NOBLE ROMAN'S, INC. Introduction
The Company currently owns and operates nine Craft Pizza & Pub locations and one non-traditional location in a hospital. Craft Pizza & Pub is designed to have a fun, pleasant atmosphere serving pizza and other related menu items, all made fresh using fresh ingredients in the view of the customers for inside dining and offers Pizza Valet service for a quick, easy and fun way to provide carry-out for those customers who want to dine elsewhere. These units operate under the trade name "Noble Roman's Craft Pizza & Pub". The Company also sells and services franchises and licenses for non-traditional foodservice operations under the trade names "Noble Roman's Pizza" and "Noble Roman's Take-N-Bake." The non-traditional concepts' hallmarks include high quality pizza along with other related menu items, simple operating systems, fast service times, labor-minimizing operations, attractive food costs and overall affordability. During the 12-month period endedDecember 31, 2022 there were no company-operated or franchised Craft Pizza & Pub restaurants opened or closed. During the same 12-month period there were 31 new non-traditional outlets opened and seven non-traditional outlets closed. The Company, atDecember 31, 2021 andDecember 31, 2022 , had deferred tax assets on its balance sheet totaling$3.2 million and$3.5 million , respectively, after adding a tax benefit in 2022 of$292,435 . Based on the Company's review of its available tax credits and 2022 tax benefit, the Company believes it is more likely than not that the deferred tax assets will be utilized prior to their expiration. 15 Table of Contents Financial Summary
The preparation of the consolidated financial statements in conformity withUnited States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company evaluates the carrying values of its assets, including property, equipment and related costs, accounts receivable and deferred tax assets, periodically to assess whether any impairment indications are present due to (among other factors) recurring operating losses, significant adverse legal developments, competition, changes in demand for the Company's products or changes in the business climate that affect the recovery of recorded values. If any impairment of an individual asset is evident, a charge will be recorded to reduce the carrying value to its estimated fair value. Condensed Consolidated Statement of Operations Data Noble Roman's, Inc. and Subsidiaries Years Ended December 31, 2020 2021 2022 Revenue: Restaurant revenue - company-owned restaurants$ 6,209,279 $ 8,939,569 $ 9,704,169 Restaurant revenue -company-owned non-traditional 470,846 485,595 712,517 Franchising revenue 4,841,229 4,444,826 4,002,824 Administrative fees and other 14,310 14,898 33,255 Total revenue 11,535,664 13,884,888 14,452,765 Operating expenses: Restaurant expenses - company-owned restaurants 4,938,133 7,224,833
8,516,405
Restaurant expenses - company-owned non-traditional 447,040 466,469 704,665 Franchising expenses 1,736,870 1,810,363 2,185,751 Total operating expenses 7,122,043 9,501,665 11,406,821 Depreciation and amortization 382,368 848,913 450,550
General and administrative expenses 1,717,209 1,790,722
2,167,678
Total expenses 9,221,620 12,141,300 14,025,049
Operating income 2,314,044 1,743,588 427,716
Interest expense 1,914,344 1,361,625 1,626,221Adjust valuation of receivables 4,941,718 - - Income (loss) before income taxes (4,542,018 ) 381,963
(1,198,505 )
Income tax expense (benefit) 839,928 (127,502 ) (142,435 )
Net income (loss) $ (5,381,946 ) $ 509,465 $ (1,056,070 )
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Quarter Ended December 31,
2021 2022
Revenue:
Restaurant revenue - company-owned restaurants
131,978 206,625
Franchising revenue 1,013,831 784,423
Administrative fees and other 4,095 8,029
Total revenue 3,593,685 3,329,103
Operating expenses:Restaurant expenses - company-owned restaurants 2,166,475
2,099,726
Restaurant expenses - company-owned non-traditional 131,890
201,026 Franchising expenses 496,891 741,678 Total operating expenses 2,795,256 3,042,430 Depreciation and amortization 399,931 112,555
General and administrative expenses 504,282
568,989 Total expenses 3,699,469 3,723,974 Operating income (105,784 ) (394,871 ) Interest expense 345,410 558,617 Loss before income taxes (451,194 ) (953,486 ) Income tax expense (benefit) (127,502 ) (80,522 ) Net loss$ (323,692 ) $ (872,964 )
(1) In 2022, the Company incurred
paid as a non-cash expense as required by the new lease accounting rules. The
Company, in the first quarter of 2023, submitted amended federal Form 941
returns for 2020 and 2021 to obtain a credit under the ERC of
which will be reduced by
While the ERC is applied to prior periods and is recorded as a reduction of
expenses in the first quarter of 2023 and is expected to be received within a
few months. (2) Decreases in revenue for both the three-month and 12-month periods were the
result of an adjustment of prior years allowances of approximately
and additional adjustments in the fourth quarter of approximately
a reserve against possible uncollectables, which in the opinion of management
were not necessary except to be ultra conservative.
