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.
There were 3,069 franchised/licensed or Company-owned outlets in operation on
3,064 on
The Company, atDecember 31, 2020 andDecember 31, 2021 , had deferred tax assets on its balance sheet totaling$3.1 million and$3.2 million , respectively, after reducing the carrying value in 2020 by$668,000 , and adding a tax benefit in 2021 of$67,350 . Based on the Company's review of its available tax credits and 2021 tax benefit, the Company believes it is more likely than not that the deferred tax assets will be utilized prior to their expiration. Financial Summary
The preparation of the consolidated financial statements in conformity withUnited States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company evaluates the carrying values of its assets, including property, equipment and related costs, accounts receivable and deferred tax assets, periodically to assess whether any impairment indications are present due to (among other factors) recurring operating losses, significant adverse legal developments, competition, changes in demand for the Company's products or changes in the business climate that affect the recovery of recorded values. If any impairment of an individual asset is evident, a charge will be recorded to reduce the carrying value to its estimated fair value. 16 Table of Contents Condensed Consolidated Statement of Operations Data Noble Roman's, Inc. and Subsidiaries Years Ended December 31, 2019 2020 2021 Revenue: Restaurant revenue - company-owned restaurants$ 4,830,199 $ 6,209,279 $ 8,939,569 Restaurant revenue - company-owned non-traditional 673,647 470,846 485,595 Franchising revenue 6,162,576 4,841,229 4,444,826 Administrative fees and other 38,202 14,310 14,898 Total revenue 11,704,624 11,535,664 13,884,888 Operating expenses: Restaurant expenses - company-owned restaurants 4,250,406 4,938,133
7,224,833
Restaurant expenses - company-owned non-traditional 626,453 447,040 466,469 Franchising expenses 2,092,001 1,736,870 1,810,363 Total operating expenses 6,968,860 7,122,043 9,501,665 Depreciation and amortization 382,793 382,368 848,913
General and administrative expenses 1,739,383 1,717,209
1,790,722
Total expenses 9,091,036 9,221,620 12,141,300
Operating income 2,613,588 2,314,044 1,743,588
Interest expense 774,565 1,914,344 1,361,625Adjust valuation of receivables 1,300,000 4,941,718 - Income (loss) before income taxes 539,023 (4,542,018 )
381,963
Income tax expense (benefit) 917,088 839,928 (127,502 )
Net income (loss) $ (378,065 ) $ (5,381,946 ) $ 509,465
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Quarter Ended December 31,
2020 2021
Revenue:
Restaurant revenue - company-owned restaurants
105,474 131,978
Franchising revenue 1,033,103 1,013,831
Administrative fees and other 3,119 4,095
Total revenue 3,267,910 3,593,685
Operating expenses:Restaurant expenses - company-owned restaurants 1,785,010
2,166,475
Restaurant expenses - company-owned non-traditional 108,880
131,890 Franchising expenses 496,491 496,891 Total operating expenses 2,390,381 2,795,256 Depreciation and amortization 119,863 399,931
General and administrative expenses 463,023
504,282 Total expenses 2,973,267 3,699,469 Operating income 294,643 (105,784 ) Interest expense 337,059 345,410
Adjust valuation of receivables 4,941,718
-
Loss before income taxes (4,984,134 ) (451,194 )
Income tax expense (benefit) 921,911 (127,502 )
Net loss $ (5,906,045 ) $ (323,692 ) (1) In 2021, the Company incurred
paid as a non-cash expense for the new lease accounting rules. In 2020, the
Company reviewed its net operating loss carry-forward and concluded that
million of its net operating loss carry-forward may expire before it is all
used and therefore increased its income tax expense by
its deferred tax assets for that amount. The Company believes the remaining
deferred tax assets will be utilized completely.
