NOBLE ROMAN'S, INC. General Information
Noble Roman's, Inc. , anIndiana corporation incorporated in 1972, sells and services franchises and licenses and operates Company-owned foodservice locations for stand-alone restaurants and non-traditional foodservice operations under the trade names "Noble Roman's Craft Pizza & Pub," "Noble Roman's Pizza," "Noble Roman's Take-N-Bake," and "Tuscano's Italian Style Subs." References in this report to the "Company" are toNoble Roman's, Inc. and its two wholly-owned subsidiaries,Pizzaco, Inc. andRH Roanoke, Inc. , unless the context requires otherwise.Pizzaco, Inc. currently does not own any locations and has no income or expense.RH Roanoke, Inc. operates a Company-owned non-traditional location. The Company has been operating, franchising and licensing Noble Roman's Pizza operations in a variety of stand-alone and non-traditional locations across the country since 1972. Its first Craft Pizza & Pub location opened inJanuary 2017 as a Company-operated restaurant in a northern suburb ofIndianapolis, Indiana . Since then, the Company opened a total of eight more Company-operated locations. The Company-operated locations serve as the base for franchising which the Company sees as a strong potential future growth driver. In 2019, the Company executed an agreement with the first such operator,Indiana's largest Dairy Queen franchisee with 19 franchised Dairy Queen locations at the time. The franchisee opened the first franchised Craft Pizza &Pub location inMay 2019 and another location inNovember 2020 . InNovember 2019 , another franchisee, with an operations background in McDonald's, opened a Craft Pizza & Pub inEvansville, Indiana . In the second quarter of 2022 the Company completed planning and development for a new generation Craft Pizza & Pub which will be smaller, easier to operate and requires less initial investment, factors which the Company believes could broaden the appeal of the concept to a greater franchising audience. As discussed above under "Impact of COVID-19 Pandemic" the COVID-19 pandemic materially affected the Company's business, especially franchising, since the first quarter of 2020.
Noble Roman's Craft Pizza & Pub
The Noble Roman's Craft Pizza & Pub utilizes many of the basic elements first introduced in 1972 but in a modern atmosphere with up-to-date systems and equipment to maximize speed, enhance quality and perpetuate the taste customers love and expect from aNoble Roman's . The Noble Roman's Craft Pizza & Pub provides for a selection of over 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 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.
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The Company designed the system to enable fast cook times, with oven speeds running approximately 2.5 minutes for traditional pizzas and 5.75 minutes for Sicilian pizzas. Traditional pizza favorites such as pepperoni are options on the menu but also offered is a selection of Craft Pizza & Pub original specialty pizza creations. The menu also features a selection of contemporary and fresh, made-to-order salads, a salad bar and fresh-cooked pasta. The menu also incorporates baked sub sandwiches, hand-sauced boneless wings and a selection of desserts, as well asNoble Roman's famous Breadsticks with Spicy Cheese Sauce, which have been offered in its locations since 1972. 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. Kids and adults enjoyNoble 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 many giant screen television monitors for sports and the nostalgic black and white shorts historically featured inNoble Roman's . The Company designed its curbside service for carry-out customers, called "Pizza Valet Service," to create added value and convenience. With Pizza Valet Service, customers place orders ahead, drive into the restaurant's reserved valet parking spaces and have their pizza run to their vehicle by specially uniformed pizza valets. Customers who pay when they place their orders are able to drive up and leave with their order very quickly without stepping out of their vehicle. For those who choose to pay after they arrive, pizza valets can take credit card payments on their mobile payment devices right at the customer's vehicle. With the fast baking times, the entire experience, from order to pick-up can take as little as 12 minutes.
Noble Roman's Pizza For Non-Traditional Locations
In 1997, the Company started franchising non-traditional locations (aNoble Roman's pizza operation within some other business or activity that has existing traffic) such as entertainment facilities, hospitals, convenience stores and other types of facilities. These locations utilize the two pizza styles the Company started with, along with its great tasting, high quality ingredients and menu extensions. 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.
· 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.
· Fresh packed, uncondensed and never cooked sauce made with secret spices,
parmesan cheese and vine-ripened tomatoes in all venues.
