ITEM 1. Financial Statements
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|
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|
The
following unaudited condensed consolidated financial statements are
included herein:
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Condensed
consolidated balance sheets as of December 31, 2015
and
June 30, 2016 (unaudited)
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Page 4
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Condensed
consolidated statements of operations for the three-month
and
six-month periods ended June 30, 2015 and 2016
(unaudited)
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Page 5
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Condensed
consolidated statements of changes in stockholders' equity
for
the six-month period ended June 30, 2016 (unaudited)
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Page 6
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Condensed
consolidated statements of cash flows for the
six-month
period ended June 30, 2015 and 2016 (unaudited)
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Page 7
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Notes
to condensed consolidated financial statements
(unaudited)
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Page 9
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Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
Assets
|
|
|
Current
assets:
|
|
|
Cash
|
$
194,021
|
$
625,522
|
Accounts
receivable - net
|
2,007,751
|
2,222,841
|
Inventories
|
492,222
|
640,150
|
Prepaid
expenses
|
634,016
|
831,155
|
Deferred
tax asset - current portion
|
925,000
|
925,000
|
Total
current assets
|
4,253,010
|
5,244,668
|
|
|
|
Property and
equipment:
|
|
|
Equipment
|
1,376,190
|
1,825,392
|
Leasehold
improvements
|
88,718
|
88,718
|
|
1,464,908
|
1,914,110
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Less
accumulated depreciation and amortization
|
1,092,785
|
1,124,832
|
Net
property and equipment
|
372,123
|
789,278
|
Deferred tax asset
(net of current portion)
|
8,158,523
|
7,994,699
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Other assets
including long-term portion of receivables - net
|
5,681,272
|
5,911,600
|
|
$
18,464,928
|
$
19,940,245
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|
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Liabilities
and Stockholders' Equity
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Current
liabilities:
|
|
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Current
portion of term loan payable to bank
|
$
601,081
|
$
1,694,316
|
Current
portion of loan payable to Super G Funding, LLC
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-
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950,000
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Accounts
payable and accrued expenses
|
847,418
|
200,423
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Total
current liabilities
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1,448,499
|
2,844,739
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Long-term
obligations:
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|
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Term
loans payable to bank - net of current
portion
|
1,366,454
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-
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Loan
payable to Super G Funding, LLC (net of current
portion)
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-
|
923,918
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Notes
payable to officers
|
175,000
|
310,000
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Note
payable to Kingsway America
|
600,000
|
600,000
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Total
long-term liabilities
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2,141,454
|
1,833,918
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Stockholders'
equity:
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|
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Common
stock - no par value (25,000,000 shares authorized,
20,775,921
issued and
outstanding as of December 31, 2015 and 20,783,032
issued
and outstanding as of June 30, 2016)
|
24,294,002
|
24,299,420
|
Accumulated
deficit
|
(9,419,027
)
|
(9,037,832
)
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Total
stockholders' equity
|
14,874,975
|
15,261,588
|
Total
liabilities and stockholders' equity
|
$
18,464,928
|
$
19,940,245
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See accompanying notes to condensed consolidated financial
statements (unaudited).
