NOBLE ROMAN'S, INC. United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
September 30, 2021
Commission file number: 0-11104
NOBLE ROMAN'S, INC. |
(Exact name of registrant as specified in its charter) |
Indiana | 35-1281154 | |
(State or other jurisdiction of organization) | (I.R.S. Employer Identification No.) | |
6612 E. 75th Street, Suite 450 | ||
Indianapolis, Indiana | 46250 | |
(Address of principal executive offices) | (Zip Code) |
(317) 634-3377
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☒ |
Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 6, 2021, there were 22,215,512 shares of Common Stock, no par value, outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The following unaudited condensed consolidated financial statements are included herein:
Condensed consolidated balance sheets as of December 31, 2020 and September 30, 2021 (unaudited) | Page 3 | ||
Page 4 | |||
Page 5 | |||
Page 7 | |||
Notes to condensed consolidated financial statements (unaudited) | Page 8 |
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Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, 2020 | September 30, 2021 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 1,194,363 | $ | 1,789,270 | ||||
Accounts receivable - net | 879,502 | 930,955 | ||||||
Inventories | 890,556 | 919,168 | ||||||
Prepaid expenses | 395,918 | 371,848 | ||||||
Total current assets | 3,360,339 | 4,011,241 | ||||||
Property and equipment: | ||||||||
Equipment | 3,708,689 | 3,905,644 | ||||||
Leasehold improvements | 2,319,445 | 2,478,385 | ||||||
Construction and equipment in progress | 510,225 | 530,430 | ||||||
| 6,538,359 | 6,914,459 | |||||||
Less accumulated depreciation and amortization | 1,989,209 | 2,272,498 | ||||||
Net property and equipment | 4,549,150 | 4,641,961 | ||||||
Deferred tax asset | 3,104,904 | 3,104,904 | ||||||
Deferred contract cost | 834,018 | 826,258 | ||||||
Goodwill | 278,466 | 278,466 | ||||||
Operating lease right of use assets | 6,088,101 | 5,667,679 | ||||||
Other assets including long-term portion of receivables - net | 201,962 | 281,878 | ||||||
Total assets | $ | 18,416,940 | $ | 18,812,387 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 878,099 | $ | 482,585 | ||||
Current portion of operating lease liability | 412,005 | 393,473 | ||||||
Total current liabilities | 1,290,104 | 876,058 | ||||||
Long-term obligations: | ||||||||
Term loan payable to Corbel | 7,468,709 | 7,789,992 | ||||||
Warrant value | 29,037 | 29,037 | ||||||
Convertible notes payable | 574,479 | 591,167 | ||||||
Operating lease liabilities - net of short-term portion | 5,863,615 | 5,488,876 | ||||||
Deferred contract income | 834,018 | 826,258 | ||||||
Total long-term liabilities | 14,769,858 | 14,725,330 | ||||||
Stockholders' equity: | ||||||||
Common stock - no par value (40,000,000shares authorized, 22,215,512 issued and outstanding as of December 31, 2020 and as of September 30, 2021) | 24,763,447 | 24,784,310 | ||||||
Accumulated deficit | (22,406,469 | ) | (21,573,311 | ) | ||||
Total stockholders' equity | 2,356,978 | 3,210,999 | ||||||
Total liabilities and stockholders' equity | $ | 18,416,940 | $ | 18,812,387 |
See accompanying notes to condensed consolidated financial statements (unaudited).
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Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
Revenue: | ||||||||||||||||
Restaurant revenue - company-owned restaurants | $ | 1,583,251 | $ | 2,122,352 | $ | 4,083,064 | $ | 6,495,788 | ||||||||
Restaurant revenue - company-owned non-traditional | 99,255 | 120,316 | 365,372 | 353,617 | ||||||||||||
Franchising revenue | 1,252,503 | 1,177,776 | 3,808,226 | 3,430,995 | ||||||||||||
Administrative fees and other | 3,073 | 3,734 | 11,191 | 10,803 | ||||||||||||
Total revenue | 2,938,082 | 3,424,178 | 8,267,853 | 10,291,203 | ||||||||||||
Operating expenses: | ||||||||||||||||
Restaurant expenses - company-owned restaurants | 1,376,754 | 1,893,721 | 3,153,123 | 5,058,358 | ||||||||||||
Restaurant expenses - company-owned non-traditional | 108,935 | 126,765 | 338,161 | 334,579 | ||||||||||||
Franchising expenses | 482,394 | 491,798 | 1,240,379 | 1,313,472 | ||||||||||||
Total operating expenses | 1,968,083 | 2,512,284 | 4,731,662 | 6,706,409 | ||||||||||||
Depreciation and amortization | 98,279 | 142,133 | 262,505 | 448,892 | ||||||||||||
General and administrative expenses | 460,392 | 505,992 | 1,254,186 | 1,286,530 | ||||||||||||
Total expenses | 2,526,753 | 3,160,409 | 6,248,353 | 8,441,831 | ||||||||||||
Operating income | 411,329 | 263,769 | 2,019,500 | 1,849,372 | ||||||||||||
Interest expense | 327,831 | 343,184 | 1,577,285 | 1,016,214 | ||||||||||||
Income (loss) before income taxes | 83,498 | (79,415 | ) | 442,215 | 833,158 | |||||||||||
Income tax expense (benefit) | - | - | (81,983 | ) | - | |||||||||||
Net income (loss) | $ | 83,498 | (79,415 | ) | $ | 524,198 | $ | 833,158 | ||||||||
Earnings per share - basic: | ||||||||||||||||
Net income (loss) before income tax | $ | .00 | $ | .00 | $ | .02 | $ | .04 | ||||||||
Net income (loss) | $ | .00 | $ | .00 | $ | .02 | $ | .04 | ||||||||
Weighted average number of common shares outstanding | 22,215,512 | 22,215,512 | 22,215,512 | 22,215,512 | ||||||||||||
Diluted earnings per share: | ||||||||||||||||
Net income (loss) before income tax | $ | .00 | $ | .00 | $ | .02 | $ | .04 | ||||||||
Net income (loss) | $ | .00 | $ | .00 | $ | .03 | $ | .04 | ||||||||
Weighted average number of common shares outstanding | 23,765,512 | 23,522,028 | 23,765,512 | 23,522,028 |
See accompanying notes to condensed consolidated financial statements (unaudited).
