NOBLE ROMANS INC - Quarter Report: 2023 March (Form 10-Q)

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 March 31, 2023

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 8, 2023, 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)

Three Months Ended March 31, 2023:

Three Months Ended March 31, 2022:

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, 2022 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.

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, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023, especially in light of past and potential future volatility and uncertainty resulting from the Coronavirus (“COVID-19”) pandemic and the governmental and consumer response.

Significant Accounting Policies

The Employee Retention Tax Credit (“ERTC”) is a refundable tax credit that businesses can claim on qualified wages paid to employees.  The program was introduced on March 27, 2020 in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to incentivize employers to keep their employees on their payroll during the pandemic and economic shutdown.  The credit applies to all qualified wages, including certain health plan expenses, paid during the period in which the operations were fully or partially suspended due to a government shutdown order or where there was significant decline in gross receipts.

When first established under the CARES Act, the tax credit was equal to 50% of the qualified wages an eligible employer paid to employees after March 12, 2020 and before January 1, 2021.  The credit was also limited to a maximum annual per employee credit of $5,000.  The credit was then extended through June 30, 2021 by the Tax Payer Certainty and Disaster Relief Act (“Relief Act”) (Division EE of the Consolidated Appropriations Act). The Relief Act modified the credit to be 70% of up to $10,000 of qualified wages per quarter in 2021 through June 30, 2021.  The program was further extended through December 31, 2021 by the American Rescue Plan Act of 2021 (“ARPA”) but was retroactively reduced by the Infrastructure Investment and Jobs Act, to end effective September 30, 2021. 

During the first quarter of 2023 the Company determined that it was entitled to an ERTC of $1.718 million and submitted amended federal Form 941 returns claiming that refund.  The ERTC refund is treated as a government grant and recognized in the first quarter of 2023 as reducing appropriate expenses for the $1.718 million less expense of $258,000 for applying for the refund or a net benefit of $1.460 million.

There have been no other significant changes in the Company's accounting policies from those disclosed in its Annual Report on Form 10-K.

Note 2 – Royalties and fees included initial franchise fees of $60,000 for the three-month period ended March 31, 2023, and $83,000 for the three-month period ended March 31, 2022.  Royalties and fees included equipment commissions of $24,000 for the three-month period ended March 31, 2023, and $8,007 for the three-month period ended March 31, 2022.  Royalties and fees, including amortized initial franchise fees and equipment commissions, were $987,000 for the three-month period ended March 31, 2023, and $934,000 for the three-month period ended March 31, 2022.  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 $943,000 on March 31, 2023.

At December 31, 2022 and March 31, 2023, 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 receivable reflected on the consolidated balance sheet as of March 31, 2023, will be collected. 

During the three-month period ended March 31, 2023 there were no company-operated or franchised Craft Pizza & Pub restaurants opened or closed.  During the same three-month period 10 new non-traditional outlets opened and 0 non-traditional outlets closed.

Note 3.  The following table sets forth the calculation of basic and diluted earnings per share for the three-month period ended March 31, 2023:

The following table sets forth the calculation of basic and diluted earnings per share for the three-month period ended March 31, 2022:

Note 4 – On February 7, 2020, the Company entered into a Senior Secured Promissory Note and Warrant Purchase Agreement (as amended, the “Agreement”) with Corbel Capital Partners SBIC, L.P. (the “Purchaser” or “Corbel”). 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 (“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. At the end of the third quarter 2022, the Company entered into an amendment to the Senior Note agreement changing the required payments of principal beginning in March 2023 from $33,333 per month to $83,333 per month in exchange for lowering the financial covenants and eliminating the excess cash flow requirement. In addition, when LIBOR is phased out it will be replaced with SOFR, as defined in the Agreement.  The Senior Note, as amended, requires principal payments of $33,333 in February 2023 and beginning in March 2023 payments of $83,333 per month continuing until maturity.

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 Agreement), at the Company's discretion. The Corbel Warrant expires on the sixth anniversary of the date of its issuance.

Impact of COVID-19 Pandemic

In the first quarter of 2020, a novel strain of coronavirus (COVID-19) 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 have, 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 and other variants of COVID-19 in late 2021 and early in 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 operations 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 sales 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.

Tax laws that address the financial impact of the lockdowns and restrictions provided relief to the Company in the form of the ERTC.  During the first quarter of 2023, the Company determined that it was entitled to an ERTC of $1.718 million and submitted amended federal Form 941 returns claiming that refund.  The ERTC refund is treated as a government grant and recognized in the first quarter of 2023 as reducing appropriate expenses for the $1.718 million less expenses for applying for the refund of $258,000 or a net benefit of $1.460 million.