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
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Three-Months
Ended
June
30,
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Six-Months
Ended
June
30,
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Revenue:
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Royalties
and fees
|
$
2,026,510
|
$
1,874,235
|
$
3,799,082
|
$
3,590,546
|
Administrative
fees and other
|
14,885
|
10,635
|
26,633
|
21,709
|
Restaurant
revenue
|
54,390
|
55,554
|
97,076
|
107,047
|
Total
revenue
|
2,095,785
|
1,940,424
|
3,922,791
|
3,719,302
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Operating
expenses:
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Salaries
and wages
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292,357
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232,601
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571,874
|
483,909
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Trade
show expenses
|
136,470
|
130,441
|
262,585
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258,877
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Travel
expenses
|
58,407
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34,407
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114,553
|
95,674
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Broker
commissions
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-
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21,821
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-
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21,821
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Other
operating expenses
|
193,964
|
179,971
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401,590
|
375,284
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Restaurant
expenses
|
49,665
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44,173
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101,435
|
89,905
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Depreciation and
amortization
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26,354
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31,675
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52,708
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61,087
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General and
administrative
|
407,669
|
384,666
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809,827
|
790,475
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Total
expenses
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1,164,886
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1,059,755
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2,314,572
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2,177,032
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Operating
income
|
930,899
|
880,669
|
1,608,219
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1,542,270
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|
|
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Interest
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42,193
|
82,735
|
88,229
|
137,941
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Loss on restaurant
closed
|
47,331
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-
|
93,672
|
36,776
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Adjust valuation of
receivables
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600,000
|
750,659
|
600,000
|
750,659
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Income
before income taxes
|
241,375
|
47,275
|
826,318
|
616,894
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|
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Income tax
expense
|
106,154
|
15,877
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343,647
|
235,699
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135,221
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31,398
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482,671
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381,195
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Earnings
per share - basic:
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Operating income
|
.05
|
.04
|
.08
|
.07
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Net
income
|
.01
|
.00
|
.02
|
.02
|
Weighted average
number of common shares
outstanding
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20,483,091
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20,783,032
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20,291,653
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20,780,727
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Diluted
earnings per share:
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Operating Income
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.04
|
.04
|
.07
|
.07
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Net
income
|
.01
|
.00
|
.02
|
.02
|
Weighted average
number of common shares
outstanding
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21,844,981
|
20,974,419
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21,653,543
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20,972,114
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See accompanying notes to condensed consolidated financial
statements (unaudited).
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in
Stockholders' Equity
(Unaudited)
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Common
Stock
Shares
Amount
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Balance
at December 31, 2015
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20,775,921
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$
24,294,002
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$
(9,419,027
)
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$
14,874,975
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Net
income for six months ended
June
30, 2016
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381,195
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381,195
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Cashless
exercise of employee
stock
option
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7,111
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Amortization
of value of employee
stock
options
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5,418
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5,418
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Balance
at June 30, 2016
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20,783,032
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$
24,299,420
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$
(9,037,832
)
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$
15,261,588
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See accompanying notes to condensed consolidated financial
statements (unaudited).
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Six Months Ended
June 30,
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OPERATING
ACTIVITIES
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2015
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Net
income
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$
482,671
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$
381,195
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Adjustments
to reconcile net income to net cash
provided (used) by
operating activities:
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Depreciation
and amortization
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68,365
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37,466
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Deferred
income taxes
|
343,647
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163,824
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Changes
in operating assets and liabilities:
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(Increase) decrease in:
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Accounts
receivable
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(75,764
)
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(215,090
)
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Inventories
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(763
)
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(147,928
)
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Prepaid
expenses
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(191,881
)
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(197,139
)
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Other
assets
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(276,655
)
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(674,176
)
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Increase
(decrease) in:
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Accounts
payable and accrued expenses
|
453,880
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(588,392
)
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NET
CASH PROVIDED (USED) BY OPERATING
ACTIVITIES
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803,500
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(1,240,240
)
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INVESTING
ACTIVITIES
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Purchase
of property and equipment
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(7,757
)
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(5,354
)
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NET
CASH USED IN INVESTING ACTIVITIES
|
(7,757
)
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(5,354
)
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FINANCING
ACTIVITIES
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Payment
of principal on bank term loans
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(744,236
)
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(273,219
)
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Payment
of principal on Super G Funding, LLC loan
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-
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(29,000
)
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Proceeds
from the exercise of employee stock options
|
171,867
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-
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Proceeds
from Super G Funding, LLC
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-
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1,902,917
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Proceeds
from officers loan
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-
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135,000
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NET
CASH PROVIDED (USED) BY FINANCING
ACTIVITIES
|
(572,369
)
|
1,735,698
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DISCONTINUED
OPERATIONS
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Payment
of obligations from discontinued operations
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(143,026
)
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(58,603
)
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Increase in
cash
|
80,348
|
431,501
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Cash at beginning
of period
|
200,349
|
194,021
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Cash at end of
period
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$
280,697
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$
625,522
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Supplemental schedule of investing and financing
activities
In 2016, moved leased equipment from other assets to equipment
account in the amount of $443,848.
In 2016, recorded valuation allowance on receivables related to a
2008 Heyser lawsuit in the amount of
$750,649.