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Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in
Stockholders' Equity
(Unaudited)
Nine Months Ended
September 30, 2021:
Common Stock | Accumulated | |||||||||||||||
Shares | Amount | Deficit | Total | |||||||||||||
Balance at December 31, 2020 | 22,215,512 | $ | 24,763,447 | $ | (22,406,469 | ) | $ | 2,356,978 | ||||||||
Net income for nine months ended September 30, 2021 | 833,158 | 833,158 | ||||||||||||||
Amortization of value of employee stock options | 20,863 | 20,863 | ||||||||||||||
Balance at September 30, 2021 | 22,215,512 | $ | 24,784,310 | $ | (21,573,311 | ) | $ | 3,210,999 |
Three Months Ended
September 30, 2021:
Common Stock | Accumulated | |||||||||||||||
Shares | Amount | Deficit | Total | |||||||||||||
Balance at June 30, 2021 | 22,215,512 | $ | 24,776,184 | $ | (21,493,896 | ) | $ | 3,282,288 | ||||||||
Amortization of value of employee stock options | 8,126 | 8,126 | ||||||||||||||
Net loss for three months ended September 30, 2021 | (79,415 | ) | (79,415 | ) | ||||||||||||
Balance at September 30, 2021 | 22,215,512 | $ | 24,784,310 | $ | (21,573,311 | ) | $ | 3,210,999 |
See accompanying notes to condensed consolidated financial statements (unaudited
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Nine Months Ended
September 30, 2020:
Common Stock | Accumulated | |||||||||||||||
Shares | Amount | Deficit | Total | |||||||||||||
Balance at December 31, 2019 | 22,215,512 | $ | 24,858,311 | $ | (17,024,523 | ) | $ | 7,833,788 | ||||||||
Net income for nine months ended September 30, 2020 | 524,198 | 524,198 | ||||||||||||||
Unamortized loan origination cost attributable to the $500,000 in aggregate principal amount of notes converted to 1,000,000 shares | (116,400 | ) | (116,400 | ) | ||||||||||||
Amortization of value of employee stock options | 15,168 | 15,168 | ||||||||||||||
Balance at September 30, 2020 | 22,215,512 | $ | 24,757,079 | $ | (16,500,325 | ) | $ | 8,256,754 |
Three Months Ended
September 30, 2020:
Common Stock | Accumulated | |||||||||||||||
Shares | Amount | Deficit | Total | |||||||||||||
Balance at June 30, 2020 | 22,215,512 | $ | 24,752,535 | $ | (16,583,823 | ) | $ | 8,168,712 | ||||||||
Amortization of value of employee stock options | 4,544 | 4,544 | ||||||||||||||
Net income for three months ended September 30, 2020 | 83,498 | 83,498 | ||||||||||||||
Balance at September 30, 2020 | 22,215,512 | $ | 24,757,079 | $ | (16,500,325 | ) | $ | 8,256.754 |
See accompanying notes to condensed consolidated financial statements (unaudited
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Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
2020 | 2021 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 524,198 | $ | 833,158 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,231,498 | 807,816 | ||||||
Amortization of lease cost in excess of cash paid | 35,794 | 27,151 | ||||||
Deferred income taxes | (81,983 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
(Increase) in: | ||||||||
Accounts receivable | (211,519 | ) | (51,452 | ) | ||||
Inventories | 17,780 | (28,612 | ) | |||||
Prepaid expenses | 86,296 | 24,068 | ||||||
Other assets including long-term portion of receivables | (424,602 | ) | (55,299 | ) | ||||
(Decrease) in: | ||||||||
Accounts payable and accrued expenses | (186,428 | ) | (395,514 | ) | ||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 991,034 | 1,161,316 | ||||||
INVESTING ACTIVITIES | ||||||||
Purchase of property and equipment | (953,028 | ) | (566,409 | ) | ||||
NET CASH (USED) IN INVESTING ACTIVITIES | (953,028 | ) | (566,409 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Payment of principal on convertible notes | (1,275,000 | ) | - | |||||
Proceeds of new loan - Corbel | 7,042,958 | - | ||||||
Payment of principal - First Financial Bank | (4,379,024 | ) | - | |||||
NET CASH (USED) BY FINANCING ACTIVITIES | 1,388,934 | - | ||||||
Increase in cash | 1,426,940 | 594,907 | ||||||
Cash at beginning of period | 218,132 | 1,194,363 | ||||||
Cash at end of period | $ | 1,645,072 | $ | 1,789,270 | ||||
Supplemental schedule of investing and financing activities | ||||||||
Cash paid for interest | $ | 634,548 | $ | 675,466 |
See accompanying notes to condensed consolidated financial statements (unaudited).