The ERTC is a refundable tax credit that businesses can claim on qualified wages paid to employees.  The program was introduced on March 27, 2020 in the CARES Act to incentivize employers to keep their employees on their payroll during the pandemic and economic shutdown.  The credit applies to all qualified wages, including certain health plan expenses, paid during the period in which the operations were fully or partially suspended due to a government shutdown order or where there was significant decline in gross receipts.

When first established under the CARES Act, the tax credit was equal to 50% of the qualified wages an eligible employer paid to employees after March 12, 2020 and before January 1, 2021.  The credit was also limited to a maximum annual per employee credit of $5,000.  The credit was then extended through June 30, 2021 by the Relief Act.  The Relief Act modified the credit to be 70% of up to $10,000 of qualified wages per quarter in 2021 through June 30, 2021.  The program was further extended through December 31, 2021 by the American Rescue Plan Act of 2021 (“ARPA”) but was retroactively reduced by the Infrastructure Investment and Jobs Act, to end effective September 30, 2021. 

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Noble Roman’s, Inc., an Indiana corporation incorporated in 1972, sells and services franchises and licenses and operates Company-owned 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 wholly-owned subsidiaries, unless the context requires otherwise. The Company’s only operating subsidiary is RH Roanoke, Inc., which 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. The Company-operated locations serve as the base for what it sees as a significant potential future growth driver, including additional Company operated locations and franchising its full-service restaurant format to experienced, multi-unit restaurant operators with a track record of success. In 2019 the Company executed an agreement with the first franchise operator, Indiana’s largest Dairy Queen franchisee with 19 franchised Dairy Queen locations at that 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 elsewhere in this report, the COVID-19 pandemic materially affected the Company’s business and its franchising strategy since the pandemic emerged during the first quarter of 2020.

Noble Roman’s Craft Pizza & Pub

The Noble Roman’s Craft Pizza & Pub format incorporates many of the basic elements first introduced in 1972 but in a modern atmosphere with up-to-date baking technology 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. Popular pizza favorites such as pepperoni are options on the menu but also offered is a selection of Craft Pizza & Pub original 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, most of which have been offered in its locations since 1972. In 2022, new salad bars were rolled out over time across all Company-operated restaurants.

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 featured in Noble Roman’s since 1972.

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 host business or activity with 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 in 1972, 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 carefully managing corporate-level overhead expenses. To accomplish this, the Company plans to continue developing, owning and operating Craft Pizza & Pub locations and franchising that format to qualified multi-unit franchisees. At the same time, the Company will continue to focus on franchising/licensing for non-traditional locations by franchising that format primarily to convenience stores and entertainment centers.

The initial franchise fees for a Noble Roman’s Pizza non-traditional location or a Craft Pizza & Pub location 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 recipes and 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 in areas across the United States where Company-owned and franchise operations are located.  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.  Each of the primary distributors purchases the ingredients from the manufacturers at prices negotiated between the Company and the manufacturers, but under payment terms agreed upon by the manufacturers and the distributor, and distributes the ingredients to the franchisee/licensee at a price determined by the distributor agreement.  Payment terms to the distributor are agreed upon between each franchisee/licensee and the respective distributor. 

Financial Summary

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results may differ from those estimates.  The Company periodically evaluates the carrying value of its assets, including property, equipment and related costs, accounts receivable and deferred tax assets, to assess whether any impairment indications are present.  If any impairment of an individual asset is evident, a charge will be provided to reduce the carrying value to its estimated fair value.

The following table sets forth the revenue, expense and margin contribution of the Company's Craft Pizza & Pub venue and the percentage relationship to its revenue: 

Note:  Margin contribution from this venue was decreased by $3,757 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 percentage relationship to its revenue:

Note:  The credit to all other expenses is the result of recording the ERTC in quarter one although the extra expenses which this program was designed to reimburse the Company for occurred in 2020 and 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 significant increase in revenue was primarily the result of the hospital releasing most of its pandemic restrictions by allowing employees and guests to travel throughout the hospital.

Total expenses were reduced by $83,177 as a result of recording the ERTC in quarter one although the extra expenses, which the program was designed to reimburse the Company for occurred in 2020 and 2021.

