General Information
Noble Roman's, Inc., an Indiana corporation incorporated in 1972, sells and
services pizza-focused foodservice franchises and licenses under the trade name
"Noble Roman's Craft Pizza & Pub," "Noble Roman's Pizza," "Noble Roman's
Take-N-Bake," and "Tuscano's Italian Style Subs". It also currently operates one
Company-owned non-traditional Noble Roman's Pizza location in a hospital and
five Company-owned Craft Pizza & Pub restaurants. The Company's concepts'
feature high quality fresh pizza, pasta and salads along with other related menu
items, simple operating systems, fast service times, attractive food costs and
overall affordability.
To facilitate growth, the Company began adding Company-owned Craft Pizza & Pub
locations to its business plan in 2017 and has now begun franchising Craft Pizza
& Pub on a limited basis to qualified multi-unit operators. The Company opened
two Craft Pizza & Pub locations in 2017, added two additional locations in 2018
and one thus far in 2020 and plans for additional company-owned locations to
open later this year and next year. The first franchised Craft Pizza & Pub
opened in May 2019 in Lafayette, Indiana and the second franchised Craft Pizza &
Pub opened in November 2019 in Evansville, Indiana. The franchisee of the first
franchised location has a second location now under development in Kokomo,
Indiana with plans to open in the summer of 2020. In addition to growth in the
Craft Pizza & Pub venue, since 1997 the Company had concentrated its efforts and
resources primarily on franchising and licensing non-traditional locations and
has awarded franchise and/or license agreements in all 50 states. That focus on
franchising and licensing non-traditional locations is continuing and currently
has a significant backlog of franchises sold but not yet opened, combined with
an active base of qualified prospects for additional locations.
RH Roanoke, Inc. operates a Company-owned non-traditional location in a hospital
and Noble Roman's, Inc. owns and operates five Craft Pizza & Pub locations with
plans to add more. The Company intends to use its Craft Pizza & Pub locations as
a base to support the franchising and continued future growth of that concept.
References in this report to the "Company" and to "Noble Roman's" are to Noble
Roman's, Inc. and its two wholly-owned subsidiaries, Pizzaco, Inc. and RH
Roanoke, Inc., unless the context indicates otherwise.
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Noble Roman's Craft Pizza & Pub
Noble Roman's Craft Pizza & Pub is intended to provide a fun, pleasant
atmosphere serving pizza and other related menu items, all made to order using
fresh ingredients in the view of the customers. In January 2017, the Noble
Roman's Craft Pizza & Pub opened its first Company-owned restaurant in
Westfield, Indiana, a prosperous and growing community on the northwest side of
Indianapolis. Since that time four additional Craft Pizza & Pubs have been
opened as Company-owned restaurants. Noble Roman's Craft Pizza & Pub is designed
to harken back to the Company's early history when it was known simply as "Pizza
Pub." Like then, and like the new full-service pizza concepts today, ordering
takes place at the counter and food runners deliver orders to the dining room
for dine-in guests. The Company believes that Noble Roman's Craft Pizza & Pub
features many enhancements over the current competitive landscape. The
restaurant features two styles of hand-crafted, made-from-scratch pizzas with a
selection of 40 different toppings, cheeses and sauces from which to choose.
Beer and wine also are featured, with 16 different beers on tap including both
national and local craft selections. Wines include 16 high quality, affordably
priced options by the bottle or glass in a range of varietals. Beer and wine
service is provided at the bar and throughout the dining room.
The pizza offerings feature Noble Roman's traditional hand-crafted thinner crust
as well as its signature deep-dish Sicilian crust. After extensive research and
development, the system has been designed to enable fast cook times, with oven
speeds running approximately 2.5 minutes for traditional pies and 5.75 minutes
for Sicilian pies. Traditional pizza favorites such as pepperoni are options on
the menu, but also offered is a selection of Craft Pizza & Pub original
creations like "Swims with the Fishes" and "Pizza Margherita". The menu also
features a selection of contemporary and fresh, made-to-order salads and
fresh-cooked pasta. In addition, the menu includes baked subs, hand-sauced wings
and a selection of desserts, as well as Noble Roman's famous Breadsticks with
Spicy Cheese Sauce.