· 100% real cheese blended from mozzarella and Muenster, with no soy
additives or extenders.
· 100% real meat toppings, with no additives or extenders, a distinction
compared to many pizza concepts.
· Vegetable and mushroom toppings are sliced and delivered fresh, never
canned.
· An extended product line that includes breadsticks and cheesy stix with
dip, pasta, baked sandwiches, salads, wings and a line of breakfast
products.
· The fully-prepared crust also forms the basis for the Company'sTake-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 licenses.
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Business Strategy
The Company is focused on revenue expansion while continuing to minimize
corporate-level overhead. To accomplish this, the Company will continue
developing, owning and operating Craft Pizza & Pub locations and franchising to
qualified franchisees. At the same time, the Company will continue to focus on
franchising/licensing for non-traditional locations by franchising primarily to
convenience stores and entertainment centers.
The initial franchise fees are as follows:
Non-Traditional Non-Traditional Traditional
Except Hospitals Hospitals Stand-Alone
Noble Roman's Pizza or
Craft Pizza & Pub $ 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 andany 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. The Company's proprietary ingredients are manufactured pursuant to the Company's specifications, recipes or formulas 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 distributors at prices negotiated between the Company and the manufacturer. The Company utilizes distributors it has strategically identified acrossthe United States . The distributor 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. Business Operations Distribution The Company's proprietary ingredients are manufactured pursuant to the Company's specifications or recipes 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 throughoutthe 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. 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 distributor, 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. 14 Table of Contents 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. If any impairment of an individual asset is evident, a charge will be provided to reduce the carrying value to its estimated fair value.
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 September 30, Nine months ended September 30,
Description 2021 2022 2021 2022
Revenue $ 2,122,352 100 % $ 2,587,182 100 % $ 6,495,788 100 % $ 7,374,143 100 %
Cost of
sales 444,831 21.0 569,470 22.0 1,355,148 20.9 1,562,878 21.2
Salaries and
wages 618,729 29.2 712,239 27.5 1,489,980 22.9 2,155,734 29.2
Facility
cost
including
rent, common
area and
utilities 353,382 16.7 432,126 16.7 808,134 12.4 1,232,359 16.7
Packaging 69,792 3.3 93,647 3.6 184,191 2.8 259,390 3.5
Third-party
delivery
fees 97,998 4.6 39,330 1.5 284,215 4.4 115,677 1.6
All other
operating
expenses 308,989 14.6 348,448 13.5 936,690 14.4 1,090,641 14.8
Total
expenses 1,893,721 89.4 2,195,260 84.8 5,058,358 77.8 6,416,679 87.0
Margin
contribution $ 228,631 10.6 % $ 391,922 15.2 % $ 1,437,430 22.2 % $ 957,464 13.0 %
Margin contribution from this venue for the nine-month period ended September
30, 2022 was decreased $14,228 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:
Three months ended September 30, Nine months ended September 30,
Description 2021 2022 2021 2022
Royalties
and fees
franchising $ 1,177,776 100 % $ 1,119,793 100 % $ 3,430,995 100 % $ 3,218,401 100 %
Salaries and
wages 207,046 17.6 227,441 20.3 503,596 14.7 637,695 19.8
Trade show
expense 105,000 8.9 90,000 8.0 294,000 8.6 225,000 7.0
Travel and
auto 13,539 1.1 22,348 2.0 51,823 1.5 81,158 2.5
All other
operating
expenses 166,213 14.2 159,689 14.3 464,053 13.5 500,220 15.6
Total
expenses 491,798 41.8 499,478 44.6 1,313,472 38.3 1,444,073 44.9
Margin
contribution $ 685,978 58.2 % $ 620,315 55.4 % $ 2,117,523 61.7 % $ 1,774,328 55.1 %
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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 September 30, Nine months ended September 30,
Description 2021 2022 2021 2022
Revenue $ 120,316 100 % $ 195,647 100 % $ 353,617 100 % $ 505,891 100 %
Total
expenses 126,765 105.4 201,013 102.7 334,579 94.6 503,639 99.6
Margin
contribution $ (6,449 ) (5.4 )% $ (5,366 ) (2.7 )% $ 19,038 5.4 % $ 2,252 .4 %
Results of Operations
Company-Owned Craft Pizza & Pub