In the first six months of 2015, an option to purchase 100,000
shares at an exercise price of $.95 per share was exercised
pursuant to the cashless exercise provision of the option and the
holder received 58,696 shares of common stock, options to purchase
300,000 shares at an exercise price of $1.05 per share were
exercised pursuant to the cashless exercise provision of the
options and the holders received 163,043 shares, an option to
purchase 66,666 shares at an exercise price of $.58 per share was
exercised pursuant to the cashless exercise provision of the option
and the holder received 49,855 shares, options to purchase 30,000
shares at an exercise price of $.90 per share were exercised
pursuant to the cashless exercise provision of the options and the
holders received 18,412 shares, and an option to purchase 45,000
shares at an exercise price of $.36 per share was exercised
pursuant to the cashless exercise provision of the option and the
holder received 36,900 shares. In the first six months of 2015 the
Company issued 50,000 shares of common stock in exchange for
$95,000 in payables.
In the first six months of 2016, an option to purchase 20,000
shares at an exercise price of $.58 per share was exercised
pursuant to the cashless exercise provision of the option and the
holder received 7,111 shares of common stock.
Cash paid for
interest
$ 74,376
$
129,013
See accompanying notes to condensed consolidated financial
statements (unaudited).
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, 2015 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, 2016, respectively, are not necessarily indicative of the
results to be expected for the full year ending December 31,
2016.
Note 2
– Royalties and fees include initial franchise fees of
$29,000 and $66,000 for the three-month and six-month periods ended
June 30, 2015, and $77,000 and $129,000 for the three-month and
six-month periods ended June 30, 2016, respectively. Royalties and
fees included equipment commissions of $8,000 and $37,000 for the
three-month and six-month periods ended June 30, 2015, and $6,000
and $10,000 for the three-month and six-month periods ended June
30, 2016, respectively. Royalties and fees including interest per
franchise agreements, less initial franchise fees and equipment
commissions, were $2.0 million and $3.7 million for the respective
three-month and six-month periods ended June 30, 2015, and $1.8
million and $3.5 million for the respective three-month and
six-month periods ended June 30, 2016. 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. Generally, the
Company’s royalty income is paid by the Company initiating a
draft on the franchisee’s account by electronic
withdrawal.
There
were 2,562 franchises/licenses in operation on December 31, 2015
and 2,678 franchises/licenses in operation on June 30, 2016. During
the six-month period ended June 30, 2016, there were 137 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, 2015:
|
Three
Months Ended June 30, 2015
|
|
|
|
|
Net
income
|
$
135,221
|
20,483,091
|
$
.01
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
Options
|
-
|
1,361,890
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
Net
income
|
$
135,221
|
21,844,981
|
$
.01
|
|
Six Months
Ended June 30, 2015
|
|
|
|
|
Net
income
|
$
482,671
|
20,291,653
|
$
.02
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
Options
|
-
|
1,361,890
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
Net
income
|
$
482,671
|
21,653,543
|
$
.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, 2016:
|
Three
Months Ended June 30, 2016
|
|
|
|
|
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
|
|
|
|
|
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
|
Note 4
- At the end of December 2015, the Company determined to close a
restaurant that had previously been used for demonstration and
training purposes. This restaurant was a part of the discontinued
operations in 2008, but the Company decided to continue operating
this location until the lease expired. Since the restaurant was
closed, the related revenue and expense were taken out of the
2015,operating income at the end of the year for the full year and
the net expense shown as a loss on restaurant closed separate from
the ongoing operations. The results for the three-month and
six-month periods ended June 30, 2015 have been reclassified to
remove those operations from ongoing operations consistent with the
full year 2015 for comparison purposes to the three-month and
six-month periods ended June 30, 2016.
Note 5
- In June 2016, the Company borrowed $2.0 million from Super G
Funding, LLC ("Super G") and used those funds: (1) to repay the
$500,000 revolving loan with the Bank, (2) for working capital
purposes, and (3) to provide for construction of two new prototype
locations to be used as a basis for additional franchising. This
loan is to be repaid in the total amount of $2.7 million in regular
bi-monthly payments over a two year period.
Note 6
- The Company evaluated subsequent events through the date the
financial statements were issued and filed with SEC. There were no
subsequent events that required recognition or disclosure beyond
what is disclosed in this report.
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 two wholly-owned subsidiaries, Pizzaco, Inc. and N.R.
