NOBLE ROMAN'S, INC. Introduction
The Company currently owns and operates five Craft Pizza & Pub locations and one non-traditional location in a hospital. The Company uses the Company-operated Craft Pizza & Pub locations as a base to support the franchising of that concept. 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 3,064 franchised/licensed or Company-owned outlets in operation on
3,041 onDecember 31, 2018 . During 2019, 35 new franchised/licensed were opened and 12 franchised outlets left the system. Grocery stores are accustomed to adding products for a period of time, removing them for a period of time and possibly re-offering them. Therefore, it is unknown how many grocery store licenses, out of the total count of 2,402, have left the system. As discussed in Note 1 to the Company's consolidated financial statements, the Company uses significant estimates in evaluating its assets including such items as accounts receivable from franchisees to reflect the actual amount that may be collected from those receivables. To arrive at these estimates the Company utilized multiple means of analysis, including management's own analysis and informed assessment of individual accounts. Based on this approach, in 2018 the Company permanently wrote off$1.3 million and created an additional reserve for possible non-collections of$2.8 million . Also, based on this approach and with particular consideration of the potential impact of the COVID-19 pandemic, as discussed under Risk Factors, may have on the economic stability of the former franchisees it was decided to take an additional reserve for possible non-collections of$1.3 million . The actual amount the Company eventually collects, however, could differ from that estimation. AtDecember 31, 2018 and 2019, the Company reported net accounts receivable from franchisees of$4.4 million and$4.0 million , respectively, each of which were net of allowances, to reflect the amount the Company expects to realize for the franchisee receivables. The allowance as ofDecember 31, 2018 was$4.3 million and as ofDecember 31, 2019 was$5.6 million . Approximately$972,000 was transferred from short-term to long-term during 2019. The franchisee receivables, for which the valuation allowance is carried, are related to former franchisees and a significant portion relates back to 2014 and 2015, which arose out of a variety of breaches by former non-traditional franchisees. The Company, atDecember 31, 2018 andDecember 31, 2019 , had deferred tax assets on its balance sheet totaling$4.8 million and$3.9 million , respectively, after reducing the carrying value in 2018 by$1.4 million , and in 2019 by$400,000 , respectively, based on the Company's review of its anticipated results in the current business plan. The Company believes it is more likely than not that the remaining deferred tax assets will be utilized prior to their expiration, between 2020 and 2036. 13 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 provided 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, 2017 2018 2019 Revenue:
Restaurant revenue - company-owned restaurants
Restaurant revenue - company-owned non-traditional 1,173,729 1,156,347 673,647
Franchising revenue 6,798,213
6,422,315 6,162,576
Administrative fees and other 45,730 53,443 38,202
Total revenue 9,838,409 12,447,947 11,704,624
Operating expenses:Restaurant expenses - company-owned restaurants 1,389,410 3,909,142 4,250,406
Restaurant expenses - company-owned non-traditional 1,155,074 1,145,106 626,453
Franchising expenses 2,443,359
2,627,745 2,092,001
Total operating expenses 4,987,843 7,681,993 6,968,860
Depreciation and amortization 240,854 440,240 382,793
General and administrative expenses 1,665,980 1,668,718 1,739,383
Total expenses 6,894,677 9,790,951 9,091,036
Operating income 2,943,732 2,656,996 2,613,588
Interest expense 1,474,027 655,203 774,565
Adjust valuation of receivables 440,000 4,095,805 1,300,000
Change in fair value of derivatives 174,737 - -
Income (loss) before income taxes 854,968 (2,094,012) 539,023
Income tax expense 4,146,459 930,397 917,088
Net loss $(3,291,491) $(3,024,409) $(378,065)
14
Quarter Ended December 31,
2018 2019
Revenue:Restaurant revenue - company-owned restaurants$1,152,587 $1,136,277 Restaurant revenue - company-owned non-traditional 293,570 173,703 Franchising revenue 1,591,010 1,267,403 Administrative fees and other 6,267 4,413 Total revenue 3,043,434 2,581,796
Operating expenses:
Restaurant expenses - company-owned restaurants 1,031,185 1,040,697
Restaurant expenses - company-owned non-traditional 293,340 161,983
Franchising expenses 620,039 543,446
Total operating expenses 1,944,564 1,746,126
Depreciation and amortization 142,085
145,875
General and administrative expenses 415,930
465,423
Total expenses 2,502,579 2,357,424
Operating income 540,855 224,372
Interest expense 168,911 207,720Adjust valuation of receivables 2,800,000
1,300,000
Loss before income taxes (2,428,056) (1,283,348)
Income tax expense 848,765 479,719
Net loss $(3,276,821) $(1,763,067)
(1)
In 2018, the Company incurred $300,000 in various expenses related to initiating
a franchising program for Craft Pizza & Pub, $166,000 in pre-opening costs for
the Company's Craft Pizza & Pub locations and $39,000 for abandoned leasehold
improvements. The Company does not expect to incur these expenses in the future.
