NOBLE ROMAN'S, INC. Introduction
The Company currently owns and operates seven Craft Pizza & Pub locations and one non-traditional location in a hospital. The Company uses the Company-operated Craft Pizza & Pub locations as a base to support the franchising of that concept. Craft Pizza & Pub is designed to have a fun, pleasant atmosphere serving pizza and other related menu items, all made fresh using fresh ingredients in the view of the customers for inside dining and offers Pizza Valet service for a quick, easy and fun way to provide carry-out for those customers who want to dine elsewhere. These units operate under the trade name "Noble Roman's Craft Pizza & Pub". The Company also sells and services franchises and licenses for non-traditional foodservice operations under the trade names "Noble Roman's Pizza" and "Noble Roman's Take-N-Bake." The non-traditional concepts' hallmarks include high quality pizza along with other related menu items, simple operating systems, fast service times, labor-minimizing operations, attractive food costs and overall affordability.
There were 3,064 franchised/licensed or Company-owned outlets in operation on
3,064 onDecember 31, 2019 . During 2020, 22 new franchised/licensed were opened and 22 franchised outlets left the system. Grocery stores are accustomed to adding products for a period of time, removing them for a period of time and possibly re-offering them. Therefore, it is unknown how many grocery store licenses, out of the total count of 2,402, have left the system. As discussed in Note 1 to the Company's consolidated financial statements, the Company uses significant estimates in evaluating its assets including such items as accounts receivable from franchisees to reflect the actual amount that may be collected from those receivables. To arrive at these estimates the Company utilized multiple means of analysis, including management's own analysis and informed assessment of individual accounts. Based on this approach, in 2018 the Company permanently wrote off$1.3 million and created an additional reserve for possible non-collections of$2.8 million . Also, based on this approach and with particular consideration of the potential impact of the COVID-19 pandemic, as discussed under Risk Factors, may have on the economic stability of the former franchisees who have unpaid obligations to the Company it was decided to take an additional reserve of$1.3 million for possible non-collections. In 2020, in light of the additional uncertainty created as a result of the COVID-19 pandemic, the Company decided to create a reserve 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 income at the time received. AtDecember 31, 2018 , 2019 and 2020, the Company reported net accounts receivable from franchisees of$4.4 million ,$4.0 million and none, respectively, each of which were net of allowances, to reflect the amount the Company expects to realize for the franchisee receivables. The Company, atDecember 31, 2019 andDecember 31, 2020 , had deferred tax assets on its balance sheet totaling$3.9 million and$3.1 million , respectively, after reducing the carrying value in 2019 by$400,000 , and in 2020 by$668,000 , respectively, based on the Company's review of its available tax credits, 2020 tax expense and its adjusted taxable income. The Company believes it is more likely than not that the remaining deferred tax assets will be utilized prior to their expiration. Financial Summary
The preparation of the consolidated financial statements in conformity withUnited States 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 evaluates the carrying values of its assets, including property, equipment and related costs, accounts receivable and deferred tax assets, periodically 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 that affect the recovery of recorded values. If any impairment of an individual asset is evident, a charge will be provided to reduce the carrying value to its estimated fair value. 13 Condensed Consolidated Statement of Operations Data Noble Roman's, Inc. and Subsidiaries Years Ended December 31, 2018 2019 2020 Revenue:
Restaurant revenue - company-owned restaurants
Restaurant revenue - company-owned non-traditional 1,156,347 673,647 470,846
Franchising revenue 6,422,315
6,162,576 4,841,229
Administrative fees and other 53,443 38,202 14,310
Total revenue 12,447,947 11,704,624 11,535,664
Operating expenses:Restaurant expenses - company-owned restaurants 3,909,142 4,250,406 4,938,133
Restaurant expenses - company-owned non-traditional 1,145,106 626,453 447,040