Additional enhancements include a glass enclosed "Dough Room" where Noble
Roman's Dough Masters hand make all pizza and breadstick dough from scratch in
customer view. Also in the dining room is a "Dust & Drizzle Station" where
guests can customize their pizzas after they are baked with a variety of
condiments and drizzles, such as rosemary-infused olive oil, honey and Italian
spices. Kids and adults enjoy Noble Roman's self-serve root beer tap, which is
also part of a special menu for customers 12 and younger. Throughout the dining
room and the bar area there are a large number of giant screen television
monitors for sports and the nostalgic black and white shorts featured in Noble
Roman's earlier days.
Noble Roman's Pizza for Non-Traditional Locations
Noble Roman's franchised and licensed non-traditional locations are designed to
bring high-quality, pizza-focused foodservice into underlying establishments
that have a captive audience or high customer counts associated with their
business. Examples of these venues include convenience stores, hospitals,
entertainment facilities, military bases, bowling centers and other similar
facilities. Noble Roman's, for non-traditional locations, range in scope from
relatively small operations focused on quick meals and impulse food purchases to
elaborate, full-scale restaurant operations depending on the facility and the
goals of the individual franchisee or licensee.
The hallmark of Noble Roman's Pizza for non-traditional locations is "Superior
quality that our customers can taste." Every ingredient and process has been
designed with a view to produce superior results.
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A fully-prepared pizza crust that captures the made-from-scratch pizzeria flavor
which gets delivered to non-traditional locations in a shelf-stable condition so
that dough handling is no longer an impediment to a consistent product, which
otherwise is a challenge in non-traditional locations.
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Fresh packed, uncondensed and never pre-cooked sauce made with secret spices and
vine-ripened tomatoes in all venues.
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100% real cheese blended from mozzarella and Muenster, with no soy additives or
extenders.
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100% real meat toppings, with no additives or extenders, a distinction compared
to many pizza concepts.
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Vegetable and mushroom toppings are sliced and delivered fresh, never canned.
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An extended product line that includes breadsticks and cheesy stix with dip,
pasta, baked sandwiches, salads, wings and a line of breakfast products.
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The fully-prepared crust also forms the basis for the Company's Take-N-Bake
pizza for use as an add-on component for its non-traditional franchise base as
well as an offering for its grocery store license venue.
Tuscano's Italian Style Subs
Tuscano's Italian Style Subs is a separate non-traditional location concept that
focuses on sub sandwich menu items but only in locations that also have a Noble
Roman's franchise. The ongoing royalty for a Tuscano's franchise is identical to
that charged for a Noble Roman's Pizza franchise.
Business Strategy
The Company is focused on revenue expansion while continuing to minimize
overhead and other costs. To accomplish this, the Company will continue owning
and operating a core of Craft Pizza & Pub locations and develop what it believes
to be a large growth opportunity by franchising with qualified multi-unit
franchisees. At the same time, the Company will continue to focus on
franchising/licensing for non-traditional locations, especially convenience
stores and entertainment centers.
10
Business Operations
Distribution
The Company's proprietary ingredients are manufactured pursuant to the Company's
recipes and specifications by third-party manufacturers under contracts between
the Company and its various manufacturers. These contracts require the
manufacturers to produce ingredients meeting the Company's specifications and to
sell them to Company-approved third-party distributors at prices negotiated
between the Company and the manufacturer.