Realty, Inc., sells, services or operates 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. The Company
currently focuses all of its sales efforts on (1)
franchises/licenses for non-traditional locations primarily in
convenience stores and entertainment facilities, (2) franchises for
stand-alone Noble Roman’s Pizza retail outlets and (3)
license agreements for grocery stores to sell Noble Roman’s
Take-N-Bake Pizza and related products. Pizzaco, Inc. owns and
operates a Company location used for testing and demonstration
purposes. 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 and grocery
locations shelf-stable so that dough handling is no longer an
impediment to a consistent product in those types of
operations.
●
In-store
fresh made crust with only specially milled flour with above
average protein and yeast for use in its stand-alone retail
outlets.
●
Fresh
packed, uncondensed and never cooked sauce made with secret spices,
parmesan cheese and vine-ripened tomatoes.
●
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.
●
An
extended product line that includes breadsticks and cheesy stix
with dip, pasta, baked sandwiches, salads, wings and a line of
breakfast products.
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, as
a stand-alone offering for grocery stores and as a stand-alone
retail outlet concept. The Company offers the take-n-bake program
in grocery stores under a license agreement rather than a franchise
agreement. The stand-alone units are offered under 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.
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 awards Tuscano’s
franchises in the same facilities as Noble Roman’s Pizza
franchises. The Company has developed a grab-n-go service system
for a selected portion of the Tuscano’s menu. The grab-n-go
system is designed to add sales opportunities at existing
non-traditional Noble Roman’s Pizza locations.
Business Strategy
The
Company’s business strategy includes the following principal
elements:
1. Focus on revenue expansion through three primary growth
vehicles:
Sales of Non-Traditional Franchises and Licenses.
The
Company believes it has an opportunity for increasing unit growth
and revenue within its non-traditional venues, particularly with
convenience stores, travel plazas and entertainment facilities. 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 a stand-alone
traditional location. Non-traditional franchises/licenses are most
often sold into pre-existing facilities as a service and/or revenue
enhancer for the underlying business.
Licensing and Franchising the Company’s Take-N-Bake
Program.
Noble Roman's take-n-bake pizza is designed as a
unique product offering for grocery stores, an add-on component for
new or existing convenience store franchisees/licensees and
stand-alone franchise locations. The Company believes there is a
significant growth opportunity to license additional supermarkets
to sell its take-n-bake pizzas in their deli
departments.
Franchising the Company’s Stand-Alone
Locations.
The Company has developed the next generation
stand-alone prototype, which features the chain’s popular
traditional Hand-Tossed Style pizza except with thinner crust that
has a crispy exterior and a flavorful and chewy interior, Deep-Dish
Sicilian pizza, SuperThin pizza, and Noble Roman’s famous
breadsticks with spicy cheese sauce. All crust styles feature
traditional toppings plus several fun new toppings and new
specialty pizzas. The menu also includes an assortment of fun new
specialty salads and traditional pastas with a choice of three
noodles and three sauces plus specialty add-ons. The new prototype
utilizes new oven technology which reduces traditional pizza bake
time to two minutes and 30 seconds. The prototype dining room will
be country Italian decor with seating for 100 plus guests,
featuring a glass enclosed room in the dining room where all dough
and breadsticks are made fresh daily in view of the customers which
highlights the hand crafted and fresh nature of the products as
well as entertainment for our guests.
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 non-traditional and take-n-bake locations. The Company will
continue to make these investments the focal point in its marketing
process. The Company believes that the quality of its products,
their cost-effectiveness, relatively simple production and service
systems, and its diverse, modularized menu offerings all contribute
to the Company’s strategic attributes and growth potential.
Every ingredient and process was designed to produce superior
results. The menu items in most venues 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, and certain other complementary menu items which require no
assembly. 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 allow
for a significant competitive advantage due to the speed 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; (4) live demonstrations at trade and
food shows; and (5) in the case of prospects for the stand-alone
outlets, requiring visits to the Company headquarters to meet
management and to sample the products. 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 products 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
products 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 distribution agreements with its
primary distributors strategically located throughout the United
States. The distribution agreements require the primary
distributors to maintain adequate inventories of all products
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 products 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 products to the franchisee/licensee at a price
determined by the distribution 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 products from
one of its primary distributors and to distribute those products
only to their grocery store customers who have signed license
agreements with the Company.
Franchising
The Company sells franchises into various non-traditional and
traditional venues.
