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 March 31, 2013
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 (I.R.S. Employer
of organization) 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 (Section
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, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller Reporting Company [X]
(do not check if smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 5, 2013, there were 19,516,589 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, 2012
and March 31, 2013 (unaudited) Page 3
Condensed consolidated statements of operations for the
three months ended March 31, 2012 and 2013 (unaudited) Page 4
Condensed consolidated statements of changes in stockholders'
equity for the three months ended March 31, 2013
(unaudited) Page 5
Condensed consolidated statements of cash flows for the
three months ended March 31, 2012 and 2013 (unaudited) Page 6
Notes to condensed consolidated financial statements (unaudited) Page 7
2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, March 31,
2012 2013
------------ ------------
Assets
Current assets:
Cash $ 144,354 $ 164,223
Accounts and note receivable - net 1,080,362 1,232,759
Inventories 460,839 485,092
Assets held for resale 259,579 259,579
Prepaid expenses 379,669 476,669
Deferred tax asset - current portion 1,400,000 1,400,000
------------ ------------
Total current assets 3,724,803 4,018,322
------------ ------------
Property and equipment:
Equipment 1,166,103 1,169,078
Leasehold improvements 12,283 12,283
------------ ------------
1,178,386 1,181,361
Less accumulated depreciation and amortization 905,376 918,254
------------ ------------
Net property and equipment 273,010 263,107
Deferred tax asset (net of current portion) 9,238,536 8,964,152
Other assets including long-term portion of receivables-net 3,924,404 3,998,443
------------ ------------
Total assets $ 17,160,753 $ 17,244,024
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Note payable to bank $ 1,250,000 $ 1,250,000
Accounts payable and accrued expenses 510,710 484,861
------------ ------------
Total current liabilities 1,760,710 1,734,861
------------ ------------
Long-term obligations:
Note payable to bank - net of current portion 3,020,833 2,708,333
------------ ------------
Total long-term liabilities 3,020,833 2,708,333
------------ ------------
Stockholders' equity:
Common stock - no par value (25,000,000 shares authorized, 19,516,589
issued and outstanding as of December 31, 2012 and March 31, 2013) 23,366,058 23,394,301
Preferred stock (5,000,000 shares authorized and 20,625 issued and
outstanding as of December 31, 2012 and March 31, 2013) 800,250 800,250
Accumulated deficit (11,787,098) (11,393,721)
------------ ------------
Total stockholders' equity 12,379,210 12,800,830
------------ ------------
Total liabilities and stockholders' equity $ 17,160,753 $ 17,244,024
============ ============
See accompanying notes to condensed consolidated financial statements.
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
--------------------------
2012 2013
----------- -----------
Royalties and fees $ 1,703,566 $ 1,782,306
Administrative fees and other 7,247 1,276
Restaurant revenue 126,849 107,156
----------- -----------
Total revenue 1,837,662 1,890,738
Operating expenses:
Salaries and wages 243,459 249,203
Trade show expense 120,997 129,549
Travel expense 48,915 44,315
Other operating expenses 178,201 181,363
Restaurant expenses 119,243 105,107
Depreciation and amortization 30,664 28,346
General and administrative 395,717 406,984
----------- -----------
Total expenses 1,137,196 1,144,867
----------- -----------
Operating income 700,466 745,871
Interest and other expense 95,929 53,157
----------- -----------
Income before income taxes 604,537 692,714
Income tax expense 239,458 274,384
----------- -----------
Net income 365,079 418,330
Cumulative preferred dividends 24,953 24,953
----------- -----------
Net income available to common
stockholders $ 340,126 $ 393,377
=========== ===========
Earnings per share - basic:
Net income $ .02 $ .02
Net income available to common stockholders .02 .02
Weighted average number of common shares
outstanding 19,477,449 19,516,589
Diluted earnings per share:
Net income $ .02 $ .02
Weighted average number of common shares
outstanding 20,005,889 20,244,804
See accompanying notes to condensed consolidated financial statements.