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - The accompanying unaudited interim condensed consolidated financial statements, included herein, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated statements have been prepared in accordance with the Company's accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in that report. Unless the context indicates otherwise, references to the "Company" mean Noble Roman's, Inc. and its subsidiaries.
Significant Accounting Policies
On February 5, 2021, the Company borrowed $940,734 under the Paycheck Protection Program (the "PPP"). The funds, according to the provision of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), may be used for payroll costs including payroll benefits, interest on mortgage obligations, rent under lease agreements and utilities. Since the Company met all of the eligibility requirements to participate in the PPP and it was probable from the beginning that the Company's PPP borrowing will be forgiven, the Company's participation in the PPP program was accounted for as a government grant. Since the entire amount of the PPP participation was used to pay qualified expenses prior to March 31, 2021, the qualifying expenses are presented herein as a reduction of those related expenses in the quarter ended March 31, 2021.
There have been no significant changes in the Company's accounting policies from those disclosed in its Annual Report on Form 10-K.
In the opinion of the management of the Company, the information contained herein reflects all adjustments necessary for a fair presentation of the results of operations and cash flows for the interim periods presented and the financial condition as of the dates indicated, which adjustments are of a normal recurring nature. The results for the three-month and nine-month periods ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021, especially in light of recent volatility and uncertainty resulting from the coronavirus ("COVID-19) pandemic, the governmental response and the PPP funding.
Note 2 - Royalties and fees included initial franchise fees of $24,000 for the three-month period ended September 30, 2021, and $42,500 for the three-month period ended September 30, 2020. Royalties and fees included equipment commissions of $2,221 for the three-month period ended September 30, 2021, and $6,674 for the three-month period ended September 30, 2020. Royalties and fees, including amortized initial franchise fees and equipment commissions, were $1.2 million for the three-month period ended September 30, 2021, and $1.3 million for the three-month period ended September 30, 2020. Royalties and fees, including amortized initial franchise fees and equipment commissions, were $3.4 million for the nine-month period ended September 30, 2021 and $3.8 million for the comparable period in 2020. Most of the cost for the services required to be performed by the Company are incurred prior to the franchise fee income being recorded, which is based on a contractual liability of the franchisee.
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The effect on comparable periods within the financial statements by recording franchise fees and cost of opening the units as deferred contract costs and deferred contract income is not material as the initial franchise fee for the non-traditional franchise is intended to defray the initial contract costs, and the franchise fees and contract costs initially incurred and paid approximate the relative amortized franchise fees and contract costs for those same periods.
The deferred contract income and deferred costs were both $826,000 on September 30, 2021.
At December 31, 2020 and September 30, 2021, the carrying values of the Company's franchise receivables have been reduced to anticipated realizable value. After considering this reduction of carrying value, the Company anticipates that substantially all of its accounts receivables reflected on the consolidated balance sheet as of September 30, 2021, will be collected. In 2020, in light of the additional uncertainty created as a result of the COVID 19 pandemic, the Company created an allowance for uncollectability on all long-term franchisee receivables. The Company will continue to pursue collection where circumstances are appropriate and all collections of these receivables in the future will result in additional royalty income at the time received.
There were 3,064 franchises/licenses in operation on December 31, 2020 and the same number of franchises/licenses were in operation on September 30, 2021. During the nine-month period ended September 30, 2021 there were 21 new outlets opened and 17 outlets closed. In the ordinary course, grocery stores from time to time add the Company's licensed products, remove them and may subsequently re-offer them. Therefore, it is unknown how many of the 2,404 licensed grocery store units included in the counts above have left the system.
Note 3. The following table sets forth the calculation of basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2021:
Three Months Ended September 30, 2021 | ||||||||||||
Income (Numerator) | Shares (Denominator) | Per-Share Amount | ||||||||||
Net loss | $ | (79,415 | ) | 22,215,512 | $ | .00 | ||||||
Effect of dilutive securities | ||||||||||||
Stock dilution | - | 56,516 | ||||||||||
Convertible notes | 15,625 | 1,250,000 | ||||||||||
Diluted earnings per share | ||||||||||||
Net loss | $ | (63,790 | ) | 23,522,028 | $ | .00 |
Nine Months Ended September 30, 2021 | ||||||||||||
Income (Numerator) | Shares (Denominator) | Per-Share Amount | ||||||||||
Net income | $ | 833,158 | 22,215,512 | $ | .04 | |||||||
Effect of dilutive securities | ||||||||||||
Stock dilution | - | 56,516 | ||||||||||
Convertible notes | 46,875 | 1,250,000 | ||||||||||
Diluted earnings per share | ||||||||||||
Net income | $ | 880,033 | 23,522,028 | $ | .04 |
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The following table sets forth the calculation of basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2020:
Three Months Ended September 30, 2020 | ||||||||||||
Income (Numerator) | Shares (Denominator) | Per-Share Amount | ||||||||||
Net income | $ | 83,498 | 22,215,512 | $ | .00 | |||||||
Effect of dilutive securities | ||||||||||||
Convertible notes | 15,625 | 1,550,000 | ||||||||||
Diluted earnings per share | ||||||||||||
Net loss | $ | 99,123 | 23,765,512 | $ | .00 |
Nine Months Ended September 30, 2020 | ||||||||||||
Income (Numerator) | Shares (Denominator) | Per-Share Amount | ||||||||||
Net income | $ | 524,198 | 22,215,512 | $ | .02 | |||||||
Effect of dilutive securities | ||||||||||||
Convertible notes | 85,479 | 1,550,000 | ||||||||||
Diluted earnings per share | ||||||||||||
Net income | $ | 609,677 | 23,765,512 | $ | .03 |
Note 4 -On February 7, 2020, the Company entered into a Senior Secured Promissory Note and Warrant Purchase Agreement (the "Agreement") with Corbel Capital Partners SBIC, L.P. (the "Purchaser"). Pursuant to the Agreement, the Company issued to the Purchaser a senior secured promissory note (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 was 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) to pay debt issuance costs; and (iv) the remaining net proceeds 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 payment-in-kind interest ("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.