The
initial franchise fees are as follows:
Franchise
Format
|
Non-Traditional,
Except Hospitals
|
|
|
Noble Roman’s
Pizza
|
$
7,500
|
$
10,000
|
$
25,000
(1)
|
Tuscano’s
Subs
|
$
6,000
|
$
10,000
|
-
|
Noble Roman’s
& Tuscano’s
|
$
11,500
|
$
18,000
|
-
|
(1) With the sale of multiple traditional stand-alone franchises to
a single franchisee, the franchise fee for the first unit is
$25,000, the franchise fee for the second unit is $20,000 and the
franchise fee for the third unit and more is $15,000.
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 distribution agreements, the
distributors place an additional mark-up, as determined by the
Company, above their normal selling price on the key ingredients as
a fee to the Company in lieu of a 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.
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 and
six-month periods ended June 30, 2015 and 2016,
respectively.
|
Three Months
Ended
|
|
|
June
30,
|
June
30,
|
|
2015
|
|
|
|
Royalties and
fees
|
96.7
%
|
96.6
%
|
96.8
%
|
96.6
%
|
Administrative fees
and other
|
.7
|
.5
|
.7
|
.6
|
Restaurant
revenue
|
2.6
|
2.9
|
2.5
|
2.8
|
Total
revenue
|
100.0
|
100.0
|
100.0
|
100.0
|
Operating
expenses:
|
|
|
|
|
Salaries
and wages
|
13.9
|
12.0
|
14.6
|
13.0
|
Trade
show expense
|
6.5
|
6.7
|
6.7
|
7.0
|
Travel
expense
|
2.8
|
1.8
|
2.9
|
2.6
|
Broker
commissions
|
-
|
1.1
|
-
|
.6
|
Other
operating expense
|
9.3
|
9.3
|
10.2
|
10.1
|
Restaurant
expenses
|
2.3
|
2.3
|
2.7
|
2.4
|
Depreciation and
amortization
|
1.3
|
1.6
|
1.3
|
1.6
|
General and
administrative
|
19.5
|
19.8
|
20.6
|
21.3
|
Total
expenses
|
55.6
|
54.6
|
59.0
|
58.6
|
Operating
income
|
44.4
|
45.4
|
41.0
|
41.4
|
Interest and other
expense
|
2.0
|
4.3
|
2.2
|
3.7
|
Loss on restaurant
discontinued
|
2.3
|
-
|
2.4
|
1.0
|
Adjustment for
valuation of receivables
|
28.6
|
38.7
|
15.3
|
20.2
|
Income
before income taxes
|
11.5
|
2.4
|
21.1
|
16.5
|
Results of Operations
Total
revenue decreased from $2.1 million and $3.9 million to $1.9
million and $3.7 million during the respective three-month and
six-month periods ended June 30, 2016 compared to the corresponding
periods in 2015. Franchise fees and equipment commissions
(“upfront fees”) increased from $37,000 and $103,000 to
$83,000 and $139,000 during the respective three-month and
six-month periods ended June 30, 2016 compared to the corresponding
periods in 2015. Royalties and fees including interest per
franchise agreements, less upfront fees, decreased from $2.0
million and $3.7 million to $1.8 million and $3.5 million for the
respective three-month and six-month periods ended June 30, 2016
compared to the corresponding periods in 2015. The breakdown of
royalties and fees less upfront fees, for the respective
three-month and six-month periods ended June 30, 2016 and 2015 was:
royalties and fees from non-traditional franchises other than
grocery stores, including interest on receivables, were $1.11
million compared to $1.25 million and $2.11 million compared to
$2.25 million; royalties and fees from the grocery store
take-n-bake were $530,000 compared to $487,000 and $1.01 million
compared to $888,000; royalties and fees from stand-alone
take-n-bake franchises were $88,000 compared to $189,000 and
$211,000 compared to $425,000; and royalties and fees from
traditional locations were $60,000 compared to $68,000 and $120,000
compared to $134,000.
During 2014 and continuing in 2015 and 2016, the Company began
auditing 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 was $56,000 and $107,000 for the three-month and six-month
periods ended June 30, 2016 compared to $54,000 and $97,000 for the
three-month and six-month periods ended June 30, 2015,
respectively. The increases in both periods were the result of same
store sales increases. The Company currently operates only one
location used primarily for testing and demonstration
purposes.