4
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in
Stockholders' Equity
(Unaudited)
Preferred Common Stock Accumulated
Stock Shares Amount Deficit Total
------------ ---------- ------------ ------------ ------------
Balance at December 31, 2012 $ 800,250 19,516,589 $ 23,366,058 $(11,787,098) $ 12,379,210
Net income for three months ended
March 31, 2013 418,330 418,330
Cumulative preferred
dividends (24,953) (24,953)
Amortization of value of employee
stock options 28,243 28,243
------------ ---------- ------------ ------------ ------------
Balance at March 31, 2013 $ 800,250 19,516,589 $ 23,394,301 $(11,393,721) $ 12,800,830
============ ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
5
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2012 2013
--------- ---------
OPERATING ACTIVITIES
Net income $ 365,079 $ 418,330
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 40,846 41,121
Deferred income taxes 239,458 274,384
Changes in operating assets and liabilities:
(Increase) in:
Accounts and notes receivable (138,677) (152,395)
Inventories (19,029) (24,253)
Prepaid expenses (58,195) (97,000)
Other assets (143,845) (74,039)
Increase (decrease) in:
Accounts payable and accrued expenses (12,090) 35,686
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 273,547 421,834
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (3,624) (2,975)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (3,624) (2,975)
--------- ---------
FINANCING ACTIVITIES
Payment of obligations from discontinued operations (71,176) (61,537)
Payment of cumulative preferred dividends (24,953) (24,953)
Payment of principal on outstanding debt (200,000) (312,500)
Payment of alternative minimum tax (34,515) --
Proceeds from the exercise of employee stock options 7,200 --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (323,444) (398,990)
--------- ---------
Increase (decrease) in cash (53,521) 19,869
Cash at beginning of period 233,296 144,354
--------- ---------
Cash at end of period $ 179,775 $ 164,223
========= =========
Supplemental schedule of non-cash investing and financing activities
None.
Cash paid for interest $ 77,108 $ 43,880
See accompanying notes to condensed consolidated financial statements.
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 its Annual Report on Form 10-K for the year
ended December 31, 2012 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 period ended March 31, 2013 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2013.
Note 2 - Royalties and fees include $74,833 and $110,000 for the three-month
periods ended March 31, 2012 and 2013, respectively, of initial franchise fees.
Royalties and fees included $9,345 and $13,327 for the three-month periods ended
March 31, 2012 and 2013, respectively, of equipment commissions. Royalties and
fees, less initial franchise fees and equipment commissions were $1,619,388 and
$1,658,979 for the three-month periods ended March 31, 2012 and 2013,
respectively. 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 for the franchisee. For the most part, the
Company's royalty income is paid by the Company initiating a draft on the
franchisee's account by electronic withdrawal. The Company has no material
amount of past due royalties.
There were 1,847 outlets in operation on December 31, 2012 and 1,895 outlets in
operation on March 31, 2013. During the three-month period ended March 31, 2013,
there were 59 new outlets opened and 11 outlets closed. In the ordinary course,
grocery stores from time to time add products, remove and frequently re-offer
them. Therefore, it is unknown how many grocery store licenses have left the
system.
7
Note 3 - The following table sets forth the calculation of basic and diluted
earnings per share for the three-month period ended March 31, 2012:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income $ 365,079 19,477,449 $ .02
Less preferred stock dividends (24,953)
----------
Earnings per share - basic
Income available to common stockholders 340,126 .02
Effect of dilutive securities
Options 161,774
Convertible preferred stock 24,953 366,666
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 365,079 20,005,889 $ .02
The following table sets forth the calculation of basic and diluted earnings per
share for the three-month period ended March 31, 2013:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income $ 418,330 19,516,589 $ .02
Less preferred stock dividends (24,953)
----------
Earnings per share - basic
Income available to common stockholders 393,377 $ .02
Effect of dilutive securities
Options 361,549
Convertible preferred stock 24,953 366,666
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 418,330 20,244,804 $ .02
Note 4 - The Company was a Defendant in a lawsuit styled Kari Heyser, Fred Eric
Heyser and Meck Enterprises, LLC, et al v. Noble Roman's, Inc. et al, filed in
Superior Court in Hamilton County, Indiana in June 2008 (Cause No. 29D01 0806 PL
739). The Plaintiffs' allegations of fraud against the Company and certain of
its officers were determined to be without merit and Plaintiffs have exhausted
their rights of appeal. The separate claim by one of the Plaintiffs under the
Indiana Franchise Act was settled. There are no longer any claims pending
against the Company in this case.
