Company” are to Noble Roman’s, Inc. and its
subsidiaries, unless the context requires otherwise.
Noble Roman’s Pizza
The hallmark of Noble Roman’s Pizza is “Superior
quality that our customers can taste.” Every ingredient and
process has been designed with a view to produce superior
results.
●
A
fully-prepared pizza crust that captures the made-from-scratch
pizzeria flavor which gets delivered to non-traditional locations
in a shelf-stable condition so that dough handling is no longer an
impediment to a consistent product in non-traditional
locations.
●
In-store
fresh made crust with only specially milled flour with above
average protein and yeast for use in its Noble Roman’s Craft
Pizza & Pub locations, the first of which opened in January
2017.
●
Fresh
packed, uncondensed and never cooked sauce made with secret spices,
parmesan cheese and vine-ripened tomatoes in all
venues.
●
100%
real cheese blended from mozzarella and Muenster, with no soy
additives or extenders.
●
100%
real meat toppings, with no additives or extenders, a distinction
compared to many pizza concepts.
●
Vegetable
and mushroom toppings that are sliced and delivered fresh, never
canned in non-traditional locations and vegetables sliced fresh on
premises in the Noble Roman’s Craft Pizza & Pub
locations.
11
●
An
extended product line that includes breadsticks and cheesy stix
with dip, pasta, baked sandwiches, salads, wings and a line of
breakfast products for the non-traditional locations.
Noble Roman’s Take-N-Bake
The Company developed a take-n-bake version of its pizza as an
addition to its menu offerings. The take-n-bake pizza is designed
as an add-on component for new and existing convenience stores and
as an offering for grocery store delis. The Company offers the
take-n-bake program in grocery stores under a license agreement
rather than a franchise agreement. In convenience stores,
take-n-bake is an available menu offering under the existing
franchise/license agreement. The Company uses the same high quality
pizza ingredients for its take-n-bake pizza as with its baked
pizza, with slight modifications to portioning for enhanced home
baking performance.
Tuscano’s Italian Style Subs
Tuscano’s Italian Style Subs is a separate non-traditional
location concept that focuses on sub sandwich menu items but only
in locations that also have a Noble Roman’s franchise.
Tuscano’s was designed to be comfortably familiar from a
customer’s perspective but with many distinctive features
that include an Italian-themed menu. The ongoing royalty for a
Tuscano’s franchise is identical to that charged for a Noble
Roman’s Pizza franchise. The Company has a grab-n-go service
system for a selected portion of the Tuscano’s menu in an
attempt to add sales opportunities for non-traditional Noble
Roman’s Pizza locations.
Noble Roman’s Craft Pizza & Pub
In January 2017, the Noble Roman’s Craft Pizza & Pub
opened in Westfield, Indiana, a prosperous and growing community on
the northwest side of Indianapolis. Noble Roman’s Craft Pizza
& Pub is designed to harken back to the Company’s early
history when it was known simply as “Pizza Pub.” Like
then, and like the new full-service pizza concepts today, ordering
takes place at the counter and food runners deliver orders to the
dining room for dine-in guests. The Company believes that Noble
Roman’s Craft Pizza & Pub features many enhancements over
the current competitive landscape. The restaurant features two
styles of hand-crafted, made-from-scratch pizzas with a selection
of 40 different toppings, cheeses and sauces from which to choose.
Beer and wine also are featured, with 16 different beers on tap
including both national and local craft selections. Wines include
16 high quality, affordably priced options by the bottle or glass
in a range of varietals. Beer and wine service is provided at the
bar and throughout the dining room.
The pizza offerings feature Noble Roman’s traditional
hand-crafted thinner crust as well as its signature deep-dish
Sicilian crust. New technology and extensive research and
development enable fast cook times, with oven speeds running only
2.5 minutes for traditional pies and 5.75 minutes for Sicilian
pies. Traditional pizza favorites such as pepperoni are options on
the menu, but also offered is a selection of original creations
such as “Pig in the Apple Tree,” a pizza featuring
bacon, diced apples, candied walnuts and gorgonzola cheese. The
menu also features a selection of contemporary and fresh,
made-to-order salads such as “Avocado Chicken Caesar,”
and fresh-cooked pasta like “Chicken Fettuccine
Alfredo.” The menu includes baked subs, hand-sauced wings and
a selection of desserts, as well as Noble Roman’s famous
Breadsticks with Spicy Cheese Sauce.
12
Additional enhancements include a glass enclosed “Dough
Room” where Noble Roman’s Dough Masters hand make all
pizza and breadstick dough from scratch in customer view. Also in
the dining room is a “Dusting & Drizzle Station”
where guests can customize their pizzas after they are baked with a
variety of toppings and drizzles, such as rosemary infused olive
oil, honey and Italian spices. Kids enjoy Noble Roman’s root
beer tap, which is part of a special menu for customers 12 and
younger. Throughout the dining room and the bar area are 13 large
and giant screen television monitors for sports and the nostalgic
black and white shorts featured in Noble Roman’s earlier
days.