In conjunction with the borrowing under the Senior Note, the Company issued to the Purchaser a warrant (the "Corbel Warrant") to purchase up to 2,250,000 shares of Common Stock. The Corbel Warrant entitles the Purchaser to purchase from the Company, at any time or from time to time: (i) 1,200,000 shares of Common Stock at an exercise price of $0.57 per share ("Tranche 1"), (ii) 900,000 shares of Common Stock at an exercise price of $0.72 per share ("Tranche 2"); and (iii) 150,000 shares of Common Stock at an exercise price of $0.97 per share ("Tranche 3"). The Purchaser is required to exercise the Corbel Warrant with respect to Tranche 1 if the Common Stock is trading at $1.40 per share or higher for a specified period, and is further required to exercise the Corbel Warrant with respect to Tranche 2 if the Common Stock is trading at $1.50 per share or higher for a specified period. Cashless exercise of the Corbel Warrant is only permitted with respect to Tranche 3. The Purchaser has the right, within six months after the issuance of any shares under the Corbel Warrant, to require the Company to repurchase such shares for cash or for Put Notes (as defined in the applicable loan agreement), at the Company's discretion. The Corbel Warrant expires on the sixth anniversary of the date of its issuance.
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Note 5 - The Company evaluated subsequent events through the date the financials statements were issued and filed with SEC. On October 9, 2021 the Company opened an additional Craft Pizza & Pub location in the north-central Indianapolis area. There were no other subsequent events that required recognition or disclosure beyond what is disclosed in this report.
Impact of COVID-19 Pandemic
In the first quarter of 2020, a novel strain of coronavirus emerged and spread throughout the United States. The World Health Organization recognized COVID-19 as a pandemic in March 2020. In response to the pandemic, the U.S. federal government and various state and local governments, among other things, imposed travel and business restrictions, including stay-at-home orders and other guidelines that required restaurants and bars to close or restrict inside dining. The pandemic resulted in significant, economic volatility, uncertainty and disruption, reduced commercial activity and weakened economic conditions in the regions in which the Company and its franchisees operate.
The pandemic and the governmental response had a significant adverse impact on the Company, due to, among other things, governmental restrictions, reduced customer traffic, staffing challenges and supply difficulties especially during the three-months ended September 30, 2021. All Company-owned Craft Pizza & Pub restaurants are located in the State of Indiana. On March 16, 2020, by order of the Governor of the State of Indiana (the "Governor"), all restaurants within Indiana were ordered to close for inside dining. Due to the order, all Craft Pizza & Pub restaurants were open for carry-out only through April 30, 2020, primarily through the Company's Pizza Valet system and third-party delivery providers. On May 1, 2020, the Governor issued another order allowing restaurants to be open for inside dining for up to 50% of capacity as of May 11, 2020, and on June 14, 2020 up to 75% of capacity, plus bars were allowed to open up to 50% of capacity, and on July 4, 2020 restaurants and bars were allowed to resume at 100% capacity. The Governor delayed the increase in capacity for a portion of the third quarter of 2020. Ultimately the Governor issued another order to allow 100% capacity for restaurants and bars but required certain social distancing rules which effectively limit capacity to much less than 100%. As the duration and scope of the pandemic is uncertain these orders are subject to further modification, which could adversely affect the Company. Further, the Company can provide no assurance the phase out of restrictions will have a positive effect on the Company's business.
Many other states and municipalities in the United States also temporarily restricted travel and suspended the operation of dine-in restaurants and other businesses in light of COVID-19, which negatively affected our franchised operations. Host facilities for the Company's non-traditional franchises were also affected by labor shortages which adversely impacted those developments and in turn slowed the sale of franchises. The uncertainty and disruption in the U.S. economy caused by the pandemic are likely to continue to adversely impact the volume and resources of potential franchisees for both the Company's Craft Pizza & Pub and non-traditional venues.
In 2020, in light of the additional uncertainty created as a result of the COVID-19 pandemic, the Company created an allowance for uncollectability on all long-term franchisee receivables. The Company will continue to pursue collection where circumstances are appropriate and all collections of these receivables in the future will result in additional royalty income at the time received.