Franchising expenses 2,627,745
2,092,001 1,736,870
Total operating expenses 7,681,993 6,968,860 7,122,043
Depreciation and amortization 440,240 382,793 382,368
General and administrative expenses 1,668,718 1,739,383 1,717,209
Total expenses 9,790,951 9,091,036 9,221,620
Operating income 2,656,996 2,613,588 2,314,044
Interest expense 655,203 774,565 1,914,344
Adjust valuation of receivables 4,095,805 1,300,000 4,941,718
Income (loss) before income taxes (2,094,012) 539,023 (4,542,018)
Income tax expense 930,397 917,088 839,928
Net loss $(3,024,409) $(378,065) $(5,381,946)
14
Quarter Ended December 31,
2019 2020
Revenue:Restaurant revenue - company-owned restaurants$1,136,277 $2,126,214 Restaurant revenue - company-owned non-traditional 173,703 105,474 Franchising revenue 1,267,403 1,033,103 Administrative fees and other 4,413 3,119 Total revenue 2,581,796 3,267,910
Operating expenses:
Restaurant expenses - company-owned restaurants 1,040,697 1,785,010
Restaurant expenses - company-owned non-traditional 161,983 108,880
Franchising expenses 543,446 496,491
Total operating expenses 1,746,126 2,390,381
Depreciation and amortization 145,875
119,863
General and administrative expenses 465,423
463,023
Total expenses 2,357,424 2,973,267
Operating income 224,372 294,643
Interest expense 207,720 337,059Adjust valuation of receivables 1,300,000
4,941,718
Loss before income taxes (1,283,348) (4,984,134)
Income tax expense 479,719 921,911
Net loss $(1,763,067) $(5,906,045)
(1)
In 2018, the Company incurred $300,000 in various expenses related to initiating
a franchising program for Craft Pizza & Pub, $166,000 in pre-opening costs for
the Company's Craft Pizza & Pub locations and $39,000 for abandoned leasehold
improvements. The Company does not expect to incur these expenses in the future.
(2)
The significant increase in income tax expense for 2017 was a result of
decreasing the carrying value of the Company's deferred tax assets as a result
of the 2017 Tax Act lowering the highest corporate income tax rate from 34% to
21%. The increase in tax expense for 2018 was the result of the Company
evaluating its deferred tax assets and determining that $1.4 million of the
deferred tax credits may expire in 2019 and 2020 before they are fully utilized,
partially offset by the tax benefit of $503,000 from the loss before income from
continuing operations which was primarily the result of the adjustment made to
the valuation of receivables.
(3)
In 2020, the Company incurred $34,986 in rent expense in addition to rent paid
as a non-cash expense for the new lease accounting rules. The Company reviewed
its net operating loss carry-forward and concluded that $1.7 million of its net
operating loss carry-forward may expire before it is all used and therefore
increased its income tax expense by $400,000 to decrease its deferred tax assets
for that amount. The Company believes the remaining deferred tax assets will be
utilized completely.
15
The following table sets forth the revenue, expense and margin contribution of
the Company's Craft Pizza & Pub locations and the percent relationship to its
revenue:
Three Months ended December 31, Year-Ended December 31,
2019 2020 2019 2020
Description
Revenue $1,136,276 100% $2,126,214 100% $4,830,199 100% $6,209,279 100%
Cost of sales 253,858 22.3 476,772 22.4 1,031,504 21.4 1,348,084 21.7
Salaries and
wages 341,431 30.0 583,000 27.4 1,448,246 30.0 1,354,795 21.8
Facility cost
including rent,
common area and
utilities 184,623 16.2 289,845 13.6 832,123 17.2 947,571 15.3
Packaging 31,469 2.8 58,792 2.8 130,708 2.7 176,267 2.8
All other
operating
expenses 207,819 18.3 376,600 17.7 807,825 16.7 1,111,416 17.9
Total expenses 1,019,200 89.7 1,785,009 84.0 4,250,406 88.0 4,938,133 79.5
Margin
contribution $117,076 10.3% $341,205 16.0% $579,793 12.0% $1,271,146 20.5%
Margin contribution from this venue for the year ended December 31, 2019 was
decreased $134,545 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:
Three Months ended December 31, Year Ended December 31,
2019 2020 2019 2020
Description
Royalties and
fees franchising $966,145 76.2% $845,509 81.8% $5,026,305 81.6% $4,102,304 84.7%
Royalties and
fees grocery 301,258 23.8 187,494 18.2 1,136,271 18.4 738,925 15.3
Total royalties
and fees 1,267,403 100.0 1,033,003 100% 6,162,576 100.0 4,841,229 100%
Salaries and
wages 199,839 15.8 205,631 19.9 751,961 12.2 625,954 12.9
Trade show
expense 105,000 8.3 105,000 10.2 420,000 6.8 420,000 8.7
Travel and auto 25,745 2.0 16,348 1.6 108,375 1.8 86,323 1.8
All other op.