Business Strategy
The
Company’s business strategy includes the following principal
elements:
1. Focus on revenue expansion through franchising/licensing
traditional and non-traditional locations:
Sales of Non-Traditional Franchises and Licenses. The
Company believes it has an opportunity for increasing unit and
revenue growth within its non-traditional venue. The
Company’s franchises/licenses in non-traditional locations
are foodservice providers within a host business and usually
require a substantially lower investment compared to stand-alone
traditional locations.
Sale of Traditional Franchises. The Company has developed the
next generation stand-alone prototype for its Noble Roman’s
Craft Pizza & Pub format. The Company has opened one location
as a Company-owned store and plans to open three additional
locations, followed by an aggressive plan to promote franchising in
concentric circles from those locations.
13
2. Leverage the results of research and development
advances.
The
Company has invested significant time and effort to create what it
considers to be competitive advantages in its products and systems
for both its non-traditional and traditional locations. The Company
will continue to make these advantages the focal point in its
marketing process. The Company believes that the quality and
freshness of its products, their cost-effectiveness, relatively
simple production and service systems, and its diverse, modularized
menu offerings will contribute to the Company’s strategic
attributes and growth potential. The menu items for the
non-traditional locations were developed to be delivered in a
ready-to-use format requiring only on-site assembly and baking
except for take-n-bake pizza, which is sold to bake at home. The
Company believes this process results in products that are great
tasting, quality consistent, easy to assemble, relatively low in
food cost, and require minimal labor, which allows for a
significant competitive advantage in the non-traditional locations
due to the speed and simplicity at which the products can be
prepared, baked and served to customers.
3. Aggressively communicate the Company’s competitive
advantages to its target market of potential franchisees and
licensees.
The
Company utilizes the following methods of reaching potential
franchisees and licensees and to communicate its product and system
advantages: (1) calling from both acquired and in-house prospect
lists; (2) frequent direct mail campaigns to targeted prospects;
(3) web-based lead capturing; and (4) live demonstrations at trade
and food shows. In particular, the Company has found that
conducting live demonstrations of its systems and products at
selected trade and food shows across the country allows it to
demonstrate advantages that can otherwise be difficult for a
potential prospect to visualize. There is no substitute for
actually tasting the difference in a product’s quality to
demonstrate the advantages of the Company’s products. The
Company carefully selects the national and regional trade and food
shows where it either has an existing relationship or considerable
previous experience to expect that such shows offer opportunities
for fruitful lead generation.
Business Operations
Distribution
The Company’s proprietary ingredients are manufactured
pursuant to the Company’s recipes and formulas by third-party
manufacturers under contracts between the Company and its various
manufacturers. These contracts require the manufacturers to produce
ingredients meeting the Company’s specifications and to sell
them to Company-approved distributors at prices negotiated between
the Company and the manufacturer.
At present, the Company has primary distributors strategically
located throughout the United States. The distributor agreements
require the primary distributors to maintain adequate inventories
of all ingredients necessary to meet the needs of the
Company’s franchisees and licensees in their distribution
areas for weekly deliveries to the franchisee/licensee locations
and to its grocery store distributors in their respective
territories. Each of the primary distributors purchases the
ingredients from the manufacturer at prices negotiated between the
Company and the manufacturers, but under payment terms agreed upon
by the manufacturer and the distributor, and distributes the
ingredients to the franchisee/licensee at a price determined by the
distributor agreement. Payment terms to the distributor are agreed
upon between each franchisee/licensee and the respective
distributor. In addition, the Company has agreements with numerous
grocery store distributors located in various parts of the country
which agree to buy the Company’s ingredients from one of the
Company’s primary distributors and to distribute those
ingredients only to their grocery store customers who have signed
license agreements with the Company.
14
Franchising
The Company sells franchises for both non-traditional and
traditional locations.
The
initial franchise fees are as follows:
Franchise
Format
|
Non-Traditional,
Except Hospitals
|
Hospitals
|
Walmart
|
Craft
Pizza
&
Pub
|
Noble
Roman’s Pizza
|
$7,500
|
$10,000
|
$12,500
|
$30,000(1)
|
(1)
With the sale of multiple traditional stand-alone franchises to a
single franchisee, the franchise fee for the first unit is $30,000,
the franchise fee for the second unit is $25,000 and the franchise
fee for the third unit and any additional unit is $20,000. The
Company has not yet begun selling any franchises for the Craft
Pizza & Pub.
The
franchise fees are paid upon signing the franchise agreement and,
when paid, are deemed fully earned and non-refundable in
consideration of the administration and other expenses incurred by
the Company in granting the franchises and for the lost and/or
deferred opportunities to grant such franchises to any other
party.
Licensing
Noble Roman’s Take-n-Bake Pizza licenses for grocery stores
are governed by a supply agreement. The supply agreement generally
requires the licensee to: (1) purchase proprietary ingredients only
from a Noble Roman’s-approved distributor; (2) assemble the
products using only Noble Roman’s approved ingredients and
recipes; and (3) display products in a manner approved by Noble
Roman’s using Noble Roman’s point-of-sale marketing
materials. Pursuant to the distributor agreements, the primary
distributors place an additional mark-up, as determined by the
Company, above their normal selling price on the key ingredients as
a fee for the Company in lieu of royalty. The distributors agree to
segregate this additional mark-up upon invoicing the licensee, to
hold the fees in trust for the Company and to remit them to the
Company within ten days after the end of each month.