The income tax benefit in both the three-montha and 12-month ended December
(3) 31, 2022 was reduced by
balance sheet.
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The following table sets forth the revenue, expense and margin contribution of
the Company's Craft Pizza & Pub locations and the percent relationship to its
revenue:
Three Months ended December 31, Year-Ended December 31,
Description 2021 2022
2021 2022
Revenue $ 2,443,781 100 % $ 2,330,026 100 % $ 8,939,569 100 % $ 9,704,169 100 %
Cost of
sales 513,848 21.0 513,636 22.0 1,868,997 20.9 2,076,514 21.4
Salaries and
wages 743,396 30.5 694,600 29.8 2,233,376 25.0 2,850,333 29.4
Facility
cost
including
rent, common
area and
utilities 379,851 15.5 403,592 17.3 1,187,984 13.3 1,635,951 16.8
Packaging 87,317 3.6 85,433 3.7 271,507 3.0 344,823 3.6
All other
operating
expenses 442,063 18.1 402,467 17.3 1,662,969 18.6 1,608,784 16.5
Total
expenses 2,166,475 88.7 2,099,726 90.1 7,224,833 80.8 8,516,405 87.7
Margin
contribution $ 277,306 11.3 % $ 230,301 9.9 % $ 1,714,736 19.2 % $ 1,187,764 12.3 %
The following table sets forth the revenue, expense and margin contribution of the Company's franchising venue and the percent relationship to its revenue:
Three Months ended December 31, Year Ended December 31,
Description 2021 2022 2021 2022
Royalties
and fees
franchising $ 860,192 84.8 % $ 627,719 80.0 % $ 3,816,164 85.8 % $ 3,371,643 84.2 %
Royalties
and fees
grocery 153,639 15.2 156,704 20.0 628,662 14.2 631,181 15.8
Total
royalties
and fees 1,013,831 100 % 784,423 100 % 4,444,826 100 % 4,002,824 100 %
Salaries and
wages 215,656 21.3 223,495 28.5 719,252 16.2 861,190 21.5
Trade show
expense 105,000 10.4 90,000 11.5 399,000 9.0 315,000 7.9
Travel and
auto 21,446 2.1 32,028 4.1 73,270 1.6 113,186 2.8
All other
op. expenses 154,789 15.2 396,155 50.5 618,841 13.9 896,375 22.4
Total
expenses 496,891 49.0 741,678 94.6 1,810,363 40.7 2,185,751 54.6
Margin
contribution $ 516,940 51.0 % $ 42,745 5.4 % $ 2,634,463 59.3 % $ 1,817,073 45.4 %
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The following table sets forth the revenue, expense and margin contribution of the Company-owned non-traditional venue and the percent relationship to its revenue:
Three Months ended December 31, Year Ended December 31,
Description 2021 2022 2021 2022
Revenue $ 131,978 100 % $ 206,625 100 % $ 485,595 100 % $ 712,517 100 %
Total
expenses 131,890 99.9 201,026 97.3 466,469 96.1 704,665 98.9
Margin
contribution $ 88 .1 % $ 5,599 2.7 % $ 19,126 3.9 % $ 7,852 1.1 %
Results of Operations
Company-Owned Craft Pizza & Pub
The revenue from this venue decreased from$2.4 million to$2.3 million for the fourth quarter and grew from$8.9 million to$9.7 million for the 12 months endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. The primary reason for the decrease in the three-month period and the increase in the 12-month period was same store sales reduction in the fourth quarter as a result of being in the opening period for two locations last year, and the increase in year-to-date was same store sales increases. Cost of sales as a percentage of revenue increased from 21.0% to 22.0% in the fourth quarter and from 20.9% to 21.4%, respectively, for the comparable periods in 2022 compared to 2021. The increases were the result of increased prices on most ingredients, which were partially offset by menu price increases. Salaries and wages as a percentage of revenue decreased from 30.5% to 29.8% in the fourth quarter and increased from 25.0% to 29.4% for the 12-month periods endedDecember 31, 2022 compared to the corresponding periods in 2021. This decrease in the fourth quarter was the result of scheduling efficiencies and a slight easing in the labor market and the increase in the annual cost was primarily the effect of the PPP loan in 2021 which reduced certain expenses including salaries and wages. Facility costs, including rent, common area maintenance and utilities, as a percentage of revenue increased from 15.5% to 17.3% and from 13.3% to 16.89% of revenue for the respective three-month and 12-month periods endedDecember 31, 2022 compared to the corresponding periods in 2021. The primary reason for the increase in both periods were two locations that opened during the fourth