expenses 212,862 16.8 169,512 16.4 811,665 13.2 604,592 12.5
Total expenses 543,446 42.9 496,491 48.1 2,092,001 33.9 1,736,869 35.9
Margin
contribution $723,957 57.1% $536,512 51.9% $4,070,575 66.1% $3,104,359 64.1%
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 December 31, Year Ended December 31,
Description
2019 2020 2019 2020
Revenue $173,703 100% $105,474 100% $673,647 100% $470,846 100%
Total expenses 161,982 93.3 108,880 103.2 626,453 93.0 447,040 94.9
Margin contribution $11,721 6.7% $(3,406) (3.2)% $47,194 7.0% $23,806 5.1%
16
Results of Operations
Company-Owned Craft Pizza & Pub
The revenue from this venue increased from$1.1 million to$2.1 million for the fourth quarter and grew from$4.8 million to$6.2 million for the 12 months endedDecember 31, 2020 compared to the corresponding periods in 2019. The primary reason for the increase in both the three-month period and the 12-month period were new locations which opened in March, October andNovember 2020 , respectively. Cost of sales increased slightly from 22.3% to 22.4% in the fourth quarter and from 21.4% to 21.7% for the comparable periods in 2020 compared to 2019. This increase was the result of commodity price increases which were mostly offset by efficiency gained as the restaurants matured and as the staff gained experience. Salaries and wages improved from 30.0% to 27.4% and from 30.0% to 21.8% for the three-month and 12-month periods endedDecember 31, 2020 compared to the corresponding periods in 2019. This improvement was the result of improved efficiency as the restaurants matured. However, the 12-month period, compared to the corresponding period in 2019, improved also because the proceeds of the initial PPP loan was used to reimburse the Company for payroll costs for retaining employees. The improvement in both periods was partially the result of all dining rooms being closed or restricted by order of the Governor onMarch 16, 2020 . During the period of closure, the restaurants increased the use of Pizza Valet service for carry-out which decreased the labor requirements to a greater extent in percentage terms while sales were reduced by lack of dining room service. Facility costs, including rent, common area maintenance and utilities, decreased from 16.2% to 13.6% and from 17.2% to 15.3% of revenue for the respective three-month and 12-month periods endedDecember 31, 2020 compared to the corresponding periods in 2019. The primary reason for the decrease was the newer restaurants achieving higher volumes with less rent expense including due to less square footage.
All other costs and expenses decreased from 18.3% to 17.7% for the three-month
period ended
Gross margin contribution increased from 10.3% to 16.0% and from 12.0% to 20.5% for the respective three-month and 12-month periods endedDecember 31, 2020 compared to the corresponding periods in 2019. These increases were partially the result of the initial PPP loan offsetting salaries and wages and, to some extent, reduction in other costs during the recent year. Also, part of the improvement was from the improvement in facility costs as a result of the newer restaurants achieving higher volumes with less rent expense including due to less square footage.
Franchising Revenue and Expense
Total revenue from this venue declined from$1.27 million to$1.03 million and declined from$6.16 million to$4.84 million for the three-month and 12-month periods endedDecember 31, 2020 compared to the corresponding periods in 2019. Royalties and fees from franchising decreased slightly in the fourth quarter in 2020 compared to the corresponding period in 2019, in addition royalties and fees from grocery store take-n-bake for the same period decreased from$301,000 to$187,000 . Many of the grocery stores that previously offered take-n-bake were not offering take-n-bake at this time because of the increased volume demands on the grocery stores and a shortage of available labor. Royalties and fees from franchising during the 12-month period endedDecember 31, 2020 compared to the comparable period in 2019 decreased from$5.0 million to$4.1 million due to the temporary closings as a result of the COVID pandemic and various restrictions and stay-at-home orders throughout the country. Gross margin in this venue decreased from 57.1% to 51.9% and decreased from 66.1% to 64.1% for the three-month and 12-month periods endedDecember 31, 2020 compared to the corresponding periods in 2019. This increased margin was the direct result of the Company's in-depth review of its operations to find ways to minimize costs but at the same time to support revenue, however the temporary closings of various locations throughout the country as a result of the COVID pandemic resulted in lower revenue, as discussed above, more than was achieved through the reduction of expenses.