(2)
The significant increase in income tax expense for 2017 was a result of
decreasing the carrying value of the Company's deferred tax assets as a result
of the 2017 Tax Act lowering the highest corporate income tax rate from 34% to
21%. The increase in tax expense for 2018 was the result of the Company
evaluating its deferred tax assets and determining that $1.4 million of the
deferred tax credits may expire in 2019 and 2020 before they are fully utilized,
partially offset by the tax benefit of $503,000 from the loss before income from
continuing operations which was primarily the result of the adjustment made to
the valuation of receivables.
(3)
In 2019, the Company incurred $134,545 in rent expense in addition to rent paid
as a non-cash expense for the new lease accounting rules. The Company reviewed
its net operating loss carry-forward and concluded that $1.7 million of its net
operating loss carry-forward may expire before it is all used and therefore
increased its income tax expense by $400,000 to decrease its deferred tax assets
for that amount. The Company believes the remaining deferred tax assets will be
utilized completely.
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:
15
Year-Ended December 31,
Description
2018 2019 2018 2019
Revenue $1,152,587 100% $1,136,276 100% $4,815,842 100% $4,830,199 100%
Cost of sales 255,084 22.1 253,858 22.3 1,061,737 22.0 1,031,504 21.4
Salaries and
wages 382,755 33.2 341,431 30.0 1,509,879 31.4 1,448,246 30.0
Facility cost
including rent,
common area and
utilities 181,293 15.7 184,623 16.2 655,188 13.6 832,123 17.2
Packaging 30,000 2.6 31,469 2.8 124,407 2.6 130,708 2.7
All other
operating
expenses 182,053 15.8 207,819 18.3 557,931 11.6 807,825 16.7
Total expenses 1,031,185 89.5 1,019,200 89.7 3,909,142 81.2 4,250,406 88.0
Margin
contribution $121,402 10.5% $117,076 10.3% $906,700 18.8% $579,793 12.0%
Margin contribution from this venue for the year ended December 31, 2019 was
decreased $134,545 for non-cash expense related to the adoption of ASU 2016-02
accounting for leases which became effective after January 1, 2019 for publicly
reporting companies.
The following table sets forth the revenue, expense and margin contribution of
the Company's franchising venue and the percent relationship to its revenue:
Year Ended December 31,
2018 2019 2018 2019
Description
Royalties and
fees franchising $1,268,229 79.7% $966,145 76.2% $4,998,678 77.8% $5,026,305 81.6%
Royalties and
fees grocery 322,781 20.3 301,258 23.8 1,423,637 22.2 1,136,271 18.4
Total royalties
and fees 1,591,010 100.0 1,267,403 100.0 6,422,315 100.0 6,162,576 100.0
Salaries and
wages 222,614 14.0 199,839 15.8 997,011 15.5 751,961 12.2
Trade show
expense 118,800 7.5 105,000 8.3 480,000 7.5 420,000 6.8
Travel and auto 65,747 4.1 25,745 2.0 194,117 3.0 108,375 1.8
All other op.
