Noble Romans (NROM) 10-Q 13 Nov 18 2018 Q3 Quarterly report Financial data

Document and Entity Information

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 09, 2018
Document And Entity Information
Entity Registrant Name	NOBLE ROMANS INC
Entity Central Index Key	709,005
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding		21,583,032
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2,018

Condensed Consolidated Balance

Condensed Consolidated Balance Sheets (Unaudited) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Current assets:
Cash	$ 232,399	$ 461,068
Accounts receivable - net	1,847,683	1,796,757
Inventories	836,468	779,989
Prepaid expenses	743,658	680,326
Total current assets	3,660,208	3,718,140
Property and equipment:
Equipment	3,066,711	2,533,848
Leasehold improvements	1,268,769	581,197
Construction and equipment in progress	90,691	558,602
Total	4,426,171	3,673,647
Less accumulated depreciation and amortization	1,530,183	1,372,821
Net property and equipment	2,895,988	2,300,826
Deferred tax asset	5,653,872	5,735,504
Deferred contract cost	592,160	0
Goodwill	278,466	278,466
Other assets including long-term portion of receivables-net	6,055,630	6,851,697
Total assets	19,136,323	18,884,633
Current liabilities:
Current portion of term loan payable to bank	871,429	754,173
Accounts payable and accrued expenses	589,380	674,600
Total current liabilities	1,460,809	1,428,773
Long-term obligations:
Term loans payable to bank - net of current portion	4,091,887	4,246,375
Convertible notes payable	1,531,502	1,131,982
Deferred contract income	592,160	0
Derivative warrant liability	0	503,851
Derivative conversion liability	0	925,561
Total long-term liabilities	6,215,549	6,807,769
Stockholders' equity:
Common stock – no par value (40,000,000 shares authorized, 20,783,032 issued and outstanding as of December 31, 2017 and 21,583,032 issued and outstanding as of September 30, 2018)	24,739,482	24,322,885
Accumulated deficit	(13,279,517)	(13,674,794)
Total stockholders' equity	11,459,965	10,648,091
Total liabilities and stockholders' equity	$ 19,136,323	$ 18,884,633

Condensed Consolidated Balanc_2

Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
Stockholders' equity:
Common stock, par value	$ 0	$ 0
Common stock, authorized shares	40,000,000	40,000,000
Common stock, issued shares	21,583,032	20,783,032
Common stock, outstanding shares	21,583,032	20,783,032

Condensed Consolidated Statemen

Condensed Consolidated Statements of Operations (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Income Statement [Abstract]
Royalties and fees	$ 1,656,074	$ 1,733,956	$ 4,831,305	$ 5,062,549
Administrative fees and other	26,548	10,992	47,177	34,933
Restaurant revenue - Craft Pizza & Pub	1,308,890	457,133	3,663,255	1,223,351
Restaurant revenue - non-traditional	283,135	310,840	862,777	871,192
Total revenue	3,274,647	2,512,921	9,404,514	7,192,025
Operating expenses:
Salaries and wages	245,581	216,432	774,397	698,326
Trade show expense	121,200	126,361	365,739	371,472
Travel expense	23,945	37,589	76,515	146,017
Other operating expenses	282,742	222,045	791,055	649,778
Restaurant expenses - Craft Pizza & Pub	1,048,566	347,342	2,877,957	902,459
Restaurant expenses - non-traditional	279,079	307,583	851,766	855,980
Depreciation and amortization	125,399	60,127	298,155	171,890
General and administrative	434,458	434,532	1,252,781	1,246,620
Total expenses	2,560,970	1,757,011	7,288,365	5,042,542
Operating income	713,676	760,910	2,116,149	2,149,483
Interest	172,639	601,192	486,292	1,220,945
Adjust valuation of receivables	1,295,805	350,000	1,295,805	350,000
Change in fair value of derivatives	0	929,810	0	632,537
Income (loss) before income taxes from continuing operations	(754,768)	(1,120,092)	334,052	(53,999)
Income tax expense (benefit)	(192,489)	(72,388)	81,632	220,089
Net income (loss) from continuing operations	(562,279)	(1,047,704)	252,420	(274,088)
Loss from discontinued operations net of tax benefits $79,228 for 2017	0	(129,037)	0	(129,037)
Net income(loss)	$ (562,279)	$ (1,176,741)	$ 252,420	$ (403,125)
Earnings per share - basic:
Net income (loss)from continuing operations	$ (.03)	$ (.05)	$ 0.01	$ (.01)
Net loss from discontinued operations net of tax benefit	0	(.01)	0	(.01)
Net income (loss)	$ (.03)	$ (.06)	$ 0.01	$ (.02)
Weighted average number of common shares outstanding	21,428,684	20,783,032	21,153,728	20,783,032
Diluted earnings per share:
Net income (loss) from continuing operations	$ (.02)	$ (.04)	$ 0.01	$ (.01)
Net loss from discontinued operations net of tax benefit	0	(.01)	0	(.01)
Net income (loss)	$ (.02)	$ (0.04)	$ 0.02	$ (.02)
Weighted average number of common shares outstanding	26,294,754	25,792,995	26,294,754	25,657,464