Company-Owned Non-Traditional Locations
Gross revenue from this venue decreased from$174,000 to$105,000 and from$674,000 to$471,000 for the respective three-month and 12-month periods endedDecember 31, 2020 compared to the corresponding periods in 2019. This venue consists of one location in a hospital. Access to the hospital has been very limited and travel within the hospital between sections of the hospital are prohibited because of the potential spread of COVID-19. The Company does not intend to operate any more Company-owned non-traditional locations except for the one location that is currently being operated. Total expenses decreased from$162,000 to$109,000 and from$626,000 to$447,000 for the three-month and 12-month periods endedDecember 31, 2020 compared to the corresponding periods in 2019. The primary reason for these decreases were restrictions on access to the hospital and on travel within the hospital, as discussed in the previous paragraph, resulting from the COVID-19 pandemic.
17
Corporate Expenses
Depreciation and amortization decreased from $146,000 to $120,000 and decreased
from $383,000 to $382,000 for three-month and 12-month periods ended December
31, 2020 compared to the corresponding periods in 2019.
General and administrative expenses decreased from $465,000 to $463,000 and from
$1.74 million to $1.72 million for the three-month and 12-month periods ended
December 31, 2020 compared to the corresponding periods in 2019.
Interest expense increased from $208,000 to $337,000 and from $775,000 to $1.9
million for the respective three-month and 12-month periods ended December 31,
2020 compared to the corresponding periods in 2019. The primary reason for the
increases was a 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 the non-cash PIK interest expense of $221,000 in the
period ended December 31, 2020 . 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 CraftPizza & Pub locations. Impact of Inflation The primary inflation factors affecting both Company and franchised operations are food and labor costs. Cheese makes up the single largest topping cost on a pizza. Cheese prices have fluctuated substantially for the past several years. In 2015 through 2017, cheese prices averaged 3% below the 10-year average. In 2018, prices further decreased and averaged 6% below the 10-year average. OnApril 15, 2020 , cheese price hit a record low, since the Company started tracking it in 1999. SinceApril 2020 , cheese gradually increased to a record high but declined somewhat over the latter part of 2020 but remained above the average. Labor costs across the country generally, through 2019, have seen upward pressure on hourly rates as the unemployment rate decreased and competition for hourly employees increased. The same applies to salaried management. The Company's Craft Pizza & Pub operations currently pay well above minimum wage rates to remain competitive, and has seen similar pressure on management salaries. There is currently proposals beforeCongress to increase the Federal minimum wage. It is unclear whether or not any such proposal will be enacted. Although the Company believes future labor cost increases for non-traditional franchisees and licensees will be somewhat mitigated due to the relatively low labor requirements of the Company's franchise concepts and the relatively high unemployment rate at the current time brought about as a result of the COVID-19 pandemic. Mounting pressures in the labor markets, with the return of an improved economy, could be a factor in both franchised and Company operations going forward. Should labor costs increase substantially, or if commodity prices for cheese or other ingredients rise significantly, or some combination thereof occurs, restaurants and foodservice concepts, including the Company and its franchisees, would face pressure to increase menu pricing, the feasibility of which could be subject to competitive concerns.
Liquidity and Capital Resources
The Company's strategy is to grow its business by concentrating on franchising/licensing non-traditional locations, franchising its updated stand-alone concept, Craft Pizza & Pub and operating a limited number of Company-owned Craft Pizza & Pub restaurants. The Company added new Company-operated Craft Pizza & Pub locations in January and November of 2017, January and June of 2018 and March, October and November of 2020.
During 2018, the Company invested resources (approximately$300,000 ) to commence franchising of the Craft Pizza & Pub franchise. As ofDecember 31, 2020 , 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.