On April 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 ended June 30, 2020. The expenses included payroll costs and benefits, interest on mortgage obligations, rent under lease agreements and utilities and other qualifying expenses pursuant to the CARES ACT. On February 19, 2021, the Company received formal notice from the Small Business Administration ("SBA") that the entire $715,000 loan was forgiven in accordance with the provisions of the CARES ACT. On February 5, 2021, the Company received an additional loan of $940,734 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 ended March 31, 2021. The expenses included payroll costs and benefits, interest on mortgage obligations, rent under lease agreements and utilities and other qualifying expenses pursuant to the CARES ACT. Because the 2020 PPP loan was applied against relevant expenses in the second quarter of 2020 and the 2021 PPP loan was applied against relevant expenses in the first quarter of 2021, the results of operations by quarter in 2020 and 2021 are of limited comparability.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General Information
Noble Roman's, Inc., an Indiana 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 to Noble Roman's, Inc. and its two wholly-owned subsidiaries, Pizzaco, Inc. and RH 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 in January 2017 as a Company-operated restaurant in a northern suburb of Indianapolis, Indiana. Since then, the Company opened a total of seven more Company-operated locations in 2017, 2018, 2020 and 2021, with two additional locations now under development. The Company-operated locations serve as the base for what it sees as the potential future growth driver franchising to experienced, multi-unit restaurant operators with a track record of success. In 2019, the Company executed an agreement with the first such operator, Indiana's largest Dairy Queen franchisee with 19 franchised Dairy Queen locations. The franchisee opened the first franchised Craft Pizza &Pub location in May 2019 and another location in November 2020. In November 2019, another franchisee, with an operations background in McDonald's, opened a Craft Pizza & Pub in Evansville, Indiana.
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As discussed above under "Impact of COVID-19 Pandemic" the COVID-19 pandemic materially affected the Company's business in the past year.
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 a Noble 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.
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 and fresh-cooked pasta. The menu also incorporates baked sub sandwiches, hand-sauced wings and a selection of desserts, as well as Noble 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 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 many giant screen television monitors for sports and the nostalgic black and white shorts historically featured in Noble 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 (a Noble 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.
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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'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. |
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 Except Hospitals | Non-Traditional Hospitals | Traditional 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 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.
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.
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The Company utilizes distributors it has strategically identified across the 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, recipes or 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.
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 September 30, | Nine Months ended September 30, | |||||||||||||||||||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||||||||||||||||||
Description | ||||||||||||||||||||||||||||||||
Revenue | $ | 1,583,251 | 100 | % | $ | 2,122,352 | 100 | % | $ | 4,083,064 | 100 | % | $ | 6,495,788 | 100 | % | ||||||||||||||||
Cost of sales | 356,683 | 22.5 | 444,831 | 21.0 | 871,312 | 21.3 | 1,355,148 | 20.9 | ||||||||||||||||||||||||
Salaries and wages | 416,490 | 26.3 | 618,729 | 29.2 | 771,795 | 18.9 | 1,489,980 | 22.9 | ||||||||||||||||||||||||
Facility cost including rent, common area and utilities | 269,369 | 17.0 | 353,382 | 16.7 | 657,725 | 16.1 | 808,134 | 12.4 | ||||||||||||||||||||||||
Packaging | 42,096 | 2.7 | 69,792 | 3.3 | 117,474 | 2.9 | 184,191 | 2.8 | ||||||||||||||||||||||||
Third-party delivery fees | 71,036 | 4.5 | 97,998 | 4.6 | 179,367 | 4.4 | 284,215 | 4.4 | ||||||||||||||||||||||||
All other operating expenses | 221,080 | 14.0 | 308,989 | 14.6 | 555,449 | 13.6 | 936,690 | 14.4 | ||||||||||||||||||||||||
Total expenses | 1,376,753 | 87.0 | 1,893,721 | 89.4 | 3,153,122 | 77.2 | 5,058,358 | 77.8 | ||||||||||||||||||||||||
Margin contribution | $ | 206,498 | 13.0 | % | $ | 228,631 | 10.6 | % | $ | 929,942 | 22.8 | % | $ | 1,437,430 | 22.2 | % |
Margin contribution from this venue for the nine-month period ended September 30, 2021 was decreased $27,151 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, | |||||||||||||||||||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||||||||||||||||||
Description | ||||||||||||||||||||||||||||||||
Royalties and fees franchising | $ | 1,063,864 | 84.9 | % | $ | 1,019,883 | 86.6 | % | $ | 3,256,796 | 85.5 | % | $ | 2,955,974 | 86.1 | % | ||||||||||||||||
Royalties and fees grocery | 188,639 | 15.1 | 157,893 | 13.4 | 551,430 | 14.5 | 475,021 | 13.9 | ||||||||||||||||||||||||
Total royalties and fees | 1,252,503 | 100.0 | 1,177,776 | 100.0 | 3,808,226 | 100.0 | 3,430,995 | 100.0 | ||||||||||||||||||||||||
Salaries and wages | 205,127 | 16.4 | 207,046 | 17.6 | 420,322 | 11.1 | 503,596 | 14.7 | ||||||||||||||||||||||||
Trade show expense | 105,000 | 8.4 | 105,000 | 8.9 | 315,000 | 8.3 | 294,000 | 8.6 | ||||||||||||||||||||||||
Travel and auto | 21,720 | 1.7 | 13,539 | 1.1 | 69,975 | 1.8 | 51,823 | 1.5 | ||||||||||||||||||||||||
All other operating expenses | 150,548 | 12.0 | 166,213 | 14.2 | 435,081 | 11.4 | 464,053 | 13.5 | ||||||||||||||||||||||||
Total expenses | 482,395 | 38.5 | 491,798 | 41.8 | 1,240,379 | 32.6 | 1,313,472 | 38.3 | ||||||||||||||||||||||||
Margin contribution | $ | 770,108 | 61.5 | % | $ | 685,978 | 58.2 | % | $ | 2,567,847 | 67.4 | % | $ | 2,117,523 | 61.7 | % |