The Company asserted counterclaims for damages for breach of contract against
the Plaintiffs. The Company proceeded to trial against two of the Plaintiffs and
obtained damage awards against each. In addition to direct and consequential
damages in the Court's summary judgment Order, the Court determined that as a
matter of law Noble Roman's is entitled to recover attorneys' fees associated
with obtaining preliminary injunctions, fees resulting from the prosecution of
Noble Roman's counterclaims, and fees for defending against the various claims
against the Company. A hearing was set for March 21, 2013 on the amount of
8
attorneys' fees to be awarded, however the hearing date was extended and the
Court has not yet issued an Order setting a new hearing date. Sometime after the
hearing on attorney fees, the Court is expected to issue an Order for a judgment
amount to be awarded to the Company against the two remaining Plaintiffs.
Note 5 - The Company evaluated subsequent events through the date the financial
statements were issued and filed with the S.E.C. 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 and
services franchises and licenses for non-traditional foodservice operations
under the trade names "Noble Roman's Pizza", "Noble Roman's Take-N-Bake" 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 focused its efforts and
resources primarily on franchising and licensing for non-traditional locations
and now has awarded franchise and/or license agreements in 49 states plus
Washington, D.C., Puerto Rico, the Bahamas, Italy, the Dominican Republic and
Canada. Although from 2005 to 2007 the Company sold some franchises for its
concepts in traditional restaurant locations, the Company is currently focusing
all of its sales efforts on (1) franchises for non-traditional locations
primarily in convenience stores and entertainment facilities, (2) franchises for
stand-alone Noble Roman's Take-N-Bake Pizza retail outlets and (3) license
agreements for grocery stores to sell the Noble Roman's Take-N-Bake Pizza.
Pizzaco, Inc. is the owner and operator of the two Company locations used for
testing and demonstration purposes. The Company has no plans to operate any
other locations. References in this report to the "Company" are to Noble
Roman's, Inc. and its subsidiaries, unless the context requires otherwise.
Products & Systems
------------------
The Company's non-traditional franchises provide high-quality products, simple
operating systems, labor minimizing operations and attractive food costs.
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.
o Crust made with only specially milled flour with above average protein
and yeast.
o Fresh packed, uncondensed sauce made with secret spices, parmesan
cheese and vine-ripened tomatoes.
o 100% real cheese blended from mozzarella and Muenster, with no soy
additives or extenders.
o 100% real meat toppings, with no additives or extenders - a
distinction compared to many pizza concepts.
o Vegetable and mushroom toppings that are sliced and delivered fresh,
never canned.
9
o An extended product line that includes breadsticks and cheesy stix
with dip, pasta, baked sandwiches, salads, wings and a line of
breakfast products.
o A fully-prepared pizza crust that captures the made-from-scratch
pizzeria flavor which gets delivered to the franchise location
shelf-stable so that dough handling is no longer an impediment to a
consistent product.
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 take-n-bake retail outlet. The Company offers the
take-n-bake program in grocery stores as a license agreement rather than a
franchise agreement. The stand-alone take-n-bake pizza format is offered under a
franchise agreement. In convenience stores, take-n-bake is an available menu
offering under the existing franchise agreement. The Company uses the same high
quality pizza ingredients for its take-n-bake pizza as with its standard pizza,
with slight modifications to portioning for increased home baking performance.