Financial Summary
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results may differ from those estimates.
The Company periodically evaluates the carrying values of its
assets, including property, equipment and related costs, accounts
receivable and deferred tax assets, to assess whether any
impairment indications are present due to (among other factors)
recurring operating losses, significant adverse legal developments,
competition, changes in demand for the Company’s products or
changes in the business climate which affect the recovery of
recorded value. If any impairment of an individual asset is
evident, a charge will be provided to reduce the carrying value to
its estimated fair value.
15
The following table sets forth the percentage relationship to total
revenue of the listed items included in Noble Roman’s
consolidated statements of operations for the three-month periods
ended March 31, 2016 and 2017, respectively.
|
Three Months
Ended
June
30,
|
Six Months
Ended
June
30,
|
||
|
2016
|
2017
|
2016
|
2017
|
Royalties and
fees
|
96.6%
|
69.6%
|
96.6%
|
71.1%
|
Administrative fees
and other
|
.5
|
.5
|
.6
|
.5
|
Restaurant revenue
– Craft Pizza & Pub
|
-
|
18.6
|
-
|
16.4
|
Restaurant revenue
– non-traditional
|
2.9
|
11.3
|
2.8
|
12.0
|
Total
revenue
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
Operating
expenses:
|
|
|
|
|
Salaries
and wages
|
12.0
|
9.8
|
13.0
|
10.3
|
Trade
show expense
|
6.7
|
5.0
|
7.0
|
5.2
|
Broker
commissions
|
1.8
|
2.0
|
2.6
|
2.3
|
Travel
expense
|
1.1
|
-
|
.6
|
-
|
Other
operating expense
|
9.3
|
9.3
|
10.1
|
9.1
|
Restaurant
expenses – Craft Pizza & Pub
|
-
|
13.9
|
-
|
11.9
|
Restaurant
expenses – non-traditional
|
2.3
|
11.2
|
2.4
|
11.7
|
Depreciation and
amortization
|
1.6
|
2.4
|
1.6
|
2.4
|
General and
administrative
|
19.8
|
16.5
|
21.3
|
17.4
|
Total
expenses
|
54.6
|
70.1
|
58.6
|
70.3
|
Operating
income
|
45.4
|
29.9
|
41.4
|
29.7
|
Interest
|
4.3
|
12.1
|
3.7
|
13.3
|
Loss on restaurant
discontinued
|
-
|
-
|
1.0
|
-
|
Adjust
valuation of receivables
|
38.7
|
-
|
20.2
|
-
|
Change
in fair value of derivatives
|
-
|
(12.8)
|
-
|
(6.4)
|
Income
before income taxes
|
2.4
|
30.6
|
16.5
|
22.8
|
Income
tax
|
.8
|
7.1
|
6.2
|
6.3
|
Net
income
|
1.6%
|
23.5%
|
10.3%
|
16.5%
|
Results of Operations
Total
revenue increased from $1.9 million and $3.7 million to $2.5
million and $4.7 million during the respective three-month and
six-month periods ended June 30, 2017 compared to the corresponding
periods in 2016. Franchise fees and equipment commissions
(“upfront fees”) decreased from $83,000 to $76,000 for
the three-month period ended June 30, 2017 and increased from
$139,000 to $140,000 for the six-month period ended June 30, 2017,
compared to the corresponding periods in 2016. Royalties and fees
including interest per franchise agreements, less upfront fees,
decreased from $1.8 million and $3.5 million to $1.6 million and
$3.2 million for the respective three-month and six-month periods
ended June 30, 2017, compared to the corresponding periods in 2016.
The breakdown of royalties and fees less upfront fees, for the
respective three-month and six-month periods ended June 30, 2017
and 2016 were: royalties and fees from non-traditional franchises
other than grocery stores, including interest on receivables, were
$1.13 million and $2.15 million compared to $1.11 million and $2.11
million; royalties and fees from the grocery store take-n-bake were
$429,000 and $891,000 compared to $530,000 and $1.01 million;
royalties and fees from stand-alone take-n-bake franchises were
$15,000 and $32,000 compared to $88,000 and $211,000; and royalties
and fees from traditional locations were $61,000 and $118,000
compared to $60,000 and $120,000.
16
Since
2014, the Company has audited the reporting of sales for computing
royalties by each non-traditional franchise and plans to continue
to do so on an ongoing basis, the effect of which is unknown. The
Company estimates franchise sales based on product purchases as
reflected on distributor reports and, where under-reporting is
identified, the Company has invoiced franchisees on the unreported
amounts.
Restaurant
revenue – Craft Pizza & Pub, which opened January 31,
2017, was $460,000 and $766,000 for the three-month and six-month
periods ended June 30, 2017.
Restaurant
revenue – non-traditional increased from $56,000 to $279,000
and from $107,000 to $560,000 for the respective three-month and
six-month periods ended June 30, 2017, compared to the
corresponding periods in 2016. The reason for the increase was the
Company’s acquisition of two non-traditional locations from
franchisees in the fourth quarter of 2016. The Company currently
operates three non-traditional locations and intends to
re-franchise at least two of them once the Company identifies
appropriate franchisees.