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, | |||||||||||||||||||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||||||||||||||||||
Description | ||||||||||||||||||||||||||||||||
Revenue | $ | 99,255 | 100 | % | $ | 120,316 | 100 | % | $ | 365,372 | 100 | % | $ | 353,617 | 100 | % | ||||||||||||||||
Total expenses | 108,935 | 109.8 | 126,765 | 105.4 | 338,161 | 92.6 | 334,579 | 94.6 | ||||||||||||||||||||||||
Margin contribution | $ | (9,679 | ) | (9.8 | )% | $ | (6,449 | ) | (5.4 | )% | $ | 27,211 | 7.4 | % | $ | 19,038 | 5.4 | % |
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Results of Operations
Company-Owned Craft Pizza & Pub
The revenue from this venue grew from $1.6 million to $2.1 million (a 34.0% increase from last year) and from $4.1 million to $6.5 million (a 59.1% increase from last year) for the respective three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. Revenue was increased by opening an additional Craft Pizza & Pub restaurant in March 2020, October 2020 and December 2020, but that increase was partially 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 which allowed carry-out and delivery. Most but not all, of the inside dining revenue that was lost from the closure of the dining rooms was made up through Pizza Valet service over time and outside delivery service. The Governor has now modified his order to allow restaurants and bars to operate at 100% capacity, although the order originally contained distance restrictions which effectively require the restaurants to operate between 50% and 75% capacity depending on each location.
Cost of sales decreased from 22.5% to 21.0% and from 21.3% to 20.9%, respectively, for the three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. This decrease in cost was the result of a modest menu price increase taken at the end of July 2021 offset by fluctuating prices of various ingredients due to temporary shortages of different products as a result of the COVID-19 pandemic and the relative lower level of experience of hourly employees due to hiring from the recent labor shortage.
Salaries and wages increased from 26.3% to 29.2% and from 18.9% to 22.9% for the respective three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. The primary reason for the increase was the shortage of hourly and salaried labor, an increase in the competitive price of labor, additional training expense due to recent hires resulting from the shortage of labor, and more overtime hours as a result of the shortage of labor
Packaging cost increased from 2.7% to 3.3% and decreased from 2.9% to 2.8% for the three-month and nine-month periods ended September 30, 2021 compared the corresponding periods in 2020. The increase in the three-month period was the result of higher packaging cost from the manufacturer which was offset in the nine-month period by more inside dining due to the reopening of the dining rooms.
All other operating expenses increased from 35.5% to 35.9% and decreased from 34.1% to 31.2% for the three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. The primary reason for the decrease was the result of facility costs decrease in the newer CPP locations combined with higher sales volume in those locations.
Gross margin contribution decreased from 13.0% to 10.6% and from 22.8% to 22.2% for the three-month and nine-month periods ended September 30, 2021, respectively, compared to the corresponding periods in 2020. This decrease was primarily the result of increased salaries and wages, as explained above, mostly offset by lower facility costs as explained above. Overall expenses for this venue increased from 87.0% to 89.2% and from 77.2% to 77.9% for the three-month and nine-month periods in 2021, respectively, compared to the corresponding periods in 2020. Facility cost decreased from 17.0% to 16.7% and from 16.1% to 12.4% for the three-month and nine-month periods in 2021, respectively, compared to the corresponding periods in 2020. The facility costs as a percentage of sales decreased because of the higher sales volume and lower cost lease for the most recent openings.
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Franchising
Total revenue from this venue decreased from $1.3 million to $1.2 million and $3.8 million to $3.4 million in the respective three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. The decrease in revenue in this venue is directly tied to the effects of COVID-19 pandemic across the country. Several of the non-traditional locations were temporarily closed as part of the pandemic and the government response. It is still unknown how many of those locations will be able to reopen in the future.
The decreases in fees from franchising were the result of the pandemic which caused several of the locations to be temporarily closed. The decreases in grocery store take-n-bake were a result of the Company's focus away from grocery stores for take-n-bake to franchising because of the strong economic conditions prior to the COVID-19 pandemic and due to the pandemic creating rushes on grocery stores with minimal staff which did not have sufficient resources to maintain the assembly of pizzas for take-n-bake during the crisis.
Salaries and wages increased from 16.4% to 17.6% and from 11.1% to 14.7% in the three-months and nine-months ended September 30, 2021 compared to the corresponding periods in 2020. The reason for this increase was the revenue decline as discussed in the paragraph above.
Trade show expense, insurance and other operating costs increased from $277,000 to $285,000 for the three-month period ended September 30, 2021 and decreased from $820,000 to $810,000 for the nine-month period ended September 30, 2021 compared to the corresponding periods in 2020. However because of the decrease in total revenue from this venue as a result of the COVID-19 pandemic, the total cost as a percentage of revenue increased from 38.5% to 41.8% and from 32.6% to 38.3% for the three-month and nine-month periods ended September 30, 2021, respectively, compared to the corresponding periods in 2020.
Gross margin, as described in the paragraph above, decreased from 61.5% to 58.2% and from 67.4% to 61.7% for the three-month and nine-month periods ended September 30, 2021, respectively, compared to the corresponding periods in 2020. As described above, the margins are lower primarily because of the decreased revenue resulting from temporary closures and reduced traffic directly resulting from the pandemic.