Results of Operations

Company-Owned Craft Pizza & Pub

The revenue from this venue was $2.1 million for the three months ended March 31, 2023 compared to $2.3 million for the corresponding period in 2022.  The primary reason for this decrease was the two restaurants that opened near the end of 2021 had less sales as a result of their still benefiting from their opening period in early 2022.  To a lesser extent, the decrease was a result of a decrease in third party deliveries which was not totally offset by an increase in dine-in sales. 

Cost of sales increased to 21.6% for the three months ended March 31, 2023 from 20.6% in the corresponding period last year.  This increase was the result of the inflationary pressures on essentially all products partially offset by more strict controls as a result of more experienced employees and menu price increases.

Salaries and wages decreased to 29.5% for the three months ended March 31, 2023 from 31.7% for the comparable period in 2022, which was the result of more efficient use of labor because employees had been there longer and more strict controls which offset the salary and wage rate increases caused by the overall labor shortage.

Gross margin contribution decreased to 8.4% for the three months ended March 31, 2023 from 9.9% for the quarter compared to the comparable period last year, which was primarily the result of a decrease in revenue as explained in the paragraph above.    

Franchising

The revenue from this venue decreased from $1.03 million to $987 thousand for the three months ended March 31, 2023 compared to the corresponding period in 2022.  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, and most of which has now been offset by the opening of additional locations and improved sales.  This venue is now continuing to grow again as the Company has sold approximately 26 new franchises since January 1, 2023 with a significant number of prospects in the pipeline.

Salaries and wages increased to 22.5% from 18.7% for the comparable period in 2022, primarily the result of adding additional staff to add renewed emphasis on growth in this venue as some of the COVID restrictions have been minimized.   

As a result of recording a reduction of expenses by recording ERTC by approximately $1.38 million, gross margin contribution increased to 188.0% from 55.4% for the quarter compared to the comparable period last year. The reduction in other operating cost was a result of recording the ERTC in the first quarter of 2023 although the extra expenses and lost revenue which this program was designed to reimburse the Company for occurred in 2020 and 2021.

Company-Owned Non-Traditional Locations

Gross revenue from this venue increased to $223,000 from $133,000 in the three-month period ended March 31, 2023 compared to the corresponding period in 2022.  The primary reason for this increase was the lifting of the restrictions placed on the hospital as a result of the COVID-19 pandemic whereby the hospital was restricted from having outside visitors and staff inside the hospital 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. 

As a result of reducing expenses by recording ERTC in this venue by $83,177, total expenses decreased to $122,000 from $133,000 for the three-month period ended March 31, 2023 compared to the corresponding period in 2022.  The primary reason for this decrease was stricter controls on the costs to maintain service in the hospital.     

Other Expenses

Depreciation and amortization decreased to $96,000 from $113,000 for the three-month period ended March 31, 2023 compared to the corresponding periods in 2022.  The primary reason for the decrease was the lack of building new Company-owned locations since late 2021. 

General and administrative expenses decreased to $519,000 from $541,000 for the three-month period ended March 31, 2023 compared to the corresponding period in 2022.  The primary reason for the decrease was the tighter control on expenses.

Interest expense increased to $383,000 from $342,000 for the three-month period ended March 31, 2023 compared to the corresponding period in 2022.  The primary reason for the increase was a result of adding non-cash PIK interest to the principal balance of the Senior Note and was partially offset by beginning principal payments on the Senior Note in February 2023. 

Net income before taxes increased to $1.1 million compared to a loss of $200 thousand for the period ended March 31, 2023 compared to the corresponding period in 2022.  Net income before income tax is an important measure for the Company since it has deferred tax credits on the balance sheet to offset any income tax expense for approximately the next $12 million in net income before taxes.  The primary reason for the significant increase was the recording of the ERTC in the first quarter of 2023 in the amount of $1.46 million, which is net of the expenses of $258,000 for applying for the refund.

Net income increased to $868,000 from a net loss of $137,000 for the three-month period ended March 31, 2023 compared to the corresponding period in 2022. 

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 2017, January and June 2018, March, October and November2020, and October and December 2021.  The Company added no new Company-operated Craft Pizza & Pub locations during 2022; however locations of non-traditional franchising have increased in recent months.

The Company is operating one non-traditional location in a hospital and has no plans for operating any additional non-traditional locations.

The Company’s current ratio was 1.7-to-1 as of March 31, 2023 compared to 1.3-to-1 as of December 31, 2022.  The Company’s current ratio was significantly impacted by the recording of the ERTC in the first quarter of 2023 when the Company applied for the credit. 