Condensed Consolidated Statem_2

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - 9 months ended Sep. 30, 2018 - USD ($)	Common Stock	Accumulated Deficit	Total
Beginning Balance, Amount at Dec. 31, 2017	$ 24,322,885	$ (13,674,794)	$ 10,648,091
Beginning Balance, Shares at Dec. 31, 2017	20,783,032
Remove derivatives in accordance with ASU 2017-11		142,857	142,857
Net income		252,420	252,420
Amortization of value of employee stock options		16,597	16,597
Conversion of convertible note to common stock, Amount	$ 400,000		400,000
Conversion of convertible note to common stock, Shares	800,000
Ending Balance, Amount at Sep. 30, 2018	$ 24,739,482	$ (13,279,517)	$ 11,459,965
Ending Balance, Shares at Sep. 30, 2018	21,583,032

Condensed Consolidated Statem_3

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
OPERATING ACTIVITIES
Net income	$ 252,420	$ (403,125)
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization	433,139	444,410
Deferred income taxes	81,632	140,862
Other non-cash expense	0	24,526
Change in fair value of derivatives	0	632,537
(Increase) decrease in:
Accounts receivable	(50,925)	(548,387)
Inventories	(56,479)	27,535
Prepaid expenses	(63,332)	(18,222)
Other assets including long-term portion of receivables	812,526	(557,527)
Increase (decrease) in:
Accounts payable and accrued expenses	(40,220)	276,392
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	1,368,761	19,001
INVESTING ACTIVITIES
Purchase of property and equipment	(1,125,886)	(341,023)
NET CASH USED IN INVESTING ACTIVITIES	(1,125,886)	(341,023)
FINANCING ACTIVITIES
Payment of principal - BMO term loans	0	(1,366,454)
Payment of principal on Super G Funding, LLC loan	0	(2,066,282)
Payment of principal - Kingsway America loan	0	(600,000)
Net payment of officers loans	0	(310,000)
Net proceeds from First Financial term loans	500,000	4,114,790
Payment of principal - First Financial Bank	(594,434)	0
Additional loan closing cost	(332,110)	0
Net proceeds from issuance of convertible notes	0	647,119
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES	(426,544)	419,173
DISCONTINUED OPERATIONS
Payment of obligations from discontinued operations	(45,000)	(193,265)
Decrease in cash	(228,669)	(96,114)
Cash at beginning of period	461,068	477,928
Cash at end of period	232,399	381,814
Supplemental schedule of investing and financing activities
Cash paid for interest	$ 367,905	$ 911,488

1. Basis of Presentation

1. Basis of Presentation	9 Months Ended
	Sep. 30, 2018
Notes to Financial Statements
1. Basis of Presentation	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, 2017 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 nine-month periods ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.

2. Royalties and Fees

2. Royalties and Fees	9 Months Ended
	Sep. 30, 2018
Notes to Financial Statements
2. Royalties and Fees	Royalties and fees included initial franchise fees of $42,000 and $164,000 for the three-month and nine-month periods ended September 30, 2017, and $97,000 and $217,000 for the three-month and nine-month periods ended September 30, 2018, respectively. Royalties and fees included equipment commissions of $16,000 and $34,000 for the three-month and nine-month periods ended September 30, 2017, and $22,000 and $63,000 for the three-month and nine-month periods ended September 30, 2018, respectively. Royalties and fees, less initial franchise fees and equipment commissions, were $1.7 million and $4.9 million for the respective three-month and nine-month periods ended September 30, 2017, and $1.5 million and $4.5 million for the respective three-month and nine-month periods ended September 30, 2018. 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. In accordance with Accounting Standards Update ("ASU") 2014-09, the Company adopted revenue and expense recognition as described in ASU 2014-09 effective January 2018. Initial franchise fees and related contract costs are deferred and amortized on a straight-line basis over the term of the franchise agreement, generally five to 10 years. The effect to comparable periods within the financial statements is not material as the initial franchise fee for the non-traditional franchise is intended to defray the initial contract costs, and the franchisee fees and contract costs initially incurred and paid approximate the relative amortized franchise fees and contract costs for those same periods. The deferred contract income and costs both approximated $592,000 on September 30, 2018. At December 31, 2017 and September 30, 2018, the Company reported net accounts receivable from franchisees of $7.8 million and $6.9 million, respectively, which were both net of allowances of $1.5 million. There were 2,854 franchises/licenses in operation on December 31, 2017 and 2,886 franchises/licenses in operation on September 30, 2018. During the nine-month period ended September 30, 2018, there were 47 new outlets opened and 15 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 of the 2,122 licensed grocery store units included in the counts above have left the system.