As a percentage of total revenue, salaries and wages decreased from
13.9% to 12.0% and from 14.6% to 13.0% for the three-month and
six-month periods ended June 30, 2016, respectively, compared to
the corresponding periods in 2015. Salaries and wages decreased
from $292,000 to $233,000 and from $572,000 and $484,000 for the
three-month and six-month periods ended June 30, 2016,
respectively, compared to the corresponding periods in 2015. The
decreases were a result of tightly controlling
expenses.
As a
percentage of revenue trade show expenses increased from 6.5% to
6.7% and from 6.7% to 7.0% for the three-month and six-month
periods ended June 30, 2016 compared to the corresponding periods
in 2015. Trade show expenses were $130,000 compared to $136,000 and
$259,000 compared to $263,000 for the three-month and six-month
periods ended June 30, 2016, respectively, compared to the
corresponding periods in 2015.
As a percentage of revenue, travel expenses decreased from 2.8% to
1.8% and from 2.9% to 2.6% for the three-month and six-month
periods ended June 30, 2016, respectively, compared to the
corresponding periods in 2015. Travel expense decreased from
$58,000 to $34,000 and from $115,000 to $96,000 for the three-month
and six-month periods ended June 30, 2016, respectively, compared
to the corresponding periods in 2015. This was the result of more
efficient scheduling of training to minimize travel.
In an attempt to more closely monitor the grocery store's
take-n-bake displays, the Company engaged a network of food brokers
on commission to assist in monitoring grocery store displays and to
assist in verifying that take-n-bake products are prepared
properly. The Company incurred a cost of $22,000 in both the
three-month and six-month periods ended June 30, 2016 compared to
none in 2015. Generally, this has not proven to be productive and
most of the foodservice brokers' services will not be continued in
the future.
As a percentage of total revenue, other operating expenses remained
the same at 9.3% of total revenue for the three-month period ended
June 30, 2016 compared to 2015 and decreased from 10.2% to 10.1%
for the six-month period ended June 30, 216 compared to the
corresponding period in 2015. Operating expenses decreased from
$194,000 to $180,000 and from $402,000 to $375,000 for the
three-month and six-month periods ended June 30, 2016,
respectively, compared to the corresponding periods in 2015. This
was the result of tightly controlling expenses.
As a
percentage of total revenue, restaurant expenses remained the same
at 2.3% of total revenue for the three-month period ended June 30,
2016 compared to 2015, and decreased from 2.7% to 2.4% for the
six-month period ended June 30, 2016 compared to the corresponding
period in 2015. Restaurant revenue increased, however with tighter
controls on operating expenses the expenses decreased. The Company
currently operates only one restaurant which it uses for
demonstration, training and testing purposes.
As a
percentage of total revenue, general and administrative expenses
increased from 19.5% to 19.8% and from 20.6% to 21.3% for the
three-month and six-month periods ended June 30, 2016,
respectively, compared to the corresponding periods in 2015.
General and administrative expenses decreased from $408,000 to
$385,000 and from $810,000 to $790,000 for the three-month and
six-month periods ended June 30, 2016, respectively, compared to
the corresponding periods in 2015.
As a
percentage of total revenue, total expenses decreased from 55.6% to
54.6% and from 59.0% to 58.6% for the three-month and six-month
periods ended June 30, 2016, respectively, compared to the
corresponding period in 2015.
As a
percentage of total revenue, operating income increased from 44.4%
to 45.4% and from 41.0% to 41.4% for the three-month and six-month
periods ended June 30, 2016, respectively, compared to the
corresponding periods in 2015.
For the
three-month and six-month periods ended June 30, 2016 compared to
the corresponding periods in 2015, interest expense increased from
$42,000 to $83,000 and from $88,000 to $138,000, respectively,
compared to the corresponding periods in 2015. This increase was
the result of additional short-term borrowing for working capital
and a higher interest rate on the additional
borrowing.
An
adjustment for valuation of receivables was $600,000 and $750,659
for the three-month and six-month periods ended June 30, 2015 and
2016. This loss reflected the valuation of certain receivables from
the operations discontinued in 2008 and was the remaining
receivable from the various plaintiffs in the Heyser lawsuit which
was won by the Company in summary judgment dismissing the Company
from any liability after numerous appeals including an appeal to
the Indiana Supreme Court by the Heyser plaintiffs. The Company
also won summary judgment on its counterclaims against the various
plaintiffs and was later awarded a judgment against the plaintiffs
in excess of $2 million, which included damages and attorney fees.