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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 2020 2021
2020 2021
Revenue $ 2,126,214 100 % $ 2,443,781 100 % $ 6,209,279 100 % $ 8,939,569 100 %
Cost of
sales 476,772 22.4 513,848 21.0 1,348,084 21.7 1,868,997 20.9
Salaries and
wages 583,000 27.4 743,396 30.5 1,354,795 21.8 2,233,376 25.0
Facility
cost
including
rent, common
area and
utilities 289,845 13.6 379,851 15.5 947,571 15.3 1,187,984 13.3
Packaging 58,792 2.8 87,317 3.6 176,267 2.8 271,507 3.0
All other
operating
expenses 376,600 17.7 442,063 18.1 1,111,416 17.9 1,662,969 18.6
Total
expenses 1,785,009 84.0 2,166,475 88.7 4,938,133 79.5 7,224,833 80.8
Margin
contribution $ 341,205 16.0 % $ 277,306 11.3 % $ 1,271,146 20.5 % $ 1,714,736 19.2 %
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 2020 2021 2020 2021
Royalties
and fees
franchising $ 845,509 81.8 % $ 860,192 84.8 % $4,102,304 84.7 %$ 3,816,164 85.8 % Royalties and fees grocery 187,494 18.2 153,639 15.2 738,925 15.3 628,662 14.2 Total royalties and fees 1,033,003 100 % 1,013,831 100 % 4,841,229 100 % 4,444,826 100 % Salaries and wages 205,631 19.9 215,656 21.3 625,954 12.9 719,252 16.2 Trade show expense 105,000 10.2 105,000 10.4 420,000 8.7 399,000 9.0 Travel and auto 16,348 1.6 21,446 2.1 86,323 1.8 73,270 1.6 All other
op. expenses 169,512 16.4 154,789 15.2
604,592 12.5 618,841 13.9 Total expenses 496,491 48.1 496,891 49.0 1,736,869 35.9 1,810,363 40.7 Margin contribution$ 536,512 51.9 %$ 516,940 51.0 %$ 3,104,359 64.1 %$ 2,634,463 59.3 %
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 2020 2021 2020 2021 Revenue$ 105,474 100 %$ 131,978 100 %$ 470,846 100 %$ 485,595 100 % Total expenses 108,880 103.2 131,890 99.9 447,040 94.9 466,469 96.1 Margin contribution$ (3,406 ) (3.2 )%$ 88 .1 %$ 23,806 5.1 %$ 19,126 3.9 % Results of Operations
Company-Owned Craft Pizza & Pub
The revenue from this venue increased from$2.1 million to$2.4 million for the fourth quarter and grew from$6.2 million to$8.9 million for the 12 months endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020. The primary reason for the increase in both the three-month period and the 12-month period were new locations which opened in October andNovember 2020 and October andDecember 2021 , respectively. 19 Table of Contents Cost of sales as a percentage of revenue decreased from 22.4% to 21.0% in the fourth quarter and from 21.7% to 20.9%, respectively, for the comparable periods in 2021 compared to 2020. The decreases were the result of menu price increases and partially offset by commodity price increases and inefficiency of new staff. Salaries and wages as percentage of revenue increased from 27.4% to 30.5% and from 21.8% to 25.0% for the three-month and 12-month periods endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020. This increase was the result of worker shortages resulting in higher salaries and wages to remain competitive for employees partially offset by menu price increases. Facility costs, including rent, common area maintenance and utilities, as a percentage of revenue increased from 13.6% to 15.5% and decreased from 15.3% to 13.3% of revenue for the respective three-month and 12-month periods endedDecember 31, 2021 compared to the corresponding periods in 2020. The primary reason for the decrease in the 12-month period was the newer restaurants achieving higher sales volumes with less rent expense due in part to less square footage.
All other operating costs and expenses as a percentage of revenue increased from 17.7% to 18.1% for the three-month period endedDecember 31, 2021 and from 17.9% to 18.6% for the 12-month period endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020. The increases were the result of general inflationary pressures. Gross margin contribution decreased from 16.0% to 11.3% and from 20.5% to 19.2% for the respective three-month and 12-month periods endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020. 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 has initiated a second price increase during the second quarter of 2022 to help offset the continue cost pressures.