In January 2017, the Company completed the offering of $2.4 million principal amount of promissory notes (the “Notes”) convertible to Common Stock at $0.50 per share and warrants (the “Warrants”) to purchase up to 2.4 million shares of the Company’s Common Stock at an exercise price of $1.00 per share, subject to adjustment. In 2018, $400,000 principal amount of Notes was converted into 800,000 shares of the Company’s Common Stock, in January 2019 another Note in the principal amount of $50,000 was converted into 100,000 shares of the Company’s Common Stock, and in August 2019 another Note in the principal amount of $50,000 was converted into 100,000 shares of the Company’s Common Stock, leaving principal amounts of Notes of $1.9 million outstanding as of December 31, 2019.  Holders of Notes in the principal amount of $775,000 extended their maturity date to January 31, 2023.  In February 2020, $1,275,000 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.  During 2022, all of those Notes were extended except for Notes with outstanding principal of $150,000 which cannot be repaid until the Corbel Note is repaid. These Notes bear interest at 10% per annum, including the Notes which have not been extended, 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 with Corbel, pursuant to which the Company issued to Corbel 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 was used to repay the Company’s then-existing bank debt which were in the original amount of $6.1 million; (ii) $1,275,000 was used to repay the portion of the Company’s existing subordinated convertible debt the maturity date of which most had not previously been extended, (iii) debt issuance costs; and (iv) the remaining net proceeds were used 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 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, as amended, requires principal payments of $33,333 in February 2023 and beginning in March 2023 principal payments of $83,333 per month continuing until maturity. At the end of the third quarter 2022, the Company entered into an amendment to the Senior Note agreement changing the required payments of principal beginning in March 2023 from $33,333 per month to $83,333 per month in exchange for lowering the financial covenants and eliminating the excess cash flow requirement.  In addition, when LIBOR is phased out it will be replaced with SOFR.

The Company, in the first quarter of 2023, submitted amended federal Form 941 returns for 2020 and 2021 to obtain a credit under the ERTC (which is a part of the CARES Act) of $1.718 million which will be reduced by $258,000 expenses of obtaining the credit for a net of $1.461 million.  While the ERTC applies to prior periods, the expected net refund was recorded when the claim was filed as a reduction in expenses in the first quarter of 2023 and is expected to be received within a few months.

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 as market conditions allow. The Company intends to refinance its outstanding debt before the maturity of the Corbel debt in February 2025.

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 and its aftermath, competitive factors and pricing and cost pressures, non-renewal of franchise agreements, shifts in market demand, the success of 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, the outcome of the election of directors at the Company’s 2023 annual meeting of shareholders (as discussed under “Part II-Other Information”), general economic conditions, changes in demand for the Company’s products or franchises, the Company’s ability to service its loans, the acceptance of the amended federal Form 941 returns relating to the ERTC, the impact of franchise regulation, the success or failure of individual franchisees and inflation and other changes in prices or supplies of food ingredients and labor as well as the factors discussed under “Risk Factors” contained in this Company’s Annual Report on Form 10-K for the year ended December 31, 2022. 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 December 31, 2022, the Company had outstanding variable interest-bearing debt in the aggregate principal amount of $8.4 million. The Company’s current borrowings were at a variable rate tied to LIBOR plus 7.25% 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 $85,000 over the succeeding 12-month period. At the end of the third quarter 2022, the Company entered into an amendment to the Senior Note agreement changing the required payments of principal beginning in March 2023 from $33,333 per month to $83,333 per month in exchange for lowering the financial covenants and eliminating the excess cash flow requirement. In addition, when LIBOR is phased out it will be replaced with SOFR.

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 5. Other Information.

BT Brands, Inc. (“BT Brands”) has notified the Company that it intends to nominate Gary Copperud for election as a Class III director at the annual meeting in opposition to A. Scott Mobley, President and Chief Executive Officer of Noble Roman’s. Mr. Mobley has been nominated and unanimously endorsed by the Board of Directors. The shareholders may receive proxy solicitation materials from BT Brands including a proxy statement and proxy card. The Board of Directors of the Company recommends to the shareholders that they not return the proxy card. The Company is not responsible for the accuracy of any information provided by or relating to BT Brands contained in any proxy solicitation materials filed or disseminated by, or on behalf of, BT Brands or any other statements that BT Brands or its representatives may have made or otherwise make. The Board, including all of its independent directors, strongly urges the shareholders NOT to sign or return any proxy card sent to them by or on behalf of BT Brands.

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.