Salaries
and wages decreased from 12.0% to 9.8% of total revenue and from
13.0% to 10.3% of total revenue for the respective three-month and
six-month periods ended June 30, 2017, compared to the
corresponding periods in 2016. Salaries and wages increased from
$233,000 to $242,000 and decreased from $484,000 to $482,000 for
the respective three-month and six-month periods ended June 30,
2017, compared to the corresponding periods in 2016.
Trade
show expenses decreased from 6.7% to 5.0% of total revenue and from
7.0% to 5.2% of total revenue for the respective three-month and
six-month periods ended June 30, 2017, compared to the
corresponding periods in 2016. Trade show expense decreased from
$130,000 to $123,000 and from $259,000 to $245,000, respectively
for the three-month and six-month periods ended June 30, 2017,
compared to the corresponding periods in 2016.
Travel
expenses increased from 1.8% of total revenue to 2.0% of total
revenue for the three-month period ended June 30, 2017 and
decreased from 2.6% to 2.3% for the six-month period ended June 30,
2017, both compared to the respective corresponding periods in
2016. Travel expense increased from $34,000 to $48,000 and from
$96,000 to $108,000, respectively, for the three-month and
six-month periods ended June 30, 2017, compared to the
corresponding periods in 2016.
Other
operating expenses represented the same percentage of sales for the
three-month period ended June 30, 2017, and decreased from 10.1% to
9.1% of total revenue, for the six-month period ended June 30,
2017, both compared to the corresponding periods in 2016. Operating
expenses increased from $180,000 to $229,000 and from $375,000 to
$428,000, respectively, for the three-month and six-month periods
ended June 30, 2017, compared to the corresponding periods in
2016.
Restaurant
expenses – Craft Pizza & Pub were $342,000 and $555,000
for the three-month and six-month periods ended June 30, 2017,
respectively. This was from the new Craft Pizza & Pub location
which opened on January 31, 2017. The Craft Pizza & Pub
operating expenses were approximately 72.2% of sales for an
operating margin of 27.8%.
17
Restaurant
expenses – non-traditional increased from 2.3% to 11.2% and
2.4% to 11.7% of total revenue for the respective three-month and
six-month periods ended June 30, 2017, compared to the
corresponding periods in 2016. The reason for the increase was the
Company’s acquisition of two non-traditional locations from
franchisees in the fourth quarter 2016. The Company currently
operates three non-traditional locations and intends to
re-franchise at least two of them once the Company identifies
appropriate franchisees.
Depreciation
and amortization increased from 1.6% to 2.4% of total revenue for
both the three-month and six-month periods ended June 30, 2017,
compared to corresponding periods in 2016. The primary reason for
the increase was the new Craft Pizza & Pub location that opened
January 31, 2017.
General
and administrative expenses decreased from 19.8% to 16.5% and from
21.3% to 17.4% of total revenue for the respective three-month and
six-month periods ended June 30, 2017, compared to the
corresponding periods in 2016. General and administrative expenses
increased from $385,000 to $408,000 and from $790,000 to $812,000,
respectively, for the three-month and six-month periods ended June
30, 2017, compared to the comparable periods in 2016.
Total
expenses increased from 54.6% to 70.1% and from 58.6% to 70.3% of
total revenue for the respective three-month and six-month periods
ended June 30 31, 2017, compared to the corresponding periods in
2016. Total expenses increased from $1.1 million to $1.7 million
and from $2.2 million to $3.3 million, respectively, for the
three-month and six month periods ended June 30, 2017, compared to
the corresponding periods in 2016. These increases in expenses were
the result of adding the new Craft Pizza & Pub location on
January 31, 2017 and acquiring the new non-traditional locations
from franchisees in the fourth quarter of 2016.
Operating
income decreased from 45.4% to 29.9% and from 41.4% to 29.7% of
total revenue for the respective three-month and six-month periods
ended June 30, 2017, compared to the corresponding periods in 2016.
The operating income decreased as a result of the decrease in
revenue from stand-alone take-n-bake of $179,000 and a decrease in
take-n-bake revenue from grocery stores of $116,000 which was
mostly offset by operating income of $213,000 from the new Craft
Pizza & Pub location which opened on January 31,
2017.
Interest
expense increased from 4.3% to 12.1% and from 3.7% to 13.3% of
total revenue for the respective three-month and six-month periods
ended June 30, 2017, compared to the corresponding periods in 2016.
Interest expense increased from $83,000 to $299,000 and from
$138,000 to $620,000, respectively, for the three-month and
six-month periods ended June 30, 2017 compared to the corresponding
periods in 2016. The breakdown of interest expense during the
six-month period ended June 30, 2017 was interest on the
convertible note of $123,000, interest on the bank term loan of
$51,000, interest on the Super G loan of $255,000, interest on the
Kingsway loan (which has been repaid) of $25,000, interest on loans
from officers of $34,000 and non-cash interest from amortizing the
value of derivative of $133,000. Total cash interest was $443,000
and non-cash interest expense was $176,000 for the six-month period
ended June 30, 2017 .