3. Earnings per Share

3. Earnings per Share	9 Months Ended
	Sep. 30, 2018
Notes to Financial Statements
3. Earnings per Share	The following table sets forth the calculation of basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2017: Three Months Ended September 30, 2017 Income (Numerator) Shares (Denominator) Per-Share Amount Net loss $ (1,176,741 ) 20,783,032 $ (.06 ) Effect of dilutive securities Options and warrants 209,963 Convertible notes 60,000 4,800,000 Dilutive earnings per share $ (1,116,741 ) 25,792,995 $ (.04 ) Net loss Nine Months Ended September 30, 2017 Income (Numerator) Shares (Denominator) Per-Share Amount Net loss $ (403,125 ) 20,783,032 $ (.02 ) Effect of dilutive securities Options and warrants 209,963 Convertible notes 131,303 4,664,469 Dilutive earnings per share Net loss $ (271,822 ) 25,657,464 $ (.01 ) The following table sets forth the calculation of basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2018: Three Months Ended September 30, 2018 Income (Numerator) Shares (Denominator) Per-Share Amount Net loss $ (562,279 ) 21,428,684 $ (.03 ) Effect of dilutive securities Options and warrants 711,722 Convertible notes 51,929 4,154,348 Dilutive earnings per share $ (510,350 ) 26,294,754 $ (.02 ) Net loss Nine Months Ended September 30, 2018 Income (Numerator) Shares (Denominator) Per-Share Amount Net income $ 252,420 21,153,728 $ .01 Effect of dilutive securities Options and warrants 711,722 Convertible notes 166,099 4,429,304 Dilutive earnings per share Net income $ 418,519 26,294,754 $ .02

4. Notes Payable

4. Notes Payable	9 Months Ended
	Sep. 30, 2018
Debt Disclosure [Abstract]
4. Notes Payable	In 2016 and 2017, the Company conducted a private placement (the "Offering") of convertible notes ("Notes") and warrants ("Warrants") in which it issued $2.4 million principal amount of Notes and Warrants to purchase up to 2.4 million shares of the Company's common stock at an exercise price of $1.00 per share subject to adjustment. The accounting treatment of derivative financial instruments formerly required 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 was recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassessed the classification of its derivative instruments at each balance sheet date. If the classification changed as a result of events during the period, the contract was reclassified as of the date of the event that caused the reclassification. In July 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-11, which simplifies the accounting for certain accounting instruments with down round features. This update changed the classification analysis of certain equity-linked financial instruments such as warrants and embedded conversion features such that a down round feature is disregarded when assessing whether the instrument is indexed to an entity's own stock. As a result of this change in the quarter ended March 31, 2018, the Company removed all of the derivative accounting from its financial statements resulting in a gain of $142,857 recognized as a cumulative adjustment to retained earnings on January 1, 2018. Placement agent fees and other origination cost of the Notes are deducted from the carrying value of the Notes, as original issue discount (“OID”). The OID is being amortized over the term of the Notes. As of September 30, 2018, the holders of $400,000 of the Notes had converted them to 800,000 shares of Noble Roman's common stock. The Notes are subordinated to the Company's term loans payable to First Financial Bank (the "Term Loans") which currently mature in 2022. Pursuant to the loan agreement the Notes cannot be repaid while the term loans are outstanding, however, the Notes can be converted to common stock at any time. The Company intends to offer note holders an opportunity to extend the maturity of the Notes to January, 2023 on the current interest rate and convertibility terms.

5. Operating Lease

5. Operating Lease	9 Months Ended
	Sep. 30, 2018
Notes to Financial Statements
5. Operating Lease	The Company has future obligations of $6.6 million under current operating leases as follows: due in 2018, $159,000, due in 2019 and 2020, $1.3 million, due in 2021 and 2022, $1.3 million and due after 2022, $3.9 million.