Tuscano's Italian Style Subs
Tuscano's Italian Style Subs is a separate 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 franchise fee and ongoing royalty for a Tuscano's is identical to that
charged for a Noble Roman's Pizza franchise. For the most part, the Company
awards Tuscano's franchises for some of the same facilities as Noble Roman's
Pizza franchises, although Tuscano's franchises are also available for locations
that do not have a Noble Roman's Pizza franchise. Noble Roman's 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 and/or Tuscano's Subs locations. Franchisees
that opened prior to the development of the grab-n-go service system may add it
as an option. New, non-traditional franchisees have the opportunity to open with
both take-n-bake pizza and grab-n-go subs when they acquire a Noble Roman's
franchise or license.
Business Strategy
-----------------
The Company's business strategy includes the following four 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 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 and licenses are most often sold into pre-existing
facilities as a service and/or revenue enhancer for the underlying business.
Although the Company's current focus is on non-traditional franchise or license
expansion and franchising stand-alone take-n-bake pizza retail outlets, the
Company will still seek to capitalize on other franchising opportunities as they
present themselves.
As a result of the Company's major focus on non-traditional franchising,
franchising stand-alone take-n-bake retail outlets and licensing take-n-bake
pizzas for grocery stores, Company overhead and operating costs are
10
significantly less than if it were focusing on franchising traditional
locations. In addition, the Company does not operate restaurants except for two
restaurants it uses for product testing, demonstration and training purposes.
This allows for a more complete focus on selling and servicing franchises and
licenses to pursue increased unit growth.
Licensing and Franchising the Company's Take-N-Bake Program. In late 2009, the
Company introduced a take-n-bake pizza as an addition to its menu offering. The
take-n-bake pizza is designed as a stand-alone offering for grocery stores and
an add-on component for new and existing convenience store franchisees or
licensees and stand-alone franchise locations. Since the Company started
offering take-n-bake pizza to grocery store chains in late 2009, through May 6,
2013, the Company has signed agreements for approximately 1,550 grocery store
locations to operate the take-n-bake pizza program and has opened the
take-n-bake pizza program in approximately 1,150 of those locations. The Company
is currently in discussions with several grocery store operators for numerous
locations for additional take-n-bake license agreements. The Company has six
"Signature Specialty Take-N-Bake Pizza" combinations in its current standard
offerings. These pizzas feature unique, fun combinations of ingredients with
proven customer appeal in other Company venues, and include Hawaiian pizza, Four
Cheese pizza, BBQ Pork pizza, BBQ Chicken pizza, Hoppin' Jalapeno pizza and
Parmesan Tomato pizza. The Company's strategy with these specialty pizzas is to
secure more shelf space in existing locations, to add appeal of the program in
order to attract new locations, and to generally increase sales of the Company's
products.
In January 2013, in an attempt to increase sales in existing grocery stores, the
Company added two optional variations to the standard grocery store take-n-bake
program. The licensee may purchase a Noble Roman's branded display warmer and a
small commercial pizza oven for approximately $500 and offer a Noble Roman's
SuperSlice hot pizza program. The other variation is for grocery store deli
departments to install a menu board and offer the Company's Make-It-Your-Way
pizza program. With this variation, the customer can choose to purchase one of
the standard take-n-bake pizzas in the display cooler or can have the deli staff
make a pizza with the toppings of the customer's choice.
Franchising the Company's Take-N-Bake Program for Stand-Alone Locations. In
2012, the Company developed a stand-alone take-n-bake pizza prototype and has
entered into agreements for 11 locations as of May 6, 2013. The first
stand-alone take-n-bake pizza location opened in October 2012, the second
location in December 2012, the third location opened in January 2013 and the
fourth and fifth locations opened in April 2013. Three additional locations are
scheduled to open in May 2013 and the remaining three locations are planned to
open in the next few months. The Company's stand-alone take-n-bake program
features the chain's popular traditional Hand-Tossed Style pizza, Deep-Dish
Sicilian pizza, SuperThin pizza, all with a choice of three different types of
sauce, and Noble Roman's famous breadsticks with spicy cheese sauce, all in a
convenient cook-at-home format. Additional menu items include such items as
fresh salads, cookie dough, cinnamon rounds, bake-able pasta and more. The
Company is currently in discussions with several other prospects for its
stand-alone program and is advertising for additional franchisees through
various web-based franchise referral systems. In addition, the Company will
demonstrate Noble Roman's stand-alone Take-N-Bake Pizza concept at the National
Restaurant Association Show in May 2013.