The Company has third-party distributors strategically located throughout the
United States. The agreements require the distributors to maintain adequate
inventories of all ingredients necessary to meet the needs of the Company's
franchisees and licensees in their distribution areas for weekly deliveries to
the franchisee/licensee locations and to its grocery store distributors in their
respective territories. Each of the primary distributors purchases the
ingredients from the manufacturers at prices negotiated between the Company and
the manufacturers, but under payment terms agreed upon by the manufacturers and
the distributors, and distributes the ingredients to the franchisee/licensee at
a price determined by the distributor agreement. Payment terms to the
distributor are agreed upon between each franchisee/licensee and the respective
distributor. In addition, the Company has agreements with various grocery store
distributors located in parts of the country which agree to buy the Company's
ingredients from one of the Company's primary distributors and to distribute
those ingredients only to their grocery store customers who have signed license
agreements with the Company.
Franchising
The Company sells franchises for both non-traditional and traditional locations.
The initial franchise fees are as follows:
Non-Traditional, Except Hospitals Hospitals Craft Pizza & Pub
Franchise Format
Noble Roman's Pizza $7,500 $10,000 $30,000(1)
(1) With the sale of multiple traditional stand-alone franchises to a single
franchisee, the franchise fee for the first unit is $30,000, the franchise fee
for the second unit is $25,000 and the franchise fee for the third unit and any
additional unit is $20,000.
The franchise fees are paid upon signing the franchise agreement and, when paid,
are non-refundable in consideration of the administration and other expenses
incurred by the Company in granting the franchises and for the lost and/or
deferred opportunities to grant such franchises to any other party.
Licensing
Noble Roman's Take-n-Bake Pizza licenses for grocery stores are governed by a
supply agreement. The supply agreement generally requires the licensee to: (1)
purchase proprietary ingredients only from a Noble Roman's-approved distributor;
(2) assemble the products using only Noble Roman's approved ingredients and
recipes; and (3) display products in a manner approved by Noble Roman's using
Noble Roman's point-of-sale marketing materials. Pursuant to the distributor
agreements, the primary distributors place an additional mark-up, as determined
by the Company, above their normal selling price on the key ingredients as a fee
for the Company in lieu of royalty. The distributors agree to segregate this
additional mark-up upon invoicing the licensee or grocery store distributor, to
hold the fees in trust for the Company and to remit them to the Company within
ten days after the end of each month.
Financial Summary
The preparation of the consolidated financial statements in conformity with
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 periodically evaluates the carrying value of its assets,
including property, equipment and related costs, accounts receivable and
deferred tax assets, 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 which affect the recovery of recorded value. If
any impairment of an individual asset is evident, a charge will be provided to
reduce the carrying value to its estimated fair value.
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The following table sets forth the revenue, expense and margin contribution of
the Company's Craft Pizza & Pub venue and the percent relationship to its
revenue:
Three Months ended March 31,
2019 2020
Description
Revenue $1,142,614 100.0% $1,092,948 100.0
Cost of sales 237,675 20.8 235,592 21.6
Salaries and wages 365,981 32.0 318,524 29.1
Facility cost including rent, common area
and utilities 200,607 17.6 202,780 18.6
Packaging 41,318 3.6 30,253 2.8
Delivery fees 14,678 1.3 35,199 3.2
All other operating expenses 150,660 13.2 149,681 13.6
Total expenses 1,010,919 88.5 972,029 88.9
Margin contribution $131,695 11.5% $120,919 11.1%
Margin contribution from this venue was decreased by $10,010 for non-cash
expense related to the adoption of ASU 2016-02 accounting for lease 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 non-traditional franchising venue and the percent relationship to
its revenue:
Three Months ended March 31,
2019 2020
Description
Royalties and fees non-traditional franchising $1,287,178 80.8% $1,278,100 87.1%
Royalties and fees non-traditional grocery 305,836 19.2 189,279 12.9
Total non-traditional revenue
1,593,014 100.0 1,467,379 100.0
Salaries and wages 195,626 12.3 196,049 13.4
Trade show expense 105,094 6.6 105,000 7.2
Insurance 109,924 6.9 86,426 5.9
Travel and auto 27,549 1.7 28,448 1.9
All other operating expenses 56,519 3.5 74,433 5.0
Total expenses 494,712 31.0 490,356 33.4
Margin contribution $1,098,302 69.0% $977,023 66.6%
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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 March 31,
2019 2020
Description
Revenue $170,502 100.0% $154,684 100.0%
Cost of sales 63,947 37.5 59,562 38.5
Salaries and wages 53,791 31.5 56,256 36.4
Rent 16,165 9.5 14,710 9.5
Packaging 4,879 2.9 4,170 2.7
All other operating expenses 14,927 8.7 17,545 11.3
Total expenses 153,709 90.1 152,243 98.4
Margin contribution $16,793 9.9% $2,441 1.6%
Results of Operations
Company-Owned Craft Pizza & Pub
The revenue from this venue remained approximately the same at $1.1 million.
