NOBLE ROMANS INC - Quarter Report: 2022 March (Form 10-Q)

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

<STRONG>Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934</STRONG>

For the quarterly period ended March 31, 2022

Commission file number: 0-11104

(317) 634-3377

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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.

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 May 6, 2022, 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:

Noble Roman's, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited).

Noble Roman's, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited).

Noble Roman's, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in

Stockholders' Equity

(Unaudited)

Quarter Ended March 31, 2022:

Quarter Ended March 31, 2021:

See accompanying notes to condensed consolidated financial statements (unaudited).

Noble Roman's, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited).

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, 2021 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”), were 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 would 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 were presented in the Company’s unaudited interim condensed consolidated financial statements for the quarter ended March 31, 2021 as a reduction of those related expenses in the quarter.  Because of the $940,734 PPP loan being applied against relevant expenses in the quarter ended March 31, 2021, the results of operations for the first quarters of 2021 and 2022 are of limited comparability.

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 period ended March 31, 2022 is not necessarily indicative of the results to be expected for the full year ending December 31, 2022, especially in light of the impact of the coronavirus (“COVID-19) pandemic on the Company’s operations during January and February 2022.

Note 2 – Royalties and fees included initial franchise fees of $83,000 for the three-month period ended March 31, 2022, and $54,500 for the three-month period ended March 31, 2021.  Royalties and fees included equipment commissions of $8,007 for the three-month period ended March 31, 2022, and $10,438 for the three-month period ended March 31, 2021.  Royalties and fees, including amortized initial franchise fees and equipment commissions, were $883,000 for the three-month period ended March 31, 2022, and $989,000 for the three-month period ended March 31, 2021.  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.

The effect on comparable period amounts 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 $852,000 on March 31, 2022.

At December 31, 2021 and March 31, 2022, 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 March 31, 2022, 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 collectability 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 3,069 franchises/licenses in operation on December 31, 2021 and 3,074 franchises/licenses were in operation on March 31, 2022.  During the three-month period ended March 31, 2022 seven new outlets opened and two 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 period ended March 31, 2022:

The following table sets forth the calculation of basic and diluted earnings per share for the three-month period ended March 31, 2021:

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 is added to the principal amount of the Senior Note. Interest is payable in arrears on the last calendar day of each month. The Senior Note matures 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.

Note 5 – The Company evaluated subsequent events through the date the financial statements were issued and filed with SEC.  There were no 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 as a result of the emergence of the Omicron variant of COVID-19 in early 2022.  Many states and municipalities in the United States, including Indiana where all of the Company-owned Craft Pizza & Pub restaurants are located, have from time to time temporarily restricted travel and suspended the operation of dine-in restaurants and other businesses in light of COVID-19, which negatively affected the Company's operations.  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.

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.

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. Also, since the 2021 PPP loan was applied against relevant expenses in the first quarter, the results of operations by quarter in 2021 and 2022 are of limited comparability.  In addition to the PPP loan in the first quarter of 2021, the emergence of the Omicron variant of COVID-19 significantly impacted operations in the first quarter of 2022. 

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 eight more Company-operated locations in 2017, 2018, 2020 and 2021, with two additional locations now in the site procurement stage. 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 at the time. 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.

As discussed above under “Impact of COVID-19 Pandemic” the COVID-19 pandemic materially affected the Company’s business in the past year and the first two months of the first quarter of 2022.

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 boneless 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.

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.

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:

____________ 

(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.

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 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 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.  

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.

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: 

Note:  The application of the $940,734 PPP loan against relevant expenses in the quarter ended March 31, 2021 materially affected the comparability of the period ended March 31, 2022 compared to the period ended March 31, 2021.  

Margin contribution from this venue was decreased by $5,692 for non-cash expense related to the adoption of Accounting Standards Update ("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:

Note:  The application of the $940,734 PPP loan against relevant expenses in the quarter ended March 31, 2021 materially affected the comparability of the period ended March 31, 2022 compared to the period ended March 31, 2021.  

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:

Note:  The application of the $940,734 PPP loan against relevant expenses in the quarter ended March 31, 2021materially affected the comparability of the period ended March 31, 2022 compared to the period ended March 31, 2021.  

Results of Operations

Company-Owned Craft Pizza & Pub

The revenue from this venue was $2.3 million compared to $2.1 million for the corresponding period in 2021.  Revenue was increased by the opening of two additional Craft Pizza & Pub restaurants in October and December 2021, respectively, but that increase was partially constrained by the impact of the Omicron variant of COVID-19 in January and February 2022.   

Cost of sales decreased to 20.6% from 20.8% in the corresponding period last year.  This increase was the result of inflationary pressures with all products partially offset by menu price increase. 