quarter 2021. All other operating costs and expenses as a percentage of revenue decreased from 18.1% to 17.3% for the three-month period endedDecember 31, 2022 and from 18.6% to 16.5% for the 12-month period endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. The decreases were the result of more efficient operations as the locations had been there longer combined with menu price increases. Gross margin contribution decreased from 11.3% to 9.9% and from 19.2% to 12.3% for the respective three-month and 12-month periods endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. The decreases in margin were primarily the result of increase in wages and other costs due to inflationary pressures only partially offset by menu price increases. The Company initiated a second price increase during the second quarter of 2022 to help offset the continued cost pressures. The largest impact on the 12-month period was the impact of the PPP loan in 2021 used to offset certain expenses. 19 Table of Contents
Franchising Revenue and Expense
Total revenue from this venue declined from$1.01 million to$784,000 and from$4.4 million to$4.0 million for the three-month and 12-month periods endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. Many of the grocery stores that previously offered take-n-bake were not offering take-n-bake at this time because of operational demands on the grocery stores and a shortage of available labor. Decreases in revenue for both the three-month and 12-month periods were the result of an adjustment of prior years allowances of approximately$140,000 and additional adjustments in the fourth quarter of approximately$235,000 as a reserve against possible uncollectables, which in the opinion of management were not necessary except to be ultra conservative. The decrease was also caused by a number of locations that had to be closed because of COVID restrictions partially offset by an increase in revenue from other existing locations. Gross margin in this venue decreased from 51.0% to 5.4% and from 59.3% to 49.4% for the three-month and 12-month periods endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. The decrease in gross margin for both periods was a decrease in revenue of approximately$140,000 and an increase in expense of approximately$235,000 as explained in the previous paragraph. Going forward this venue has been showing new growth activity and both the revenue and margin is expected to achieve or exceed historic levels in upcoming periods.
Company-Owned Non-Traditional Locations
Gross revenue from this venue increased from$132,000 to$207,000 and from$486,000 to$713,000 for the respective three-month and 12-month periods endedDecember 31, 2022 compared to the corresponding periods in 2021. This venue consists of one location in a hospital. Access to the hospital had been very limited and movement within the hospital was prohibited because of the potential spread of COVID-19, and revenue increased as those restrictions within the hospital were relaxed. The Company does not intend to operate any more Company-owned non-traditional locations except for the one location that is currently being operated. Total expenses increased from$132,000 to$201,000 and from$466,000 to$705,000 for the three-month and 12-month periods endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. The primary reason for the increases was increased revenue as the hospital relieved many of their restrictions on access to the hospital and on movement within the hospital, as discussed in the previous paragraph, resulting from the COVID-19 pandemic.
Corporate Expenses
Depreciation and amortization decreased from$400,000 to$113,000 and from$849,000 to$451,000 for the three-month and 12-month periods endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. These decreases were the result of opening costs for new Company-owned locations of Craft Pizza & Pub restaurants becoming fully expensed prior to 2022. General and administrative expenses increased from$504,000 to$569,000 and from$1.79 million to$2.17 million for the three-month and 12-month periods endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. The increase reflected general inflation pressures as well as the growth of
the
Craft Pizza & Pub venue.