Net
income increased from $31,000 to $581,000 and from $381,000 to
$774,000 for the respective three-month and six-month periods ended
June 30, 2017, compared to the corresponding periods in 2016. This
increase was primarily the result of the $751,000 valuation
allowance taken in 2016 and none in 2017 plus the change in value
of change in fair value of derivatives of $297,000 partially offset
by the increased interest cost.
18
Liquidity and Capital Resources
The Company’s strategy in recent years has been to grow its
business by concentrating on franchising/licensing non-traditional
locations including grocery store delis to sell take-n-bake pizza
and franchising stand-alone locations. This strategy was intended
to not require significant increase in expenses. The focus on
franchising/licensing non-traditional locations will continue to be
a primary element of the Company’s strategy but, in addition,
over the past two years the Company has been developing a major
business initiative by re-designing and re-positioning its
stand-alone franchise for the next generation stand-alone prototype
called “Noble Roman’s Craft Pizza & Pub.” As
a result, the Company opened its first Craft Pizza & Pub on
January 31, 2017, plans to open and operate at least three more
locations and plans to launch a major franchising effort for the
Noble Roman’s Craft Pizza & Pub concept. The Company
currently operates three non-traditional locations in addition to
the new Craft Pizza &Pub location. Two of the three
non-traditional locations were previously operated by franchisees
but acquired by the Company in the fourth quarter of 2016. The
Company does not intend to take over any additional non-traditional
locations from franchisees and is in the process of attempting to
re-franchise one or both of the two recently acquired
non-traditional locations.
The Company’s current ratio was 1.4-to-1 as of June 30, 2017
compared to 2.1-to-1 as of December 31, 2016. The primary reason
for this decrease was reclassifying the current portion of deferred
tax asset to long-term in accordance with the Financial Accounting
Standards Board (the “FASB”) recently issued Accounting
Standards Update (“ASU”) 2015-17 as part of its
Simplification Initiative. In addition, since the Company’s
term loan with its bank matures March 31, 2018 and the Super G loan
matures in June 2018, both were moved into current liabilities. The
Company is actively pursuing the refinancing all of its existing
debt (which is described below) except the convertible notes, and
incorporating enough capacity in the refinancing to provide funds
for the three planned additional Craft Pizza & Pub
Company-owned locations and in the process lower its interest cost
and significantly reduce monthly debt service
requirement.
In 2012, the Company entered into a Credit Agreement with BMO
Harris Bank, N.A. (the “Bank”) for a term loan in the
amount of $5.0 million which was repayable in 48 equal monthly
principal installments of approximately $104,000 plus interest with
a final payment due in May 2016. In October 2013, the Company
entered into a First Amendment to the Credit Agreement (the
“First Amendment”). The First Amendment maintained the
terms of the term loan except for reducing the monthly principal
payments from $104,000 to approximately $80,700 and extending the
loan’s maturity to February 2017. All other terms and
conditions of the term loan remained the same including interest on
the unpaid principal at a rate per annum of LIBOR plus 4%. The
First Amendment also provided for a new term loan in the original
amount of $825,000 requiring monthly principal payments of
approximately $20,600 per month commencing in November 2013 and
continuing thereafter until the final payment in February 2017. The
term loan provided for interest on the unpaid principal balance to
be paid monthly at a rate per annum of LIBOR plus 6.08% per annum.
Proceeds from the new term loan were used to redeem the
Company’s Series B Preferred Stock which was earning a return
to the holders of 12% per annum.
In October 2014, the Company entered into a Second Amendment to its
Credit Agreement (the “Second Amendment”). Pursuant to
the Second Amendment, the Company borrowed $700,000 in the form of
a term loan repayable in 36 equal monthly installments of principal
in the amount of $19,444 plus interest on the unpaid balance of
LIBOR plus 6% per annum. The terms and conditions of the Credit
Agreement were otherwise unchanged. The Company used the proceeds
from the loan for additional working capital and open air display
coolers for grocery stores, as a result of the then recent growth
in the grocery store take-n-bake venue.
19
In July 2015, the Company borrowed $600,000 from a third-party
lender, evidenced by a promissory note which was to mature in July
2017. Interest on the note was payable at the rate of 8% per annum
quarterly in arrears and this loan was subordinate to borrowings
under the Company’s bank loan. In connection with the loan,
the Company issued, to the holder of the promissory note, a warrant
entitling the holder to purchase up to 300,000 shares of the
Company’s common stock at an exercise price per share of
$2.00. The warrant expires in July 2020. The Company repaid this
loan in January 2017 with the proceeds of a $600,000 loan from Paul
W. Mobley, an executive officers of the Company, at an interest
rate of 7% per annum payable quarterly in arrears. The loan matures
in March 2018. Per the anti-dilution provisions of the warrant, as
of January 2017, the warrant entitles the holder to purchase 1.2
million shares of the Company’s common stock at a price of
$.50 per share.
In December 2015, the Company borrowed $100,000 from Paul W. Mobley
and $75,000 from A. Scott Mobley, two executive officers of the
Company, which are evidenced by promissory notes that were
originally to mature in January 2017. In January 2016, $25,000 of
the previous borrowing from A. Scott Mobley was repaid. In February
2016, A. Scott Mobley loaned the Company another $10,000, evidenced
by a promissory note. In April 2016, the Company borrowed an
additional $150,000 from Paul W. Mobley, evidenced by a promissory
note. Proceeds were used for working capital. In conjunction with
the loan from Super G Funding, LLC (“Super G”), as
described below, Paul W. Mobley subordinated his $250,000 note and
A. Scott Mobley subordinated his $60,000 note to the Super G loan
and agreed to extend the maturity of those notes to June 10, 2018.