The Company has been pursuing collection ever since. During the
most recent quarter the Company made the decision that it was in
its best interest to cease incurring additional legal fees and
settle for $350,000, which is evidenced by a promissory note
secured by a mortgage on two pieces of real estate. The note is to
be paid over the next two years.
Net income before taxes decreased from $241,000 to $47,000 and from
$826,000 to $617,000 for the three-month and six-month periods
ended June 30, 2016, respectively, compared to the corresponding
periods in 2015. This was primarily the result of valuation of
receivables in 2015 Net income before taxes from continuing
operations is significant since the Company will pay no income
taxes on approximately the next $21 million in net income before
taxes due to its deferred tax assets.
Liquidity and Capital Resources
The Company’s strategy in recent years has been to grow its
business by concentrating on franchising/licensing new
non-traditional locations, licensing grocery stores to sell
take-n-bake pizza and franchising stand-alone locations. This
strategy was intended to not require significant increase in
expenses. Generally this will continue to be the Company's
strategy, however over the last year the Company has been
re-designing and re-positioning its stand-alone franchise. As a
result, the Company plans to open and operate two locations with
the re-designed and re-positioned stand-alone format and, once open
which is expected in the fourth quarter 2016, will launch a major
franchising effort based on those two locations. The Company
currently operates one restaurant location which it current uses
for testing and demonstration purposes.
The Company’s current ratio was 1.84 to-1 as of June 30, 2016
compared to 2.9-to-1 as of December 31, 2015. A significant portion
of the Company's outstanding debt is due in the first quarter 2017,
therefore that debt was reclassified from long-term debt at
December 31, 2015 to short-term debt at June 30, 2016.
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.
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.
In July, 2015, the Company borrowed $600,000 from a third-party
lender, evidenced by a promissory note which matures in July, 2017.
Interest on the note is payable at the rate of 8% per annum
quarterly in arrears and this loan is 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. Proceeds were used to increase
working capital in anticipation of expected growth due to the
Company hiring two new sales people, a Vice President of
Supermarket Development, and entering into an agreement with a
franchise broker.
In December 2015, the Company borrowed $100,000 from Paul Mobley
and $75,000 from A. Scott Mobley, two 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 Mobley, evidenced by a promissory note. In
conjunction with the Super G loan, both Paul Mobley and A. Scott
Mobley signed a subordination letter regarding the three notes
agreeing to extend the maturity of each to June 10, 2018. Interest
on the notes are payable at the rate of 10% per annum quarterly in
arrears and the loans are unsecured. Proceeds were used for working
capital.
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 matures March 31, 2017 when all remaining principal
balance becomes 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 conjunction with a new loan in June 2016 from
Super G Funding, LLC ("Super G"), the $500,000 revolving loan to
the bank was repaid.
In June 2016, the Company borrowed $2.0 million from Super G and
used those funds: (i) to repay the $500,000 revolving loan with the
Bank, (ii) for working capital purposes, and (iii) provide for
construction of two new prototype locations to be used as a basis
for additional franchising. This loan is to be repaid in the total
amount of $2.7 million in regular bi-monthly payments over a two
year period.
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 until March 31, 2017. The Company will
need to refinance its $1.2 million remaining bank debt as of March
31, 2017. The Company’s cash flow projections for the next
two years are primarily based on the Company’s strategy of
focusing on growth in non-traditional venues and growth in the
number of grocery store locations licensed to sell the take-n-bake
pizza.
The Company does not anticipate that any of the recently issued
Statement of Financial Accounting Standards will have a material
impact on its Statement of Operations or its Balance Sheet
except:
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 noncurrent
amounts in a classified balance sheet. Rather, deferred taxes will
be presented as noncurrent under the new standard. It takes effect
in 2017 for public companies and early adoption is
permitted.
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.
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
its need to refinance its indebtedness that matures in March 2017,
competitive factors and pricing pressures, non-renewal of franchise
agreements, shifts in market demand, the success of new franchise
programs, general economic conditions, changes in demand for the
Company’s products or franchises, 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” contained
in the Company's Annual Report on Form 10-K for the year ended
December 31, 2015. 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.