11
2. Leverage the results of extensive 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 growth potential. Every ingredient and process was designed with a
view to producing superior results. The menu items were developed to be
delivered in a ready-to-use form requiring only on-site assembly and baking
except for take-n-bake pizza, which is sold to bake at home, and certain other
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 very low amounts of labor, thus
allowing for a significant competitive advantage due to the speed at which the
products can be prepared, baked and served to customers.
For example, in convenience stores and travel plazas, at competitive retail
prices, gross margins on Noble Roman's products, after cost of product and
royalty, can range from approximately 65% to 70%. The Company believes it
maintains a competitive advantage in product cost by using carefully selected,
independent third-party manufacturers and independent third-party distributors.
This allows the Company to contract for production of proprietary products and
services with highly efficient suppliers that have the potential of keeping
costs low compared to many competing systems whereby the franchisor owns and
operates production and distribution systems much less efficiently.
3. Expand the Company's overall capacity to generate new franchises and
licenses.
The Company's Chairman and CEO has assumed the lead position at all of the
Company's trade shows across the country, which is the primary means for
demonstrating its product and system advantages to thousands of prospective
non-traditional and grocery operators. This focus has underscored the Company's
current, overriding orientation towards new revenue generation.
4. Aggressively communicate the Company's competitive advantages to its target
market of potential franchisees and licensees.
The Company utilizes four basic methods of reaching potential franchisees and
licensees and to communicate its product and system advantages. These methods
include: 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 they offer opportunities for successful lead generation.
Business Operations
-------------------
Distribution
------------
Primarily all of the Company's 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
12
manufacturers to produce products with specific specifications and to sell them
to Company-approved distributors at a price negotiated between the Company and
the manufacturer.
At present, the Company has distribution agreements with 11 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
for weekly deliveries to the franchisee/licensee locations plus the grocery
store distributors in their respective territories. Each of the primary
distributors purchases the products from the manufacturer, under payment terms
agreed upon by the manufacturer and the distributor, and distributes the
products to the franchisee/licensee at a price fixed by the distribution
agreement, which is landed cost plus a contracted mark-up for distribution.
Payment terms to the distributor are agreed upon between each
franchisee/licensee and the respective distributor. In addition, the Company has
agreements with several grocery store distributors located in various parts of
the country which agree to buy their products from one of the primary
distributors and to distribute take-n-bake products to their grocery store
customers.
Franchising
The Company sells franchises into various non-traditional and traditional
venues.
The initial franchise fees are as follows:
-------------------------------------------------------------------------------
Non-Traditional, Traditional
Franchise except Hospitals Hospitals Stand-Alone
-------------------------------------------------------------------------------
Noble Roman's Pizza $ 6,000 $10,000 $15,000
-------------------------------------------------------------------------------
Tuscano's Subs $ 6,000 $10,000 $15,000
-------------------------------------------------------------------------------
Noble Roman's & Tuscano's $10,000 $18,000 $18,000
-------------------------------------------------------------------------------
The initial franchise fee for a Noble Roman's stand-alone take-n location
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 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 amount in trust for
the Company and to remit such fees to the Company within ten days after the end
of each month.
13
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 periods ended March 31, 2012 and 2013, respectively.
Three Months Ended
March 31,
--------
2012 2013
----- -----
Royalties and fees 92.7 % 94.3 %
Administrative fees and other .4 .1
Restaurant revenue 6.9 5.6
----- -----
Total revenue 100.0 % 100.0 %
Operating expenses:
Salaries and wages 13.2 % 13.2 %
Trade show expense 6.6 6.9
Travel expense 2.7 2.3
Other operating expense 9.7 9.6
Restaurant expenses 6.5 5.6
Depreciation and amortization 1.7 1.5
General and administrative 21.5 21.5
----- -----
Total expenses 61.9 60.6
----- -----
Operating income 38.1 39.4
Interest and other expense 5.2 2.8
----- -----
Income before income taxes 32.9 36.6
Income tax expense 13.0 14.5
----- -----
Net income 19.9 % 22.1 %
===== =====
Results of Operations
---------------------
Total revenue increased from $1.84 million to $1.89 million for the three-month
period ended March 31, 2013 compared to the corresponding period in 2012.