The revenue from this venue increased from$2.1 million to$2.6 million and from$6.5 million to$7.4 million for the respective three-month and nine-month periods endedSeptember 30, 2022 , compared to the corresponding periods in 2021. Revenue reflected the opening of additional Craft Pizza & Pub restaurants in October andDecember 2021 and same store sales increases, both of which were partially offset by the impact of the Omicron variant of COVID-19 in January andFebruary 2022 . Cost of sales as a percentage of revenue from this venue increased from 21.0% to 22.0% for the three-month period and from 20.9% to 21.2% for the nine-month period endedSeptember 30, 2022 compared to the corresponding periods in 2021. The Company incurred significant increases in product cost but was able to offset most of that cost with menu price increases and efficiency gained as staffing levels stabilized and employee experience levels increased. Salaries and wages, as a percentage of revenue from this venue, were 27.5% and 29.2% for the three-month and nine-month periods endedSeptember 30, 2022 compared to 29.2% and 22.9% for the corresponding periods in 2021. The cost of salaries and wages for this venue has increased significantly due to the competitive environment for available labor caused by the general shortage of available labor in 2022, which was mostly offset by menu price increases. For the nine months endedSeptember 30, 2021 salaries and wages were reduced to 22.9% of revenue as a result of the PPP loan/grant used in part to reimburse the Company$370,832 of payroll costs in the first quarter 2021. Gross margin contribution as a percentage of revenue for this venue was 15.2% and 13.0% for the three-month and nine-month periods endedSeptember 30, 2022 compared to 10.6% and 22.2% for the corresponding periods in 2021. The margin of 13.0% for the nine-month period was adversely affected in January and February because of the spread of the Omicron variant in the market area where the Company-owned restaurants are located. The increase in margin in the most recent three-month period reflected more efficient use of labor and facility cost. The increase in margin for the nine-month period endedSeptember 30, 2021 was primarily a result of certain expenses being reimbursed in 2021 by the PPP loan/grant including the reimbursement of$370,832 payroll costs in the first quarter 2021. 16 Table of Contents Franchising Total revenue was$1.1 million and$3.2 million for the three-month and nine-month periods endedSeptember 30, 2022 , compared to$1.2 million and$3.4 million for the comparable periods in 2021, respectively. Franchising had a significant loss of sales during the COVID-19 pandemic primarily because of closures of many host locations in different parts of the country which were forced to close due to government regulations to restrict the spread of COVID-19. The revenue has been gradually increasing again due to the opening of new locations and on a sequential quarter basis revenue from this venue increased from$1,013,000 in the three-months endedDecember 31, 2021 , to$1,034,000 in the three-months endedMarch 31, 2022 , to$1,064,000 in the three-months endedJune 30, 2022 , and to$1,120,000 in the three-months endedSeptember 30, 2022 , respectively. The Company expects the trend to continue to increase as a result of new openings anticipated during the balance of 2022
and into 2023.
Salaries and wages, trade show expense, insurance and other operating costs as a percentage of revenue from this venue were 44.6% and 44.9% for the three-month and nine-month periods endedSeptember 30, 2022 compared to 41.8% and 38.3%, respectively, for the corresponding periods in 2021. The 38.3% for total expenses, as a percentage of revenue from this venue, in the nine-months endedSeptember 30, 2021 reflected the reduction of payroll and other expenses partially reimbursed by the PPP loan/grant inFebruary 2021 , but which was partially offset in the nine months endedSeptember 30, 2022 by a reduction in trade show cost as a result of participating in fewer trade shows. Margin contribution was 55.4% and 55.1%, as a percentage of revenue from this venue, for the three-month and nine-month periods endedSeptember 30, 2022 , compared to 58.2% and 61.7% for the comparable periods in 2021, respectively. The decrease in margin contribution was partially the result of the decrease in revenue. As explained above franchising revenue decreased due to the closure of locations throughout the country during the COVID-19 pandemic as a result of government regulations. That revenue decrease is gradually improving as a result of the opening of new locations, as explained above.
