| Note 3 - Notes Payable | In 2012, the Company entered into a Credit Agreement with the Bank
for a term loan in the amount of $5.0 million which was repayable in 48 equal monthly principal installments of approximately $104,000
plus interest with a final payment due in May 2016. In October 2013, the Company entered into a First Amendment to the Credit Agreement
(the “First Amendment”). The First Amendment maintained the terms of the term loan except for reducing the monthly
principal payments from $104,000 to approximately $80,700 and extending the loan’s maturity to February 2017. All other terms
and conditions of the term loan remained the same including interest on the unpaid principal at a rate per annum of LIBOR plus
4%. The First Amendment also provided for a new term loan in the original amount of $825,000 requiring monthly principal payments
of approximately $20,600 per month commencing in November 2013 and continuing thereafter until the final payment in February 2017.
The term loan provided for interest on the unpaid principal balance to be paid monthly at a rate per annum of LIBOR plus 6.08%
per annum. Proceeds from the new term loan were used to redeem the Company’s Series B Preferred Stock which were earning
a return to the holders of 12% per annum. In October 2014, the Company entered into a Second Amendment to its
Credit Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the Company borrowed $700,000 in the form
of a term loan repayable in 36 equal monthly installments of principal in the amount of $19,444 plus interest on the unpaid balance
of LIBOR plus 6% per annum. The terms and conditions of the Credit Agreement were otherwise unchanged. The Company used the proceeds
from the loan for additional working capital and open air display coolers for grocery stores, as a result of the then recent growth
in the grocery store take-n-bake venue. In July 2015, the Company borrowed $600,000 from a third-party lender,
evidenced by a promissory note which was to mature in July 2017. Interest on the note was payable at the rate of 8% per annum quarterly
in arrears and this loan was subordinate to borrowings under the Company’s bank loan. In connection with the loan, the Company
issued, to the holder of the promissory note, a warrant entitling the holder to purchase up to 300,000 shares of the Company’s
common stock at an exercise price per share of $2.00. The warrant expires in July 2020. The Kingsway warrant included anti-dilution
features similar to those discussed in Note 3. As such, the Kingsway warrant is considered a derivative liability at December 31,
2016 due to the additional borrowing from Super G and the conversion feature of the private placement Notes, the number of shares
of common stock underlying the Kingsway warrants increased from 300,000 to 480,000 and the exercise price per warrant decreased
from $2.00 per share to $.50 per share. In 2017, the number of shares underlying the warrant increased to 1.2 million and the exercise
price remained at $.50 per share. 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. The Company repaid this loan in January 2017 with the proceeds of a $600,000 loan from Paul W. Mobley at an interest rate
of 7% per annum payable quarterly in arrears. The loan matures in March 2018. In December 2015, the Company borrowed $100,000 from Paul W. 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 W. Mobley, evidenced by a promissory note. Proceeds were used for working capital. In conjunction with the loan
from Super G Funding, LLC (“Super G”), as described below, Paul W. Mobley subordinated his $250,000 note and A. Scott
Mobley subordinated his $60,000 note to the Super G loan and agreed to extend the maturity of those notes to June 10, 2018. Interest
on the notes are payable at the rate of 10% per annum paid quarterly in arrears and the loans are unsecured. In January 2016, the Company entered into a Third Amendment to its
Credit Agreement (the “Third Amendment”). Pursuant to the Third Amendment, the Company consolidated its three term
loans with the Bank into a new term loan of $1,967,000 repayable in monthly payments of principal in the amount of $54,654 plus
interest on the unpaid balance of LIBOR plus 6% per annum. The new term loan was to mature March 31, 2017 when the remaining principal
balance would have become due. In addition, the Third Amendment provided for a revolving loan in the maximum amount of $500,000
with a maturity of March 31, 2017. In June 2016, the Company borrowed $2.0 million from Super G and
used those funds: (i) to repay the $500,000 revolving Bank loan and (ii) for working capital purposes. This loan is to be repaid
in the total amount of $2.7 million in regular semi-monthly payments over a two year period. In the fourth quarter of 2016, the Company issued 32 Units, for a
purchase price of $50,000 per Unit, or $1,600,000 in the aggregate. Each $50,000 Unit consists of a convertible, subordinated,
unsecured promissory note (a “Note”) in an aggregate principal amount of $50,000 and warrants (the “Warrants”)
to purchase up to 50,000 shares of the Company’s common stock, no par value per share (the “Common Stock”). The
Company issued Units to investors including the following related parties: Paul W. Mobley, the Company’s Executive Chairman,
Chief Financial Officer and a director of the Company ($150,000); and Herbst Capital Management, LLC, the principal of which is
Marcel Herbst, a director of the Company ($200,000). Interest on the Notes accrues at the annual rate of 10% and is payable
quarterly in arrears. Principal of the Notes matures three years after issuance. Each holder of the Notes may convert them at any
time into Common Stock of the Company at a conversion price of $0.50 per share (subject to anti-dilution adjustments). Subject
to certain limitations, upon 30 days’ notice the Company may require the Notes to be converted into Common Stock if the daily
average weighted trading price of the Common Stock equals or exceeds $2.00 per share for a period of 30 consecutive trading days.