However, revenues in the first quarter 2012 included a $200,000 adjustment to
increase the estimated net realizable value of receivables in the Heyser case.
Without the adjustment revenue would have increased from $1.64 million to $1.89
million for the three-month period ended March 31, 2013 compared to the
corresponding period in 2012, or 15.5%. One-time fees, franchisee fees and
equipment commissions ("upfront fees") increased from $84,000 to $123,000 in the
first quarter 2013 compared to the first quarter 2012. Royalties and fees
increased from $1.62 million, or $1.42 million without the adjustment to the
Heyser case referenced above, to $1.66 million for the three-month period ended
March 31, 2013 compared to the corresponding period in 2012. The breakdown of
14
royalties and fees, less upfront fees, for the three month periods ended March
31, 2012 and 2013, respectively, was: royalties and fees from non-traditional
franchises other than grocery stores were $1.01 million and $1.16 million; fees
from the grocery stores were $324,000 and $397,000; royalties and fees from
traditional locations were $280,000, or $80,000 without the adjustment related
to the Heyser case referenced above, and $77,000; and royalties and fees from
stand-alone take-n-bake locations were $0 and $24,000. Included in royalties and
fees from traditional locations were $200,000 in the three-month period ended
March 31, 2012 for royalties and fees recognized as collectible from traditional
locations which are no longer operating.
Restaurant revenue decreased from $127,000 to $107,000 for the three-month
period ended March 31, 2013 compared to the corresponding period in 2012. The
Company only operates two restaurants which it uses for demonstration, training
and testing purposes.
Salaries and wages remained approximately the same at 13.2% of total revenue for
both the three-month periods ended March 31, 2013 and 2012. Actual salaries and
wages increased from $243,000 to $249,000 but were offset by an increase in
total revenue.
Trade show expenses increased from 6.6% of total revenue to 6.9% of total
revenue for the three-month period ended March 31, 2013 compared to the
corresponding period in 2012. This increase was the result of scheduling more
trade shows for grocery stores consistent with the Company's strategy of
accelerating the growth in the number of grocery store locations for its
take-n-bake offering.
Travel expenses decreased from 2.7% of total revenue to 2.3% of total revenue
for the three-month period ended March 31, 2013 compared to the corresponding
period in 2012. Actual travel expense decreased from $49,000 to $44,000 for the
three-month period ended March 31, 2013 compared to the corresponding period in
2012. The primary reason for the decrease was by more efficient scheduling of
Franchise Managers by grouping openings in the same geographic area.
Other operating expenses decreased, as a percentage of total revenue, from 9.7%
to 9.6% for the three-month period ended March 31, 2013 compared to the
corresponding period in 2012. Actual operating expenses increased from $178,000
to $181,000. The reduction in operating expenses as a percentage of total
revenue was a result of the Company's continuing efforts to control costs and to
increase revenue.
Restaurant expenses decreased as a percentage of total revenue from 6.5% to 5.6%
for the three-month period ended March 31, 2013 compared to the corresponding
period in 2012. The Company only operates two restaurants which it is uses for
demonstration, training and testing purposes.
General and administrative expenses as a percentage of total revenue remained
approximately the same at 21.5% for both the three-month period ended March 31,
2013 and 2012. Actual general and administrative expense increased from $396,000
to $407,000 for the three-month period ended March 31, 2013 compared to the
corresponding period in 2012. The actual increase was primarily the result of
the Company's hiring an investor relations firm with all other expenses
remaining approximately the same.
Total expenses decreased as a percentage of total revenue from 61.9% to 60.6%
for the three-month period ended March 31, 2013 compared to the corresponding
period in 2012. Actual expenses remained approximately the same at $1.14 million
for both the three-month periods ended March 31, 2013 and 2012. This resulted
15
from the Company's commitment to continue to tightly control expenses while
increasing total revenue.