expenses 361,720 22.7 212,862 16.8 956,617 14.9 811,665 13.2
Total expenses 768,881 48.3 543,446 42.9 2,627,745 40.9 2,092,001 33.9
Margin
contribution $822,129 51.7% $723,957 57.1% $3,794,570 59.1% $4,070,575 66.1%
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:
Year Ended December 31,
2018 2019 2018 2019
Description
Revenue $293,570 100% $173,703 100% $1,156,347 100% $673,647 100%
Total expenses 293,340 99.9 161,982 93.3 1,145,106 99.0 626,453 93.0
Margin contribution $230 .1% $11,721 6.7% $11,241 1.0% $47,194 7.0%
16
Results of Operations
Company-Owned Craft Pizza & Pub
The revenue from this venue declined from$1.2 million to$1.1 million for the fourth quarter and grew from$4.82 million to$4.83 million for the 12 months ended compared to the comparable periods in 2018. The primary reason for the decrease in the three-month period were same store sales decline relative to the grand opening weeks from the latest two store openings in 2018. The increase in the year was the result of one additional restaurant, which opened inJune 2018 , partially offset by the unusually extreme winter weather conditions inIndiana during the months of January andFebruary 2019 . Cost of sales increased slightly from 22.1% to 22.3% in the fourth quarter but improved from 22.0% to 21.4% for the year compared to the comparable periods in 2018. This improvement was the result of efficiency gain as the restaurants matured and as the staff gained experience. Salaries and wages improved to 30.0% from 33.2% and to 30.0% from 31.4% for the three-month and twelve-month periods endedDecember 31, 2019 compared to the comparable periods in 2018. This improvement was the results of improved efficiency as the restaurants matured and as the staff gained experience. These gains were partially offset in the first three months of 2019 by the unusually extreme winter weather conditions inIndiana during the months of January andFebruary 2019 . Facility costs, including rent, common area maintenance and utilities, increased to 16.2% from 15.7% and to 17.2% from 13.6% of revenue for the respective three-month and twelve-month periods endedDecember 31, 2019 compared to the comparable periods in 2018. The primary reason for the significant increases was the increase in common area maintenance. In 2018, all four locations were operating in new strip centers based on the landlord's estimate of common area maintenance costs. When the estimates were reconciled with the actual costs, the Company had to pay common area maintenance in 2019 based on the actual costs in 2018. In two cases, the actual common area maintenance costs were double the landlord's estimate. In addition, the non-cash expense related to the adoption of ASU 2016-02 increased reported rent costs of$134,544 for the year 2019. The rent expense for existing locations will be less than the amount paid in some future years as the leases mature. All other costs and expenses increased to 18.3% from 15.8% and to 16.7% from 11.6% of revenue for the respective three-month and twelve-month periods endedDecember 2019 compared to the comparable periods in 2018. The primary increases were insurance, advertising and delivery fees. The insurance increase was a combination of price increases and the effect of low sales in January and February due to the extreme winter weather conditions. The increase in advertising was a more normal level from the reduced level in 2018 during the period of new openings. The delivery fees were the result of adding delivery service by use of outside vendors which began during the harsh winter weather last year. Gross margin contribution decreased to 10.3% from 10.5% and to 12.0% from 18.8% for the respective three-month and twelve-month periods endedDecember 31, 2019 compared to the comparable periods in 2018. A significant contributor of those margin decreases were the results of the impact of severe winter weather in 2019 on revenue, as noted above. In addition, the margin contribution was also impacted by the unanticipated effect of facility costs primarily due to an increase in common area maintenance fees, the addition of non-cash expense as a result of the new accounting rules regarding leases and the addition of delivery fees from adding delivery service by outside vendors that began during the harsh winter weather in January andFebruary 2019 .
Franchising Revenue and Expense
Total revenue from this venue declined to$1.3 million from$1.6 million and declined to$6.2 million from$6.4 million for the three-month and twelve-month periods endedDecember 31, 2019 compared to the comparable periods in 2018. Royalties and fees from franchising remained approximately the same at$5.0 million for the twelve-month period endedDecember 31, 2019 compared to the comparable period in 2018. Royalties and fees from grocery store take-n-bake decreased to$301,000 from$323,000 and to$1.1 million from$1.4 million for the three-month and twelve-month periods endedDecember 31, 2019 compared to the comparable periods in 2018. The increase in royalties and fees from franchising and the decrease in royalties and fees from grocery store take-n-bake reflected the change in emphasis on franchising over licensing grocery stores to sell take-n-bake pizza because of the general business conditions that existed in 2019. Gross margin in this venue increased to 57.1% from 51.7% and to 66.1% from 59.1% for the three-month and twelve-month periods endedDecember 31, 2019 compared to the comparable periods in 2018. These increased margins were the direct result of the Company's in-depth review of its operations to find ways to minimize costs but at the same time to support revenue. The Company expects these higher margins to continue in the future. 17
Company-Owned Non-Traditional Locations