Interest on the notes are payable at the rate of 10% per annum paid
quarterly in arrears and the loans are unsecured.
In January 2016, the Company entered into a Third Amendment to its
Credit Agreement (the “Third Amendment”). Pursuant to
the Third Amendment, the Company consolidated its three term loans
with the Bank into a new term loan of $1,967,000 repayable in
monthly payments of principal in the amount of $54,654 plus
interest on the unpaid balance of LIBOR plus 6% per annum. The new
term loan was to mature March 31, 2017 when the remaining principal
balance would have become due. In addition, the Third Amendment
provided for a revolving loan in the maximum amount of $500,000
with a maturity of March 31, 2017.
In June 2016, the Company borrowed $2.0 million from Super G and
used those funds: (1) to repay the $500,000 revolving Bank loan and
(2) for working capital purposes. This loan is to be repaid in the
total amount of $2.7 million in regular semi-monthly payments over
a two-year period.
In October 2016, the Company began a private placement (the
“Offering”) of convertible notes (“Notes”)
and warrants (“Warrants”) and engaged Divine Capital
Markets, LLC to serve as placement agent for the Offering (the
“Placement Agent”). As of December 31, 2016, the
Company had issued Notes in the aggregate principal amount of $1.6
million and Warrants to purchase up to 1.6 million shares of the
Company’s common stock. In January 2017, the Company
completed the Offering and issued an additional $800,000 in Notes
and Warrants to purchase up to an additional 800,000 shares, for a
total of $2.4 million principal amount of Notes and Warrants to
purchase up to 2.4 million shares of the Company’s common
stock. These Notes and Warrants are described in greater detail in
Note 3 to the consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2016. The Company used the net proceeds of the Notes
to fund the opening of a Noble Roman’s Craft Pizza & Pub
restaurant and for general corporate purposes.
20
In January 2017, the Company entered into a Fourth Amendment to its
Credit Agreement (the “Fourth Amendment”). Pursuant to
the Fourth Amendment, the Bank extended the maturity of the term
loan to March 31, 2018. All other terms and conditions of the loan
remain the same including the monthly principal payments and the
interest rate. In addition, the Company borrowed $600,000 from Paul
Mobley, evidenced by a promissory note at 7% interest which was
used to repay the Kingsway America loan of $600,000 at 8% interest
which was to mature in July 2017.
As a result of the financial arrangements described above and the
Company’s cash flow projections, the Company believes it will
have sufficient cash flow to meet its obligations and to carry out
its current business plan during 2017. Following the completion of
the Offering, the Company has begun efforts to refinance all of its
loans except the Notes, into one loan with an extended amortization
schedule. The Company’s cash flow projections for the next
two years are primarily based on the Company’s strategy of
growing the non-traditional franchising/licensing venues including
growth in the number of grocery store locations licensed to sell
the take-n-bake pizza and to open and operate three additional
Noble Roman’s Craft Pizza & Pub locations, as described
above, plus launching an aggressive franchising program for Noble
Roman’s Craft Pizza & Pub restaurants.
The Company does not anticipate that any of the recently issued
Statement of Financial Accounting Standards will have a material
impact on its Consolidated Statement of Operations or its
Consolidated Balance Sheet except:
In February 2016, the FASB issued ASU 2016-02, its leasing standard
for both lessees and lessors. Under its core principle, a lessee
will recognize lease assets and liabilities on the balance sheet
for all arrangements with terms longer than 12 months. The new
standard takes effect in 2019 for public business
entities.
In May 2014, the FASB issued ASU 2014-09, regarding revenue on
contracts with customers. These new standards become effective in
January 2018. The Company is currently evaluating the impact, if
any, of this Accounting Standards Update.
The Company does not believe these accounting pronouncements will
have a material adverse effect on its financial condition or
results of operations.
Forward-Looking Statements
The statements contained above in Management’s Discussion and
Analysis concerning the Company’s future revenues,
profitability, financial resources, market demand and product
development are forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) relating
to the Company that are based on the beliefs of the management of
the Company, as well as assumptions and estimates made by and
information currently available to the Company’s management.
The Company’s actual results in the future may differ
materially from those indicated by the forward-looking statements
due to risks and uncertainties that exist in the Company’s
operations and business environment, including, but not limited to,
completion of its proposed financing, competitive factors and
pricing pressures, non-renewal of franchise agreements, shifts in
market demand, the success of new franchise programs, including the
new Noble Roman’s Craft Pizza & Pub format, the
Company’s ability to successfully operate an increased number
of Company-owned restaurants, general economic conditions, changes
in demand for the Company’s products or franchises, the
Company’s ability to service and refinance its loans, the
impact of franchise regulation, the success or failure of
individual franchisees and changes in prices or supplies of food
ingredients and labor as well as the factors discussed under
“Risk Factors” in our Annual Report on Form 10-K for
the year ended December 31, 2016. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions or
estimates prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated,
expected or intended.