Operating income increased as a percentage of total revenue from 38.1% to 39.4%
for the three-month period ended March 31, 2013 compared to the corresponding
period in 2012. Actual operating income increased from $700,000 to $746,000 for
the three-month period ended March 31, 2013 compared to the corresponding period
in 2012. This increase was a result of the Company's strategy of seeking to
increase revenue while controlling expenses.
Interest expense decreased as a percentage of total revenue from 5.2% to 2.8%
for the three-month period ended March 31, 2013 compared to the corresponding
period in 2012. This decrease was primarily the result of a decrease in the
principal amount of notes payable outstanding and the Company's refinancing of
its debt in May 2012 resulting in lowering the effective interest rate on its
outstanding debt.
Net income increased from $365,000 to $418,000 for the three-month period ended
March 31, 2013 compared to the corresponding period in 2012. This increase was
primarily the result of the Company's continuing efforts to increase revenue
while controlling expenses and the Company continuing to reduce its outstanding
debt.
Liquidity and Capital Resources
-------------------------------
The Company's current strategy is to grow its business by concentrating on
franchising/licensing new non-traditional locations, licensing grocery stores to
sell take-n-bake pizza and other retail products, and franchising stand-alone
take-n-bake locations. This strategy is intended to not require any significant
increase in expenses. The Company previously announced the development of the
take-n-bake program, which it has been distributing through grocery stores, and
it has also created a stand-alone take-n-bake program for an added revenue
growth opportunity. The Company has signed agreements for 11 such locations, the
first of which opened in October 2012, the second opened in December 2012, the
third opened in January 2013 and the fourth and fifth units opened in April
2013. Three additional locations are scheduled to open in May 2013 and the
remaining three locations will open in the next few months. The strategy is to
continue franchising the stand-alone take-n-bake retail outlets, which the
Company believes can be done within its existing overhead structure.
Additionally, the Company does not operate any restaurants except for two
locations for testing and demonstration purposes. This strategy requires limited
overhead and operating expense and does not require significant capital
investment.
The Company's current ratio was 2.3-to-1 as of March 31, 2013 compared to
0.9-to-1 as of March 31, 2012. This significant improvement was achieved by
refinancing all of its debt into one 48-month amortizing term loan, combined
with net income from operating activities.
On May 15, 2012, the Company entered into a Credit Agreement with a bank for a
term loan in the amount of $5.0 million which is repayable in 48 equal monthly
principal installments of approximately $104,000 plus interest with a final
payment due on May 15, 2016. Interest on the unpaid principal balance is payable
at a rate per annum of LIBOR plus 4%. The proceeds from the term loan, net of
certain fees and expenses associated with obtaining the term loan, were used to
repay existing bank indebtedness and borrowings from an officer of the Company.
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 for the foreseeable
16
future. The Company's cash flow projections are based on the Company's strategy
of focusing on growth in non-traditional venues, growth in the number of grocery
store locations licensed to sell the take-n-bake pizza and the anticipated
growth from franchising the new stand-alone take-n-bake locations.
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.
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 projected in the forward-looking
statements due to risks and uncertainties that exist in the Company's operations
and business environment, including, but not limited to competitive factors and
pricing pressures, non-renewal of franchise agreements, shifts in market demand,
the success of new franchise programs including the stand-alone take-n-bake
locations, general economic conditions, changes in demand for the Company's
products or franchises, 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" as contained in the Company's annual
report on Form 10-K. 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.
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 March 31, 2013, the Company had outstanding variable
interest-bearing debt in the aggregate principal amount of $4.0 million. The
Company's current borrowings are at a variable rate tied to the London Interbank
Offered Rate ("LIBOR") plus 4% 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 $33,000 over the succeeding
twelve-month period.
ITEM 4. Controls and Procedures
Based on his evaluation as of the end of the period covered by this report, Paul
W. Mobley, the Company's Chief Executive Officer and Chief Financial Officer,
has concluded that the Company's disclosure controls and procedures and internal
controls over financial reporting (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.