Company-Owned Non-Traditional Locations
Gross revenue from this venue was$196,000 and$506,000 during the three-month and nine-month periods endedSeptember 30, 2022 , compared to$120,000 and$354,000 for the comparable periods in 2021, respectively. The primary reason for the increase during both periods was the withdrawal of restrictions placed on hospital locations as a result of the COVID-19 pandemic that prevented hospitals from having outside visitors and staff inside the hospital 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$201,000 and$504,000 for the three-month and nine-month periods endedSeptember 30, 2022 , compared to$127,000 and$335,000 for the comparable periods in 2021, respectively. The primary reason for the increase in both periods was the increase in revenue as a result of lifting restrictions on the hospital due to the COVID-19 pandemic, as explained above.
Corporate Level Results of Operations
Depreciation and amortization were$113,000 and$338,000 for the three-month and nine-month periods endedSeptember 30, 2022 , compared to$142,000 and$449,000 for the comparable periods in 2021, respectively. The depreciation decrease was the result of not opening any new corporate-owned locations to date in 2022. General and administrative expenses were$518,000 and$1.6 million for the three-month and nine-month periods endedSeptember 30, 2022 , compared to$506,000 and$1.3 million for the comparable periods in 2021, respectively. The primary reason for the increase was a partial reimbursement of certain qualifying expenses through theFebruary 2021 PPP loan/grant and the hiring of an outside investor relations consultant. 17 Table of Contents Operating income was$382,000 and$823,000 for the three-month and nine-month periods endedSeptember 30, 2022 compared to$264,000 and$1.8 million for the comparable periods in 2021, respectively. The primary reason for the decrease in year-to-date was the$941,000 PPP loan/grant inFebruary 2021 which reduced certain qualifying expenses during that period. Interest expense was$378,000 and$1.1 million for the three-month and nine-month periods endedSeptember 30, 2022 compared to$343,000 and$1.0 million for the comparable periods in 2021, respectively. The primary reason for the increases was the non-cash PIK interest which adds to the principal amount of the Corbel loan outstanding. As a result of the above factors, net income (loss) was$4,000 and$(183,000) for the three-month and nine-month periods endedSeptember 30, 2022 , compared to$(79,000) and$833,000 for the comparable periods in 2021, respectively.
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 Company-owned Craft Pizza & Pub restaurants. The Company added new Company-operated Craft Pizza & Pub locations in January andNovember 2017 , January andJune 2018 , March, October andDecember 2020 , and October andDecember 2021 .
The Company is operating one non-traditional location in a hospital and has no plans for operating any additional Company-owned non-traditional locations.
The Company's current ratio was 2.38-to-1 as of
InJanuary 2017 , the Company completed the private placement 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 and recently holders of the Notes in the principal amount of$475,000 extended the maturity untilFebruary 28, 2025 . 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 with$475,000 dueFebruary 28, 2025 and$150,000 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 and are subordinate to the senior note payable toCorbel Capital Partners SBIC, L.P. 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 . 18 Table of Contents OnFebruary 7, 2020 , the Company entered into the Agreement, 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 to repay the Company's then-existing bank debt which were in the original amount of$6.1 million ; (ii)$1,275,000 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 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 plus 7.75% per annum, as defined in the Agreement. In addition, the Senior Note requires PIK Interest of 3% per annum, which is being 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. 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. OnNovember 19, 2021 , the Company received formal notice from the SBA that the entire$940,734 loan was forgiven in accordance with the provisions of the CARES ACT. The Company had already treated the loan as a grant because forgiveness was probable. 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.
The Company does not anticipate that any of the recently issued accounting pronouncements will have a material impact on its consolidated financial statements.
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, the availability and cost of hourly and management labor to adequately staff Company-operated and franchise operations, competitive factors and pricing pressures, accelerating inflation and the cost of labor, food items and supplies, non-renewal of franchise agreements, shifts in market demand, the success of new franchise programs, including the smaller Noble Roman's Craft Pizza & Pub format under development, 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 Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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. 19 Table of Contents
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