Company-Owned Non-Traditional Location
Gross revenue from this single-unit venue increased from $99,000 to $120,000 and decreased from $365,000 to $354,000 for the respective three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. This venue consists of one location in a hospital. Access to the hospital has been severely limited and travel within sections of the hospital are prohibited because of the potential spread of COVID-19. The revenue increased in the three-month period ended September 30, 2021 as a result of the hospital easing restrictions somewhat on the movement of people within the hospital. 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 increased from $109,000 to $127,000 and decreased from $338,000 to $336,000 for the three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020.
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Depreciation and amortization increased from $98,000 to $142,000 and from $263,000 to $449,000 for three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. Depreciation increased as a result of the opening of additional locations in March 2020, October 2020 and December 2020.
General and administrative expenses increased from $460,000 to $506,000 and from $1.25 million to $1.29 million for the three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. The increase in general and administrative expense was the result of the expanded Craft Pizza & Pub operation, as described above, in addition to preparing for additional openings later this year.
Interest expense increased from $328,000 to $343,000 and decreased from $1.6 million to $1.0 million for the respective three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. The primary reason for the increase in the three-month period was the PIK interest being accrued added to the principal amount of the Corbel loan outstanding. The reason for the decrease in the nine-month period was the result of the financing that occurred in February 2020 resulting in non-cash write-offs of the unamortized original loan cost for both First Financial Bank and the private placement subordinated debt, which in the aggregate was $658,000 and partially offset by the non-cash PIK interest expense of $64,000 in the three-month period ended September 30, 2021 and $189,000 for the nine-month period ended September 30, 2021. This non-cash expense to obtain the new financing was necessary in order to reduce cash outlays for principal repayments, provide liquidity and to provide growth capital for more Craft Pizza & Pub locations.
Net income (loss) before income tax decreased from $83,000 to $(79,000) and increased from $442,000 to $833,000 for the respective three-month and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020. The decrease in net income (loss) before income tax for the three-month period was the direct result of the COVID-19 pandemic resulting in a number of temporarily closed franchises in the non-traditional venue, the shortage of labor and higher labor costs and higher product cost, combined with higher operating costs to comply with regulatory requirements intended to restrict the spread of COVID-19. The increase in the nine-month period was a result of opening additional CPP locations.
Income tax for all periods was not material since the partial reimbursements of certain expenses in both years by the two PPP loans/grants is non-taxable.
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, March, October and December of 2020, and October of 2021. The Company intends to open one or two more Company-owned Craft Pizza & Pub locations in 2021.
During 2018, the Company invested resources (approximately $300,000) to commence franchising of the Craft Pizza & Pub franchise. As of September 30, 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.
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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 4.6-to-1 as of September 30, 2021 compared to 2.6-to-1 as of December 31, 2020. The current ratio was improved significantly with the PPP grant in February 2021.
In January 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, 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 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 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. The remaining Warrants to purchase 775,000 shares were re-priced to $0.57 per share as a result of the financing completed in February 2020.
On February 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, as defined in the Agreement, plus 7.75%. 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 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 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 ended June 30, 2020. On February 19, 2021, the Company received formal notice from the SBA that the entire $715,000 loan was forgiven in accordance with the provisions of the CARES ACT which the Company had already treated as a grant because forgiveness was probable.
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On February 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 anticipates this loan will also be forgiven and, therefore, accounted for it as a government grant. In accordance with the Company's accounting policies, those proceeds were used to offset certain expenses during the quarter ended March 31, 2021.
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 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.
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 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 Company's Annual Report on Form 10-K for the year ended December 31, 2020. 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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to interest rate risk relates primarily to its variable-rate debt. As of September 30, 2021, the Company had outstanding variable interest-bearing debt in the aggregate principal amount of $8.4 million. The Company's current borrowings are at a variable rate tied to LIBOR plus 7.75% per annum adjusted on a monthly basis. Based on its current debt structure, for each 1% increase in LIBOR the Company would incur increased interest expense of approximately $87,000 over the succeeding 12-month period.
ITEM 4. Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, A. Scott Mobley, the Company's President and Chief Executive Officer, and Paul W. Mobley, the Company's Executive Chairman and Chief Financial Officer, have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective. There have been no changes in internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is not involved in material litigation against it.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
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ITEM 6. Exhibits.