Gross revenue from this venue decreased to$174,000 from$294,000 and to$674,000 from$1.16 million for the respective three-month and twelve-month periods endedDecember 31, 2019 compared to the comparable periods in 2018. The primary reason for this decrease was the Company operating three non-traditional locations in 2018 and only one in 2019. The two locations vacated inDecember 2018 were locations that the Company was only operating to the end of their contract terms. The Company does not intend to operate any more Company-owned non-traditional locations except for the one location that is currently operating. Comparing the various expenses is not meaningful since they reflected different types of non-traditional venues. Total expenses were$162,000 and$626,000 for the three-month and twelve-month periods endedDecember 31, 2019 compared to$293,000 and$1.15 million for the comparable periods in 2018. The primary reason for this decrease was two fewer locations operated by the Company in 2019 compared to 2018. Gross margin contribution from this venue increased to 6.7% and 7.0% from 0.1% and 1.0% for the three-month and twelve-month periods endedDecember 31, 2019 compared to the comparable periods in 2018. As discussed above, two of the locations being operated in 2018 were only being operated to the end of their contract terms. Impact of Inflation The primary inflation factors affecting both Company and franchised operations are food and labor costs. Cheese makes up the single largest topping 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. Labor costs across the country generally, through 2019, have seen upward pressure on hourly rates as the unemployment rate decreased and competition for hourly employees increased. The same applies to salaried management. The Company's Craft Pizza & Pub operations currently pay well above minimum wage rates to remain competitive, and has seen similar pressure on management salaries. Although the Company believes future labor cost increases for non-traditional franchisees and licensees will be somewhat mitigated due to the relatively low labor requirements of the Company's franchise concepts and the high unemployment rate at the current time brought about as a result of the COVID-19 pandemic. 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 November of 2017,
January and June of 2018 and
During 2018, the Company invested resources (approximately$300,000 ) to commence franchising of the Craft Pizza & Pub franchise. As ofDecember 31, 2019 , the Company had two Craft Pizza & Pub locations under franchise agreements which were open and an additional franchise location under development and expected to open in the summer of 2020.
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 1.5-to-1 as ofDecember 31, 2019 compared to 2.4-to-1 as ofDecember 31, 2018 . The current ratio was improved significantly with the new financing inFebruary 2020 . InJanuary 2017 , the Company completed the offering of$2.4 million principal amount of Notes convertible to common stock at$.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 of the Notes were repaid in conjunction with a new financing leaving a principal balance of$625,000 of subordinated convertible notes outstanding dueJanuary 31, 2023 . These Notes bear interest at 10% per annum paid quarterly and are convertible to common stock any time prior to maturity at the option of the Holder at$.50 per share. Warrants to purchase 1,775,000 shares of common stock at$1.00 expired late in 2019. 18 InSeptember 2017 , the Company entered into a loan agreement (the "Bank Agreement") withFirst Financial Bank (the "Bank"). The Bank Agreement provided for a senior credit facility (the "Credit Facility") from the Bank consisting of: (1) a term loan in the amount of$4.5 million (the "Term Loan"); and (2) a development line of credit of up to$1.6 million (the "Development Line of Credit") for the opening of three Craft Pizza & Pub restaurants. Borrowings under the Credit Facility bore interest at a variable annual rate up to the London Interbank Offer Rate ("LIBOR") plus 7.25%. All outstanding amounts owed under the Bank Agreement matured inSeptember 2022 , however those Notes were all paid in full from the$8.0 million new financing inFebruary 2020 . 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 or will use 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 will be used for working capital or 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 will be 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 under the Payroll Protection Program in the amount of$715,000 . It is anticipated this note will be forgiven. The funds, according to the provision in the CARES Act, may be used for payroll costs including payroll benefits, interest on mortgage obligations incurred beforeFebruary 15, 2020 , rent under lease agreements in force beforeFebruary 15, 2020 and utilities for which service began beforeFebruary 15, 2020 . 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 an aggressive franchising program for Craft Pizza & Pub restaurants. 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. Contractual Obligations The following table sets forth the future contractual obligations of the Company as ofFebruary 7, 2020 : Less than Total 1 Year 1-3 Years 3-5 Years More than 5 Years
Long-term debt (1)$8,625,000 $-$991,667 $7,633,333 $- Operating leases 7,033,594 771,330 2,415,812 1,675,635 2,170,817 Total$15,658,594 $771,330 $3,407,479 $9,308,968 $2,170,817
(1) The amounts do not include interest.
19
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 pressures, non-renewal of
franchise agreements, shifts in market demand, the success of new 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
changes in prices or supplies of food ingredients and labor as well as the
factors discussed under "Risk Factors "above in this annual report. 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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