The Notes provide for customary events of default. The Notes are unsecured and subordinate to senior debt of the Company. The Warrants expire three years from the date of issuance and provide
for an exercise price of $1.00 per share of Common Stock (subject to anti-dilution adjustments). Subject to certain limitations,
the Company may redeem the Warrants at a price of $0.001 per share of Common Stock subject to the Warrant upon 30 days’ notice
if the daily average weighted trading price of the Common Stock equals or exceeds $1.50 per share for a period of 30 consecutive
trading days. In connection with the issuance of the Units, the Company granted
the Investors certain registration rights with respect to the shares of Common Stock into which the Notes are convertible and for
which the Warrants are exercisable. Divine Capital Markets LLC served as the placement agent for the
offering of the Units (the “Placement Agent”). In consideration of the Placement Agent’s services, the Placement
Agent earns a cash fee and expense allowance equal to 10% and 3%, respectively, of the gross proceeds of the offering, as well
as warrants (the “Placement Agent Warrants”) for 10% of Units sold. Each Placement Agent Warrant allow the Placement
Agent to purchase a Unit for $60,000. The Company evaluated the Notes, Warrants and Placement Agent Warrants
to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for
in accordance with ASC 815, Derivatives and Hedging. Due to the anti-dilution features in the contracts, commonly referred to as
“down-round protection”, the contracts do not meet the scope exception for treatment as a derivative under ASC 815.
As such, the embedded conversion feature in the Notes (the “Conversion Feature”), the Warrants and the Placement Agent
warrants are considered derivative financial instruments. The accounting treatment of derivative financial instruments requires
that the Company record these instruments at their fair values as of the inception date of the agreement and at fair value as of
each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each
reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance
sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date
of the event that caused the reclassification. The fair value of the derivative instruments, along with the cash
Placement Agent fees, are deducted from the carrying value of the Notes, as original issue discount (“OID”). The OID
is amortized over the term of the Notes using the effective interest rate method. Activity related to the Units during the fourth quarter of 2016 is
as follows:
Gross Proceeds $ 1,600,000
Placement Agent Fees 208,000
Fair Value of Warrants 96,380
Fair Value of Conversion Features 458,875
Fair Value of Placement Agent Warrants 46,358
Legal and Other Costs of Issuance 42,918
Net Amount Allocable to Notes $ 747,469 At December 31, 2016, the balance of the Notes is comprised of:
Face Value $ 1,600,000
Unamortized OID (830,165 )
Carrying Value $ 769,835 Interest expense related to the Notes, including amortization of
OID, amounted to $22,365 for the year ended December 31, 2016. The Company intends to use the net proceeds of the Notes to fund
the opening of a Noble Roman’s Noble Roman’s Craft Pizza & Pub restaurants and for general corporate purposes. In January 2017, the Company entered into a Fourth Amendment to its
Credit Agreement (the “Fourth Amendment”). Pursuant to the Fourth Amendment, the Bank extended the maturity of the
term loan to March 31, 2018. All other terms and conditions of the loan remain the same including the monthly principal payments
and the interest rate. Interest paid on the Company’s loans in 2016 was $401,034 and
in 2015 was $139,328. |