21
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk
The
Company’s exposure to interest rate risk relates primarily to
its variable-rate debt. As of June 30, 2017, the Company had
outstanding variable interest-bearing debt in the aggregate
principal amount of $1.0 million. The Company’s current
borrowings are at a variable rate tied to LIBOR plus 6% per annum
adjusted on a monthly basis. Based on its current debt structure,
for each 1% increase in LIBOR the Company would incur increased
interest expense of approximately $9,000 over the succeeding
12-month period.
ITEM 4. Controls and Procedures
Based on their evaluation as of the end of the period covered by
this report, A. Scott Mobley, the Company’s President and
Chief Executive Officer, and Paul W. Mobley, the Company’s
Executive Chairman and Chief Financial Officer, have concluded that
the Company’s disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) are effective. There have been no changes in
internal controls over financial reporting during the period
covered by this report that have materially affected, or are
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 involved in material litigation against
it.
The
Company offered and issued the Notes and Warrants in reliance on
Section 4(a)(2) and Rule 506 of Regulation D of the Securities Act
of 1933, as amended. The Notes and Warrants were issued to
accredited investors in privately negotiated transactions and not
pursuant to any public solicitation.
ITEM 6. Exhibits.
(a)
Exhibits: See the accompanying Exhibit Index.
22
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.
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NOBLE
ROMAN'S, INC.
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Date: August
14, 2017
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By:
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/s/ Paul W.
Mobley
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|
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Paul W. Mobley, Executive
Chairman,
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|
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Chief Financial Officer and Principal
Accounting
|
|
|
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Officer
(Authorized Officer and Principal Financial
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|
|
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Officer)
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23
Index
to Exhibits
Exhibit
Number
|
Description
|
3.1
|
Amended
Articles of Incorporation of the Registrant, filed as an exhibit to
the Registrant’s Amendment No. 1 to the Post-Effective
Amendment No. 2 to Registration Statement on Form S-1 filed July 1,
1985 (SEC File No.2-84150), is incorporated herein by
reference.
|
3.2
|
Amended
and Restated By-Laws of the Registrant, as currently in effect,
filed as an exhibit to the Registrant’s Form 8-K filed
December 23, 2009, is incorporated herein by
reference.
|
3.3
|
Articles
of Amendment of the Articles of Incorporation of the Registrant
effective February 18, 1992 filed as an exhibit to the
Registrant’s Registration Statement on Form SB-2 (SEC File
No. 33-66850), ordered effective on October 26, 1993, is
incorporated herein by reference.
|
3.4
|
Articles
of Amendment of the Articles of Incorporation of the Registrant
effective May 11, 2000, filed as Annex A and Annex B to the
Registrant’s Proxy Statement on Schedule 14A filed March 28,
2000, is incorporated herein by reference.
|
3.5
|
Articles
of Amendment of the Articles of Incorporation of the Registrant
effective April 16, 2001 filed as Exhibit 3.4 to Registrant’s
annual report on Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.
|
3.6
|
Articles
of Amendment of the Articles of Incorporation of the Registrant
effective August 23, 2005, filed as Exhibit 3.1 to the
Registrant’s current report on Form 8-K filed August 29,
2005, is incorporated herein by reference.
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3.7
|
Articles
of Amendment of the Articles of Incorporation of the Registrant
effective February 7, 2017, filed as Exhibit 3.7 to the
Registrant’s Registration Statement on Form S-1 (SEC File No.
33-217442) filed April 25, 2017, is incorporated herein by
reference.
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4.1
|
Specimen
Common Stock Certificates filed as an exhibit to the
Registrant’s Registration Statement on Form S-18 filed
October 22, 1982 and ordered effective on December 14, 1982 (SEC
File No. 2-79963C), is incorporated herein by
reference.
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4.2
|
Warrant
to purchase common stock, dated July 1, 2015, filed as Exhibit
10.11 to the Registrant’s Form 10-Q filed on August 11, 2015,
is incorporated herein by reference.
|
24
10.1*
|
Employment
Agreement with Paul W. Mobley dated January 2, 1999 filed as
Exhibit 10.1 to Registrant’s annual report on Form 10-K for
the year ended December 31, 2005, is incorporated herein by
reference.
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10.2*
|
Employment
Agreement with A. Scott Mobley dated January 2, 1999 filed as
Exhibit 10.2 to Registrant’s annual report on Form 10-K for
the year ended December 31, 2005, is incorporated herein by
reference.
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10.3
|
Credit
Agreement with BMO Harris Bank, N.A., dated May 25, 2012, filed as
Exhibit 10.17 to the Registrant’s quarterly report on Form
10-Q filed on August 13, 2012, is incorporated herein by
reference.
|
10.4
|
First
Amendment to Credit Agreement with BMO Harris Bank, N.A. dated
October 31, 2013, filed as Exhibit 10.4 to the Registrant’s
annual report on Form 10-K for the year ended December 31, 2013, is
incorporated herein by reference.
|
10.5
|
Promissory
Note (Term Loan) with BMO Harris Bank, N.A. dated October 31, 2013,
filed as Exhibit 10.5 to the Registrant’s annual report on
Form 10-K for the year ended December 31, 2013 is incorporated
herein by reference.
|
10.6
|
Promissory
Note (Term Loan II) with BMO Harris Bank, N.A. dated October 31,
2013, filed as Exhibit 10.6 to the Registrant’s annual report
on Form 10-K for the year ended December 31, 2013 is incorporated
herein by reference.