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Interest expense increased from$345,000 to$559,000 and from$1.36 million to$1.63 million for the respective three-month and 12-month periods endedDecember 31, 2022 , respectively, compared to the corresponding periods in 2021. The primary reason for the increase in both periods was the compounding of the PIK interest on the Senior Note and the increase in interest rate. In 2023, the interest cost should decline gradually as a result of the required principal payment on the note which should more than offset the additional interest because of compounding of the PIK notes. During the first quarter of 2023 the Company determined that it is entitled to an ERC of$1.718 million and has submitted amended federal Form 941 returns claiming that refund. The ERC refund is treated as a government grant reducing appropriate expenses for the$1.718 million less expenses for applying for the refund of$258,000 or a net of$1.460 million . Recording this refund in the first quarter of 2023 will result in significantly improved margins in the Company-owned Craft Pizza and Pub, Franchising Revenue and Expense, Company-Owned Non-Traditional Locations and Corporate Expenses. Impact of Inflation The primary inflation factors affecting both Company and franchised operations are food and labor costs. Cheese makes up the single largest ingredient cost on a pizza. Cheese prices have fluctuated substantially for the past several years. In 2015 through 2017, cheese prices averaged 3% below the 10-year average. In 2018, prices further decreased and averaged 6% below the 10-year average. OnApril 15, 2020 , cheese prices hit a record low, since the Company started tracking it in 1999. SinceApril 2020 , cheese gradually increased to a record high, declined somewhat over the latter part of 2020 but remained well above the previous ten-year average causing the ten-year average to shift higher. During 2021, cheese price fluctuated erratically due to the various impacts of COVID-19 modestly above and below the now higher ten-year average. During 2022, cheese prices were well above the ten-year average and ending the year approximately 20% above the ten-year average. So far in 2023, cheese prices are remaining well above the ten-year average but have declined somewhat in recent weeks to about 13.5% above the ten-year average as of the filing of this Annual Report on
Form 10-K. The Company has also been impacted in recent times by inflationary pressures on other commodities, such as pork, beef, chicken and wheat. The Company expects further significant inflationary pricing pressures to occur, at a minimum, in both the wheat and tomato markets as well as beef. Labor costs across the Company's markets generally have seen upward pressure on hourly rates as the unemployment rate decreased and competition for hourly employees increased, which intensified during the post-peak period of the COVID-19 pandemic. The same applies to salaried management. The Company's Craft Pizza & Pub operations currently pay well above minimum wage rates to remain competitive. The Company has experienced similar pressure on management salaries. Future labor cost increases for non-traditional franchisees and licensees may be somewhat mitigated due to the relatively low labor requirements of the Company's franchise concepts. Mounting pressures in the labor markets, with the return of an improved economy, could be a factor in both franchised and Company operations going forward. Should labor costs increase substantially, or if commodity prices for cheese or other ingredients rise significantly, or some combination thereof occurs, restaurants and foodservice concepts, including the Company and its franchisees, would face pressure to increase menu pricing, the feasibility of which could be subject to competitive concerns and customer
tolerance.
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Liquidity and Capital Resources
The Company's strategy is to grow its business by concentrating on
franchising/licensing non-traditional locations, franchising its updated
stand-alone concept, Craft Pizza & Pub, and operating a limited number of
Company-owned Craft Pizza & Pub restaurants. The Company added new
Company-operated Craft Pizza & Pub locations in January and
The Company is operating one non-traditional location in a hospital and has no plans for operating any additional non-traditional locations.
The Company's current ratio was 1.3-to-1 as ofDecember 31, 2022 compared to 2.3-to-1 as ofDecember 31, 2021 . The Company's current ratio was negatively impacted by amortization of the Corbel loan which began in February and increased inMarch 2023 . In addition, it was negatively impacted by the approximately$140,000 in prior year allowances and additional adjustments in the fourth quarter of approximately$235,000 as a reserve against possible uncollectables, which in the opinion of management were not necessary except to be ultra conservative. Going forward the current ratio will be significantly improved in the first quarter of 2023 as the Company determined that it is entitled to an ERC of$1.718 million and has submitted amended federal Form 941 returns claiming that refund. The ERC refund is treated as a government grant by reducing appropriate expenses for the$1.718 million less expenses for applying for the refund of$258,000 or a net of$1.460 million . Recording this refund in the first quarter of 2023 will result in significantly improved margins in the Company-owned Craft Pizza and Pub, Franchising Revenue and Expense, Company-Owned Non-Traditional Locations and Corporate Expenses. InJanuary 2017 , the Company completed the offering of$2.4 million principal amount of the Notes convertible to Common Stock at$0.50 per share 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. In 2018,$400,000 principal amount of Notes was converted into 800,000 shares of the Company's Common Stock, inJanuary 2019 another Note in the principal amount of$50,000 was converted into 100,000 shares of the Company's Common Stock, and inAugust 2019 another Note in the principal amount of$50,000 was converted into 100,000 shares of the Company's Common Stock, leaving principal amounts of Notes of$1.9 million outstanding as ofDecember 31, 2019 . Holders of Notes in the principal amount of$775,000 