Revenue was increased by opening an additional Craft Pizza & Pub restaurant on
March 25, 2020 but that increase was offset by the Governor of the State of
Indiana issuing an order on March 16, 2020 in response to the COVID-19 pandemic
closing all dining rooms for inside dining for an indefinite period of time but
allowed carry-out and delivery.
Cost of sales increased to 21.6% from 20.8% in the comparable period last year.
Salaries and wages improved to 29.1% compared to 32.0% for the comparable period
in 2019. This improvement was primarily the result of efficiencies gained as the
restaurants had been operating longer. It was also partially the result of all
of the dining rooms being closed by order of the Governor on March 16, 2020,
however the restaurants continued to use Pizza Valet service for carry-out which
decreased the labor requirements to a greater extent in percentage terms than
the sales were reduced by the lack of dining room service.
Gross margin contribution decreased from 11.5% to 11.1% for the quarter compared
to the comparable period last year. Overall expenses for this venue increased
from 88.5% to 88.9% with the cost of sales increasing 0.8%, facility cost
increasing by 1.0%, delivery fees and bank charges by 2.4%, all being partially
offset by labor efficiency improving with the cost decreasing from 32.0% to
29.1%. The non-cash expense for adopting to ASU 2016-02 accounting for operating
leases, which became effective after January 1, 2019 for publicly reporting
companies, decreased the margin from 12.0% to 11.1%.
Franchising Non-Traditional Locations
The revenue from this venue decreased from $1.6 million to $1.5 million for the
three months ended March 31, 2020 compared to the comparable period in 2019.
Royalties and fees from non-traditional franchising remained approximately the
same at $1.3 million however royalties and fees from grocery stores declined
from $306,000 to $189,000. This decrease in grocery store take-n-bake was a
result of the Company's focus away from grocery stores to franchising because of
the strong economic conditions prior to COVID-19 pandemic and due to
pandemic-caused rush on grocery stores with minimal staff which did not have
sufficient resources to maintain assembling pizzas for take-n-bake.
Salaries and wages, trade show expense, insurance and other operating costs
decreased from $495,000 to $490,000 for the three-month period ended March 31,
2020 compared to the comparable period in 2019. In January 2019, the Company
reviewed this venue in depth to find ways to minimize costs and accomplish its
objectives with fewer people and lower costs in general. These efforts are
reflected in the 66.6% margin during the three-month period ended March 31, 2020
and are expected to benefit results in future quarters.
Gross margin contribution from this venue decreased to 66.6% from 69.0% in the
three-month period ended March 31, 2020 compared to the comparable period in
2019. The reason for the margin decrease was a result of the decrease in total
revenue resulting from a decline in grocery store take-n-bake sales while
maintaining the same reduced expense level.
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Company-Owned Non-Traditional Locations
Gross revenue from this venue decreased from $171,000 to $155,000 in the
three-month period ended March 31, 2020 compared to the comparable period in
2019. The primary reason for this decrease was the restriction placed on
hospital locations as a result of the COVID-19 pandemic whereby hospitals were
restricted from having outside visitors and staff inside the hospital was
restricted from going from one area of the hospital to another. The Company does
not intend to operate any more Company-owned non-traditional locations except
the one location that it is currently operating.