Franchising Revenue and Expense
Total revenue from this venue declined from$1.03 million to$1.01 million and from$4.84 million to$4.44 million for the three-month and 12-month periods endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020. Royalties and fees from franchising increased from$846,000 to$860,000 in the fourth quarter and decreased from$4.10 million to$3.82 million for the year endedDecember 31, 2021 compared to the corresponding periods in 2020. Royalties and fees from grocery store take-n-bake for the same period decreased from$187,000 to$154,000 and from$739,000 to$629,000 for the three-month and 12-month periods endedDecember 31, 2021 compared to the corresponding periods in 2020. 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. Gross margin in this venue decreased from 51.9% to 51.0% and from 64.1% to 59.3% for the three-month and 12-month periods endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020. This decrease was the result of the decreases in revenue. The decrease in revenue was largely due to closings, some of which were temporary and some permanent of various host business locations throughout the country as a result of the COVID pandemic. 20 Table of Contents
Company-Owned Non-Traditional Locations
Gross revenue from this venue increased from$105,000 to$132,000 and from$471,000 to$486,000 for the respective three-month and 12-month periods endedDecember 31, 2021 compared to the corresponding periods in 2020. This venue consists of one location in a hospital. Access to the hospital had been very limited and movement within the hospital were prohibited because of the potential spread of COVID-19. 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$109,000 to$132,000 and from$447,000 to$466,000 for the three-month and 12-month periods endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020. The primary reason for the increases was increased revenue as the hospital relieving 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 increased from$120,000 to$400,000 and from$382,000 to$849,000 for three-month and 12-month periods endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020. These increases were the result of more Company-owned locations of Craft Pizza & Pub restaurants combined with expensing of preopening costs totaling approximately$471,000 for new locations.
General and administrative expenses increased from$463,000 to$504,000 and from$1.72 million to$1.79 million for the three-month and 12-month periods endedDecember 31, 2021 , respectively, compared to the corresponding periods in 2020.
The increase reflected general inflation pressures as well as the growth of the Craft Pizza & Pub venue.
Interest expense increased from$337,000 to$345,000 for the three-month period endedDecember 31, 2021 compared to the corresponding period in 2020, and decreased from$1.91 million to$1.36 million for the respective and 12-month period endedDecember 31, 2021 , respectively, compared to the corresponding period in 2020. The primary reason for the increase in the three-month period was the compounding of the PIK interest on the Senior Note. The decrease in the 12-month period was a result of the financing that occurred inFebruary 2020 resulting in non-cash write-offs of the unamortized original loan cost for bothFirst Financial Bank and the private placement subordinated debt, which in the aggregate was$658,000 partially offset by the non-cash PIK interest expense of$221,000 in the period endedDecember 31, 2020 and$254,000 in 2021. This non-cash expense of$658,000 in 2020 was necessary to obtain the new financing in order to reduce cash outlays for principal repayments, provide liquidity and to provide growth capital for addition of Craft Pizza & Pub locations. 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 price hit a record low, since the Company started tracking it in 1999. SinceApril 2020 , cheese gradually increased to a record high but 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. At the current time in 2022, cheese prices are well above the ten year average but
not
near the record high.
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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.
Labor costs across the country generally have seen upward pressure on hourly
rates as the unemployment rate decreased and competition for hourly employees
increased, which intensified during 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.
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
As ofDecember 31, 2021 , the Company had three Craft Pizza & Pub locations under franchise agreements which were open and one of those franchisees is exploring other locations for an additional franchise location.
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 2.3-to-1 as of
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 . These Notes bear interest at 10% per annum 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 . 22 Table of Contents OnFebruary 7, 2020 , the Company entered into the Agreement with the Purchaser, pursuant to which the Company issued to the Purchaser 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. 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 does not require any fixed principal payments untilFebruary 28, 2023 , at which time required monthly payments of principal in the amount of$33,333 begin and continue until maturity. The Senior Note requires the Company to make additional payments on the principal balance of the Senior Note based on its consolidated excess cash flow, as defined in the Agreement. 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.
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 open
additional Company-owned Craft Pizza & Pub restaurants in the future.
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.
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Contractual Obligations
The following table sets forth the future contractual obligations of the Company
as of March 1, 2022 :
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Long-term debt (1) $ 9,097,985 $ - $ 1,791,655 $ 7,306,330 $ -
Operating leases 6,268,963 656,146 2,333,679 1,828,629 1,450,509 Total$ 15,366,948 $ 656,146 $ 4,125,334 $ 9,134,959 $ 1,450,509 (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, 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 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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