extended their maturity date toJanuary 31, 2023 . InFebruary 2020 ,$1,275,000 principal amount of the Notes were repaid in conjunction with a new financing leaving a principal balance of$625,000 of subordinated convertible notes outstanding dueJanuary 31, 2023 . During 2022, all of those Notes were extended except for Notes with outstanding principal of$150,000 which cannot be repaid until the Corbel Note is repaid. These Notes bear interest at 10% per annum, including the Notes which have not been extended, paid quarterly and are convertible to Common Stock any time prior to maturity at the option of the holder at$0.50 per share. The remaining Warrants to purchase 775,000 shares were re-priced to$0.57 per share as a result of the financing completed inFebruary 2020 . OnFebruary 7, 2020 , the Company entered into the Agreement with Corbel, pursuant to which the Company issued to Corbel the Senior Note in the initial principal amount of$8.0 million . The Company has used the net proceeds of the Agreement as follows: (i)$4.2 million was used to repay the Company's then-existing bank debt which were in the original amount of$6.1 million ; (ii)$1,275,000 was used to repay the portion of the Company's existing subordinated convertible debt the maturity date of which most had not previously been extended, (iii) debt issuance costs; and (iv) the remaining net proceeds was used for working capital and other general corporate purposes, including development of new Company-owned Craft Pizza & Pub locations. 22 Table of Contents
The Senior Note bears cash interest of LIBOR, as defined in the Agreement, plus 7.75%. In addition, the Senior Note requires PIK Interest of 3% per annum, which is added to the principal amount of the Senior Note. Interest is payable in arrears on the last calendar day of each month. The Senior Note matures onFebruary 7, 2025 . The Senior Note requires principal payments of$33,333 inFebruary 2023 and beginning inMarch 2023 principal payments of$83,333 per month continuing until maturity. At the end of the third quarter 2022, the Company entered into an amendment to the Senior Note agreement changing the required payments of principal beginning inMarch 2023 from$33,333 per month to$83,333 per month in exchange for lowering the financial covenants and eliminating the excess cash flow requirement. In addition, when LIBOR is phased out it will be replaced with SOFR. OnApril 25, 2020 , the Company received a loan of$715,000 under the PPP. In accordance with the applicable accounting policy adopted, the Company accounted for the loan as a government grant and presented it in the Condensed Consolidated Statement of Operations as a reduction of certain qualifying expenses incurred during the three-month period endedJune 30, 2020 . These expenses included payroll costs including payroll benefits, interest on mortgage obligations, rent under lease agreements and utilities and other qualifying expenses pursuant to the CARES Act. OnFebruary 19, 2021 , the Company received notice from the SBA that the entire$715,000 loan was forgiven in accordance with the provisions of the CARES Act. OnFebruary 5, 2021 , the Company received an additional loan of$940,734 under the PPP. The Company used the proceeds of this loan for qualifying expenses under the CARES Act. The Company accounted for this loan as a government grant and presented in the condensed Consolidated Statement of Operations as reduction of certain qualifying expenses incurred during the three-month period endedMarch 31, 2021 . OnNovember 19, 2021 the Company received notice from the SBA that the entire$940,734 loan was forgiven in accordance with the provision
of the CARES Act. The Company, in the first quarter of 2023, submitted amended federal Form 941 returns for 2020 and 2021 to obtain a credit under the ERC (which is a part of the CARES Act) of$1.718 million which will be reduced by$258,000 commission for a net of$1.461 million . While the ERC is applied to prior periods, the expected net refund was recorded as a reduction in expenses in the first quarter of 2023 and is expected to be received within a few months. As a result of the financial arrangements described above and the Company's cash flow projections, the Company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan. The Company's cash flow projections for the next two years are primarily based on the Company's strategy of growing the non-traditional franchising/licensing venues, operating Craft Pizza & Pub locations and pursuing a franchising program for Craft Pizza & Pub restaurants as market conditions allow. The Company intends to refinance its outstanding debt before the maturity of the Corbel debt inFebruary 2025 . The Company does not anticipate that any of the recently issued pronouncements relating to the Statement of Financial Accounting Standards will have a material impact on its Consolidated Statement of Operations or its Consolidated Balance Sheet. 23 Table of Contents Contractual Obligations The following table sets forth the future contractual obligations of the Company as ofMarch 1, 2023 : Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Long-term debt (1)$ 9,390,425 $ 866,663 $ 8,523,762 $ - $ - Operating leases 5,922,892 732,689 2,626,041
1,611,098 953,063 Total$ 15,313,317 $ 1,599,352 $ 11,149,803 $ 1,611,098 $ 953,063
(1) The amounts do not include interest.
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 the effects of the COVID-19 pandemic and its aftermath, competitive factors and pricing and cost pressures, non-renewal of franchise agreements, shifts in market demand, the success of franchise programs, including the Noble Roman's Craft Pizza & Pub format, the Company's ability to successfully operate an increased number of Company-owned restaurants, general economic conditions, changes in demand for the Company's products or franchises, the Company's ability to service its loans, the acceptance of the amended federal Form 941 returns relating to the ERC, the impact of franchise regulation, the success or failure of individual franchisees and inflation and other changes in prices or supplies of food ingredients and labor as well as the factors discussed under "Risk Factors" above in this 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.
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