Salaries and wages increased to 31.7% from 10.9% for the comparable period in 2021.  The $940,734 PPP loan, which was used to reduce certain qualified expenses including labor cost in the first quarter of 2021, materially affects the comparison with the prior quarter.  Salaries and wages without the effect of the PPP loan in 2021 increased from 28.4% to 31.7% which is a result of the current labor shortage and overall inflation which have driven up competitive prices for labor.  The shortage is currently trending toward correcting itself and with the most recent menu price increase it is beginning to neutralize itself, for example salaries and wages for the month of March 2022 was 29.0%.

Gross margin contribution decreased to 9.9% from 41.7% for the quarter compared to the comparable period last year. The reduction in certain qualified expenses due to the Company’s PPP loan in the first quarter of 2021 material affects the comparison with the prior quarter.  In addition, the spread of the Omicron variant in January and February of 2022 had a significant negative impact which has now significantly dissipated. 

Franchising

The revenue from this venue decreased from $1.05 million to $1.03 million for the three months ended March 31, 2022 compared to the corresponding period in 2021.  This decrease was the result of the closure of several non-traditional locations as a result of the emergence of the Omicron variant of COVID-19, most of which has been offset by the opening of additional locations.    

Salaries and wages for this venue increased to 18.7% of revenue from 8.4% of revenue.  The reduction in certain qualified expenses, including salaries and wages, due to the Company’s PPP loan in the first quarter of 2021 materially affects the comparison with the prior quarter.

Trade show expense, insurance and other operating costs increased to $268,000 from $251,000 for the three-month period ended March 31, 2022, partially offset due to a reduction in trade show expense, compared to the corresponding period in 2021. The reduction in certain qualified expenses, including general insurance and group insurance costs, due to the Company’s PPP loan in the first quarter of 2021 materially affects the comparison with the prior quarter.

Gross margin contribution from this venue declined to 55.4% from 67.8% in the three-month period ended March 31, 2022 compared to the corresponding period in 2021.  The reduction in certain qualified expenses due to the Company’s PPP loan in the first quarter of 2021 materially affects the comparison with the prior quarter.  In addition, the emergence of the Omicron variant in January and February of 2022 had a significant negative impact which has now dissipated. 

Company-Owned Non-Traditional Locations

Gross revenue from this venue increased to $133,000 from $116,000 in the three-month period ended March 31, 2022 compared to the corresponding period in 2021.  The primary reason for this increase was the lifting of the restriction placed on hospital locations as a result of the COVID-19 pandemic whereby hospitals were restricted from having outside visitors and staff inside the hospital was restricted from going from one area of the hospital to another.  The Company does not intend to operate any more Company-owned non-traditional locations except the one location that it is currently operating. 

Total expenses increased to $133,000 from $89,000 for the three-month period ended March 31, 2022 compared to the corresponding period in 2021.  The primary reason for this increase was caused by higher volume in the location due to the lifting of the restrictions on hospitals resulting from the COVID-19 pandemic and, in addition, certain qualifying expenses were reduced in 2021 by a portion of the PPP loan for that purpose.   

Other Expenses

Depreciation and amortization decreased to $113,000 from $165,000 for the three-month period ended March 31, 2022 compared to the corresponding periods in 2021.  The primary reason for the decrease was the amortization of pre-opening costs of new Company-owned Craft Pizza & Pub locations during 2021 which were charged to expense in December 2021.    

General and administrative expenses increased to $540,530 from $299,000 for the three-month period ended March 31, 2022 compared to the corresponding period in 2021. The reduction in certain qualified expenses due to the Company’s PPP loan in the first quarter of 2021 materially affects the comparison with the prior quarter. 

Interest expense increased to $342,000 from $334,000 for the three-month period ended March 31, 2022 compared to the corresponding period in 2021.  The primary reason for the increase was a result of adding non-cash PIK interest to the principal balance of the Senior Note. 

Net income decreased to a net loss of $137,000 from net income of $827,000 for the three-month period ended March 31, 2022 compared to the corresponding period in 2021.  The reduction in certain qualified expenses due to the Company’s PPP loan in the first quarter of 2021 materially affects the comparison with the prior quarter.

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 and November of 2017, January and June of 2018, March, October and December of 2020, and October and December of 2021. The Company intends to open two more Company-owned Craft Pizza & Pub locations in 2022.

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 2.5-to-1 as of March 31, 2022 compared to 2.3-to-1 as of December 31, 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.

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.  On November 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 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, 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.

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 $8.4million.  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.

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.

ITEM 6. Exhibits.

Index to Exhibits

*Management contract or compensation plan.

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.