17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company, from time to time, is or may become involved in various litigation
relating to claims arising out of its normal business operations.
The Company was a Defendant in a lawsuit styled Kari Heyser, Fred Eric Heyser
and Meck Enterprises, LLC, et al v. Noble Roman's, Inc. et al, filed in Superior
Court in Hamilton County, Indiana in June 2008 (Cause No. 29D01 0806 PL 739).
The Plaintiffs' allegations of fraud against the Company and certain of its
officers were determined to be without merit and Plaintiffs have exhausted their
rights of appeal. The separate claim by one of the Plaintiffs under the Indiana
Franchise Act was settled. There are no longer any claims pending against the
Company in this case.
The Company asserted counterclaims for damages for breach of contract against
the Plaintiffs. The Company proceeded to trial against two of the Plaintiffs and
obtained damage awards against each. In addition to direct and consequential
damages in the Court's summary judgment Order, the Court determined that as a
matter of law Noble Roman's is entitled to recover attorneys' fees associated
with obtaining preliminary injunctions, fees resulting from the prosecution of
Noble Roman's counterclaims, and fees for defending against the various claims
against the Company. A hearing was set for March 21, 2013 on the amount of
attorneys' fees to be awarded, however the hearing date was extended and the
Court has not yet issued an Order setting a new hearing date. Sometime after the
hearing on attorneys' fees, the Court is expected to issue an Order for a
judgment amount to be awarded to the Company against the two remaining
Plaintiffs.
Other than as disclosed above, the Company is involved in no other material
litigation.
ITEM 6. Exhibits.
(a) Exhibits: See Exhibit Index appearing on page 20.
18
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.
NOBLE ROMAN'S, INC.
Date: May 9, 2013 By: /s/ Paul W. Mobley
----------------------------------
Paul W. Mobley, Chairman,
Chief Executive Officer,
Chief Financial Officer and
Principal Accounting Officer
(Authorized Officer and Principal
Financial Officer)
19
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.
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.
4.2 Form of Warrant Agreement filed as Exhibit 4.1 to the Registrant's
current report on Form 8-K filed August 29, 2005, is incorporated
herein by reference.
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.
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.
20
10.3 1984 Stock Option Plan filed with the Registrant's Form S-8 filed
November 29, 1994 (SEC File No. 33-86804), is incorporated herein by
reference.
10.4 Noble Roman's, Inc. Form of Stock Option Agreement filed with the
Registrant's Form S-8 filed November 29, 1994 (SEC File No. 33-86804),
is incorporated herein by reference.
10.10 Fourth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
July 19, 2011, filed as Exhibit 10.12 to the Registrant's annual
report on Form 10-K filed on March 13, 2012, is incorporated herein
by reference.
10.11 Fifth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
October 28, 2011, filed as Exhibit 10.13 to the Registrant's annual
report on Form 10-K filed March 13, 2012, is incorporated herein by
reference.
10.12 Sixth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
December 1, 2011, filed as Exhibit 10.14 to the Registrant's annual
report on Form 10-K filed on March 13, 2012, is incorporated herein by
reference.
10.13 Seventh Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
January 30, 2012 filed as Exhibit 10.15 to the Registrant's annual
report on Form 10-K filed on March 13, 2012, is incorporated herein by
reference.
10.14 Amended Promissory Note to Paul Mobley dated December 21, 2011, filed
as Exhibit 10.16 to the Registrant's annual report on Form 10-K filed
on March 13, 2012, is incorporated herein by reference.
10.15 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.
10.16 Promissory Note to BMO Harris Bank, N.A. dated May 15, 2012, filed as
Exhibit 10.18 to the Registrant's quarter report on Form 10-Q filed on
August 13, 2012, is incorporated herein by reference.
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.
31.1 C.E.O. and C.F.O. Certification under Rule 13a-14(a)/15d-14(a)
32.1 C.E.O. and C.F.O. Certification under Section 1350
101 Interactive Financial Data
21