Index to Exhibits
Exhibit Number | Description | |
3.1 | Amended Articles of Incorporation of the Registrant, filed as an exhibit to the Registrant's Amendment No. 1 to the Post-Effective Amendment No. 2 to Registration Statement on Form S-1 filed July 1, 1985 (SEC File No.2-84150), is incorporated herein by reference. | |
3.2 | Amended and Restated By-Laws of the Registrant, as currently in effect, filed as an exhibit to the Registrant's Form 8-K filed December 23, 2009, is incorporated herein by reference. | |
3.3 | Articles of Amendment of the Articles of Incorporation of the Registrant effective February 18, 1992 filed as an exhibit to the Registrant's Registration Statement on Form SB-2 (SEC File No. 33-66850), ordered effective on October 26, 1993, is incorporated herein by reference. | |
3.4 | Articles of Amendment of the Articles of Incorporation of the Registrant effective May 11, 2000, filed as Annex A and Annex B to the Registrant's Proxy Statement on Schedule 14A filed March 28, 2000, is incorporated herein by reference. | |
3.5 | Articles of Amendment of the Articles of Incorporation of the Registrant effective April 16, 2001 filed as Exhibit 3.4 to Registrant's annual report on Form 10-K for the year ended December 31, 2005, is incorporated herein by reference. | |
3.6 | Articles of Amendment of the Articles of Incorporation of the Registrant effective August 23, 2005, filed as Exhibit 3.1 to the Registrant's current report on Form 8-K filed August 29, 2005, is incorporated herein by reference. | |
3.7 | Articles of Amendment of the Articles of Incorporation of the Registrant effective February 7, 2017, filed as Exhibit 3.7 to the Registrant's Registration Statement on Form S-1 (SEC File No. 33-217442) filed April 25, 2017, is incorporated herein by reference. | |
4.1 | Specimen Common Stock Certificates filed as an exhibit to the Registrant's Registration Statement on Form S-18 filed October 22, 1982 and ordered effective on December 14, 1982 (SEC File No. 2-79963C), is incorporated herein by reference. | |
4.2 | Warrant to purchase common stock, dated July 1, 2015, filed as Exhibit 10.11 to the Registrant's Form 10-Q filed on August 11, 2015, is incorporated herein by reference. |
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4.3 | Form of Senior Secured Promissory Note issued by Registrant to Corbel Capital Partners SBIC, L.P. dated February 7, 2020, filed as Exhibit 4.3 to Registrant's annual report on Form 10-K for the year ended December 31, 2019, is incorporated herein by reference. | |
4.4 | Form of Warrant issued to Corbel Capital Partners SBIC, L.P. dated February 7, 2020, filed as Exhibit 4.4 to Registrant's annual report on Form 10-K for the year ended December 31, 2019, is incorporated herein by reference. | |
4.5 | Form of Promissory Note under the Paycheck Protection Payment loan issued by Registrant Huntington National Bank dated April 17, 2020, filed as Exhibit 4.5 to Registrant's quarterly report on Form 10-Q for the period ended March 31, 2020,filed herewith. | |
4.6 | Promissory Note under the Paycheck Protection Program loan issued by Noble Roman's, Inc. to Huntington National Bank dated February 5, 2021 filed as Exhibit 10.1 to Registrant's current report on Form 8-K filed February 8, 2021 is incorporated herein by reference. | |
10.1* | Employment Agreement with Paul W. Mobley dated January 2, 1999 filed as Exhibit 10.1 to Registrant's annual report on Form 10-K for the year ended December 31, 2005, is incorporated herein by reference. | |
10.2* | Employment Agreement with A. Scott Mobley dated January 2, 1999 filed as Exhibit 10.2 to Registrant's annual report on Form 10-K for the year ended December 31, 2005, is incorporated herein by reference. | |
10.3 | Loan Agreement dated as of September 13, 2017 by and between the Registrant and First Financial, filed as Exhibit 10.1 to the Registrant's Form 8-K filed September 19, 2017, is incorporated herein by reference. | |
10.4 | Term note dated September 13, 2017 to First Financial Bank filed as Exhibit 10.4 to the Registrant's Form 10-Q filed November 14, 2017, is incorporated herein by reference. | |
10.5 | Development line note dated September 13, 2017 to First Financial Bank filed as Exhibit 10.5 to the Registrant's Form 10-Q filed November 14, 2017, is incorporated herein by reference. | |
10.6 | Agreement dated April 8, 2015, by and among the Registrant and the shareholder parties, filed as Exhibit 10.1 to Registrant's Form 8-K filed on April 8, 2015, is incorporated herein by reference. |
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10.7 | Form of 10% Convertible Subordinated Unsecured note filed as Exhibit 10.16 to the Registrant's Form 10-K filed on March 27, 2017, is incorporated herein by reference. | |
10.8 | Form of Redeemable Common Stock Purchase Class A Warrant filed as Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (SEC File No. 33-217442) on April 25, 2017, is incorporated herein by reference. | |
10.9 | Registration Rights Agreement dated October 13, 2016, by and among the Registrant and the investors signatory thereto, filed as Exhibit 10.22 to the Registrant's Registration Statement on Form S-1 (SEC File No. 33-217442) on April 25, 2017, is incorporated herein by reference. | |
10.10 | First Amendment to the Registration Rights Agreement dated February 13, 2017, by and among the Registrant and the investors signatory thereto, filed as Exhibit 10.23 to the Registrant's Registration Statement on Form S-1 (SEC File No. 33-217442) on April 25, 2017, is incorporated herein by reference. | |
10.11 | Senior Secured Note and Warrant Purchase Agreement dated February 7, 2020 by and between the Registrant and Corbel Capital Partners SBIC, L.P., filed as Exhibit 10.11 to Registrant's annual report on Form 10-K for the year ended December 31, 2019, is incorporated herein by reference. | |
21.1 | Subsidiaries of the Registrant filed in the Registrant's Registration Statement on Form SB-2 (SEC File No. 33-66850) ordered effective on October 26, 1993, is incorporated herein by reference. | |
101 | Interactive Financial Data |
*Management contract or compensation plan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NOBLE ROMAN'S, INC. | |||
| Date: November __, 2021 | By: | ||
Paul W. Mobley, Executive Chairman, Chief Financial Officer and Principal Accounting Officer (Authorized Officer and | |||
| Principal Financial Officer) |
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Noble Roman's Inc. published this content on 12 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 12 November 2021 11:06:02 UTC.