6. Other Assets

6. Other Assets	9 Months Ended
	Sep. 30, 2018
Other Assets [Abstract]
6. Other Assets	Other assets as of September 30, 2018, include security deposits of $16,300, cash surrender value of life insurance in the amount of $199,000, long-term franchisee receivables in the amount of $5.8 million which is net after a $1.5 million valuation allowance. Long-term receivable from franchisees represent receivables from approximately 80 different non-traditional franchisees (Noble Roman’s franchises located within a host facility). These receivables originated from a variety of circumstances, including where audits of a number of the non-traditional franchises’ reporting of sales found them to be underreporting their sales and, therefore, underpaying their royalty obligations. In other instances, some franchisees were selling non-Noble Roman’s products under the Noble Roman’s trademark. In addition, some receivables arose from the Company incurring legal fees to enforce the franchise agreements and other collection costs which adds to the receivables in accordance with the agreements totaling approximately $2.3 million and some of the receivables were generated by early termination of the franchise agreements. These receivables have been classified as long-term since collections are expected to extend over more than a one-year cycle. In the three-month period ended September 30, 2018the Company wrote off $1.3 million of receivables, of which approximately 70% were legal fees, associated with two receivables which had been the subject of a court cases pending over two years. Even though the Company believes those receivables and collection cost may ultimately have been collectable, the Company entered into settlement agreements to stop the cash outlays which would have been required to litigate the claims.

7. Subsequent Events

7. Subsequent Events	9 Months Ended
	Sep. 30, 2018
Subsequent Events [Abstract]
7. Subsequent Events	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.

3. Earnings per Share (Tables)

3. Earnings per Share (Tables)	9 Months Ended
	Sep. 30, 2018
Earnings Per Share
Earnings Per Share	Three Months Ended September 30, 2017 Income (Numerator) Shares (Denominator) Per-Share Amount Net loss $ (1,176,741 ) 20,783,032 $ (.06 ) Effect of dilutive securities Options and warrants 209,963 Convertible notes 60,000 4,800,000 Dilutive earnings per share $ (1,116,741 ) 25,792,995 $ (.04 ) Net loss Nine Months Ended September 30, 2017 Income (Numerator) Shares (Denominator) Per-Share Amount Net loss $ (403,125 ) 20,783,032 $ (.02 ) Effect of dilutive securities Options and warrants 209,963 Convertible notes 131,303 4,664,469 Dilutive earnings per share Net loss $ (271,822 ) 25,657,464 $ (.01 ) Three Months Ended September 30, 2018 Income (Numerator) Shares (Denominator) Per-Share Amount Net loss $ (562,279 ) 21,428,684 $ (.03 ) Effect of dilutive securities Options and warrants 711,722 Convertible notes 51,929 4,154,348 Dilutive earnings per share $ (510,350 ) 26,294,754 $ (.02 ) Net loss Nine Months Ended September 30, 2018 Income (Numerator) Shares (Denominator) Per-Share Amount Net income $ 252,420 21,153,728 $ .01 Effect of dilutive securities Options and warrants 711,722 Convertible notes 166,099 4,429,304 Dilutive earnings per share Net income $ 418,519 26,294,754 $ .02

2. Royalties and Fees (Details

2. Royalties and Fees (Details Narrative)	3 Months Ended		9 Months Ended
	Sep. 30, 2018USD ($)Integer	Sep. 30, 2017USD ($)	Sep. 30, 2018USD ($)Integer	Sep. 30, 2017USD ($)	Dec. 31, 2017Integer
Royalties and Fees | $	$ 1,500,000	$ 1,700,000	$ 4,500,000	$ 4,900,000
Number of Franchisee | Integer	2,886		2,886		2,854
Outlets opened | Integer			47
Outlets closed | Integer			15
Initial Franchisee Fees
Royalties and Fees | $	$ 97,000	42,000	$ 217,000	164,000
Equipment Commission
Royalties and Fees | $	$ 22,000	$ 16,000	$ 63,000	$ 34,000

3. Earnings Per Share (Details)

3. Earnings Per Share (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Income (Numerator)
Net income	$ (562,279)	$ (1,176,741)	$ 252,420	$ (403,125)
Dilutive earnings per share: Net income per share with assumed conversions	$ (510,350)	$ (1,116,741)	$ 418,519	$ (271,822)
Shares (Denominator)
Shares, basic	21,428,684	20,783,032	21,153,728	20,783,032
Dilutive earnings per share: Income available to common stockholders and assumed conversions	26,294,754	25,792,995	26,294,754	25,657,464
Per-Share (Amount)
Earnings per share	$ (.03)	$ (.06)	$ 0.01	$ (.02)
Diluted earnings per share Income available to common stockholders and assumed conversions	$ (.02)	$ (0.04)	$ 0.02	$ (.02)
Options
Shares (Denominator)
Effect of dilutive securities	711,722	209,963	711,722	209,963
Convertible Preferred Stock
Income (Numerator)
Effect of dilutive securities	$ 51,929	$ 60,000	$ 166,099	$ 131,303
Shares (Denominator)
Effect of dilutive securities	4,154,348	4,800,000	4,429,304	4,664,469