Total expenses were $152,000 for the three-month period ended March 31, 2020
compared to $154,000 for the comparable period in 2019. The primary reason for
this decrease was caused by lower volume due to restrictions on hospitals
resulting from the COVID-19 pandemic.
Gross margin contribution from this venue decreased to 1.6% from 9.9% in the
three-month period ended March 31, 2020 compared to the comparable period in
2019. As previously discussed, the margin was decreased as a result of decreased
revenue due to restrictions on hospitals resulting from the COVID-19 pandemic,
as described above.
Depreciation decreased to $66,000 from $94,000 for the three-month period ended
March 31, 2020 compared to the corresponding periods in 2019. The primary reason
for the decrease was the result of no new Company-owned Craft Pizza & Pub
locations opening during the year 2019. An additional Company-owned Craft Pizza
& Pub location was opened in late March 2020 with plans to open one or two
additional Company-owned Craft Pizza & Pub during the remainder of 2020.
General and administrative expenses increased to $449,000 from $416,000 for the
three-month period ended March 31, 2020 compared to the corresponding period in
2019. The primary reason for the increase was the increase in employee group
insurance cost.
Operating income decreased to $589,000 from $754,000 for the three-month period
ended March 31, 2020 compared to the corresponding period in 2019. Operating
income decreased as a result of a $200,000 decrease in revenue, while all
expenses remained approximately the same. The revenue decrease was primarily
related to the COVID-19 pandemic shutting down the economy.
Interest expense increased to $926,000 from $127,000 for the three-month period
ended March 31, 2020 compared to the corresponding period in 2019. The primary
reason for the increase was a result of the financing that occurred in February
2020 resulting in one-time non-cash write-offs of the unamortized original loan
cost for both First Financial Bank and the private placement sub-debt, which in
the aggregate was $658,445 and, in addition, the non-cash PIK interest expense
of $35,371.
Net income (loss) before income taxes decreased to ($337,000) from $627,000 for
the three-month period ended March 31, 2020 compared to the corresponding period
in 2019. This was primarily the result of the one-time non-cash interest as
explained in the previous paragraph.
Net income (loss) decreased to ($255,000) from $476,000 for the three-month
period ended March 31, 2020 compared to the corresponding period in 2019. Net
income decreased because of the one-time non-cash expense associated with
financing the Company's debt and to a lesser extent the decrease in total
revenue, but with approximately the same expenses, primarily caused by the
COVID-19 pandemic.
14
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 March of 2020.
During 2018, the Company invested resources (approximately $300,000) to commence
franchising of the Craft Pizza & Pub franchise. As of December 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 4.1-to-1 as of March 31, 2020 compared to
1.5-to-1 as of December 31, 2019. The current ratio was improved significantly
with the new financing in February 2020.
In January 2017, the Company completed the offering of $2.4 million principal
amount of convertible, subordinated and unsecured promissory notes (the "Notes")
to common stock at $0.50 per share and warrants (the "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, in
January 2019 another Note in the principal amount of $50,000 was converted into
100,000 shares of the Company's common stock, and in August 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 of December 31, 2019. Holders of Notes in the principal amount of
$775,000 extended their maturity date to January 31, 2023. In February 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
due January 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. Warrants to purchase 1,775,000 shares of common
stock at $1.00 per share expired late in 2019.
In September 2017, the Company entered into a loan agreement (the "Bank
Agreement") with First 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 were due to mature in September 2022, however these
amounts were all paid in full from the $8.0 million new financing in February
2020.
On February 7, 2020, the Company entered into the Agreement with Corbel Capital
Partners SBIC, L.P. (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 on
February 7, 2025. The Senior Note does not require any fixed principal payments
until February 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.
On April 25, 2020, the Company received a loan of $715,000 under the Payroll
Protection Program. 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 before
February 15, 2020, rent under lease agreements in force before February 15, 2020
and utilities for which service began before February 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.
15
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 " contained in the 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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NOBLE ROMAN'S, INC. 