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10.7
|
Second
Amendment to Credit Agreement with BMO Harris Bank, N.A. dated
October 15, 2014, filed as Exhibit 10.7 to the Registrant’s
Annual Report on Form 10-K filed on March 12, 2015, is incorporated
herein by reference.
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10.8
|
Promissory
Note with BMO Harris Bank, N.A. dated October 15, 2014, filed as
Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K
filed on March 12, 2015, is incorporated herein by
reference.
|
25
10.9
|
Agreement dated April 8, 2015, by and among the Registrant and the
shareholder parties, filed as Exhibit 10.1 to Registrant’s
Form 8-K filed on April 8, 2015, is incorporated herein by
reference.
|
|
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10.1
|
Promissory Note payable to Kingsway America, Inc., dated July 1,
2015, filed as Exhibit 10.10 to the Registrant’s Form 10-Q
filed on August 11, 2015, is incorporated herein by
reference.
|
|
|
10.11
|
Third Amendment to Credit Agreement with BMO Harris Bank, N.A.
dated January 22, 2016, filed as Exhibit 10.11 to
Registrant’s Form 10-K filed on March 14, 2016, in
incorporated herein by reference.
|
|
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10.12
|
Promissory Note payable to BMO Harris Bank, N.A., dated January 22,
2016, filed as Exhibit 10.12 to Registrant’s Form 10-K filed
on March 14, 2016, in incorporated herein by
reference.
|
|
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10.13
|
Promissory Note payable to BMO Harris Bank, N.A., dated January 22,
2016, filed as Exhibit 10.13 to Registrant’s Form 10-K filed
on March 14, 2016, in incorporated herein by reference
|
|
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10.14
|
Amended and Restated Promissory Note payable to Paul and Jenny
Mobley dated August 10, 2016, filed as Exhibit 10.12 to the
Registrant’s Form 10-Q filed on August 11, 2016 is
incorporated herein by reference.
|
|
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10.15
|
Amended and Restated Promissory Note payable to Scott Mobley dated
August 10, 2016, filed as Exhibit 10.13 to the Registrant’s
Form 10-Q filed on August 11, 2016 is incorporated herein by
reference.
|
|
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10.16
|
Subordination Letter from Paul Mobley dated June 8, 2016, filed as
Exhibit 10.15 to the Registrant’s Form 10-Q filed on August
11, 2016 is incorporated herein by reference.
|
|
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10.17
|
Subordination Letter from A. Scott Mobley dated June 8, 2016, filed
as Exhibit 10.16 to the Registrant’s Form 10-Q filed on
August 11, 2016 is incorporated herein by reference.
|
|
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10.18
|
Business Loan and Security Agreement with Super G Funding LLC dated
June 10, 2016, filed as Exhibit 10.17 to the Registrant’s
Form 10-Q filed on August 11, 2016 is incorporated herein by
reference.
|
|
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10.19
|
Debt and Lien Subordination Agreement between Super G Funding, LLC
and BMO Harris Bank, N.A., filed as Exhibit 10.18 to the
Registrant’s Form 10-Q filed on August 11, 2016 is
incorporated herein by reference.
|
|
|
10.20
|
Form of 10% Convertible Subordinated Unsecured Note, filed as Exhibit 10.16 to the Registrant’s Form 10-K filed on March 27, 2017 is incorporated herein by reference. |
26
10.21
|
Form of
Redeemable Common Stock Purchase Class A Warrant, filed as Exhibit
10.21 to the Registrant’s Registration Statement on Form S-1
(SEC File No. 33-217442) on April 25, 2017, is incorporated herein
by reference.
|
10.22
|
Registration
Rights Agreement dated October 13, 2016, by and between the
Registrant and the investors signatory thereto, filed as Exhibit
10.22 to the Registrant’s Registration Statement on Form S-1
(SEC File No. 33-217442) on April 25, 2017, is incorporated herein
by reference.
|
10.23
|
First
Amendment to the Registration Rights Agreement dated February 13,
2017, by and among Registrant and the investors signatory thereto,
filed as Exhibit 10.23 to the Registrant’s Registration
Statement on Form S-1 (SEC File No. 33-217442) on April 25, 2017,
is incorporated herein by reference.
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21.1
|
Subsidiaries
of the Registrant filed in the Registrant’s Registration
Statement on Form SB-2 (SEC File No. 33-66850) ordered effective on
October 26, 1993, is incorporated herein by reference.
|
C.E.O.
Certification under Rule 13a-14(a)/15d-14(a)
|
|
C.F.O.
Certification under Rule 13a-14(a)/15d-14(a)
|
|
C.E.O.
Certification under 18 U.S.C. Section 1350
|
|
C.F.O.
Certification under 18 U.S.C. Section 1350
|
|
101
|
Interactive
Financial Data
|
*Management
contract or compensation plan.
27