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 2.6-to-1 as ofDecember 31, 2020 compared to 1.5-to-1 as ofDecember 31, 2019 . The current ratio was improved significantly with the new financing inFebruary 2020 in addition to the initial PPP loan inApril 2020 . InJanuary 2017 , the Company completed the offering of$2.4 million principal amount of the Notes convertible to common stock at$0.50 per share and Warrants to purchase up to 2.4 million shares of the Company's common stock at an exercise price of$1.00 per share, subject to adjustment. In 2018,$400,000 principal amount of Notes was converted into 800,000 shares of the Company's common stock, inJanuary 2019 another Note in the principal amount of$50,000 was converted into 100,000 shares of the Company's common stock, and inAugust 2019 another Note in the principal amount of$50,000 was converted into 100,000 shares of the Company's common stock, leaving principal amounts of Notes of$1.9 million outstanding as ofDecember 31, 2019 . Holders of Notes in the principal amount of$775,000 extended their maturity date toJanuary 31, 2023 . InFebruary 2020 ,$1,275,000 principal amount of the Notes were repaid in conjunction with a new financing leaving a principal balance of$625,000 of subordinated convertible notes outstanding dueJanuary 31, 2023 . These Notes bear interest at 10% per annum paid quarterly and are convertible to common stock any time prior to maturity at the option of the holder at$0.50 per share. The remaining Warrants to purchase 775,000 shares were re-priced to$0.57 per share as a result of the financing completed inFebruary 2020 . OnFebruary 7, 2020 , the Company entered into the Agreement with the Purchaser, pursuant to which the Company issued to the Purchaser the Senior Note in the initial principal amount of$8.0 million . The Company has used or will use the net proceeds of the Agreement as follows: (i)$4.2 million was used to repay the Company's then-existing bank debt which were in the original amount of$6.1 million ; (ii)$1,275,000 was used to repay the portion of the Company's existing subordinated convertible debt the maturity date of which most had not previously been extended, (iii) debt issuance costs; and (iv) the remaining net proceeds will be used for working capital or other general corporate purposes, including development of new Company-owned Craft Pizza & Pub locations. 18 The Senior Note bears cash interest of LIBOR, as defined in the Agreement, plus 7.75%. In addition, the Senior Note requires PIK Interest of 3% per annum, which will be added to the principal amount of the Senior Note. Interest is payable in arrears on the last calendar day of each month. The Senior Note matures onFebruary 7, 2025 . The Senior Note does not require any fixed principal payments untilFebruary 28, 2023 , at which time required monthly payments of principal in the amount of$33,333 begin and continue until maturity. The Senior Note requires the Company to make additional payments on the principal balance of the Senior Note based on its consolidated excess cash flow, as defined in the Agreement. OnApril 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 endedJune 30, 2020 . These expenses included payroll costs including payroll benefits, interest on mortgage obligations, rent under lease agreements and utilities and other qualifying expenses pursuant to the CARES ACT. OnFebruary 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. OnFebruary 5, 2021 , the Company received an additional loan of$940,734 under the PPP. The Company intends to use the proceeds of this loan for qualifying expenses under the CARES ACT. The Company anticipates this loan will also be forgiven and , therefore, will account for it as a grant. As a result of the financial arrangements described above and the Company's cash flow projections, the Company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan. The Company's cash flow projections for the next two years are primarily based on the Company's strategy of growing the non-traditional franchising/licensing venues, operating Craft Pizza & Pub locations and pursuing an aggressive franchising program for Craft Pizza & Pub restaurants. The Company intends to open additional Company-owned Craft Pizza & Pub restaurants in the future. The Company does not anticipate that any of the recently issued pronouncements relating to the Statement of Financial Accounting Standards will have a material impact on its Consolidated Statement of Operations or its Consolidated Balance Sheet. Contractual Obligations The following table sets forth the future contractual obligations of the Company as ofFebruary 7, 2021 : Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Long-term debt (1)$8,625,000 $-$991,667 $7,633,333 $- Operating leases 8,234,626 967,406 3,026,966 2,089,083 2,151,171 Total$16,859,626 $967,406 $4,018,633 $9,722,416 $2,151,171
(1) The amounts do not include interest and do not include the PPP loan as it is being accounted for as a grant.
Forward-Looking Statements
The statements contained above in Management's Discussion and Analysis concerning the Company's future revenues, profitability, financial resources, market demand and product development are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to the Company that are based on the beliefs of the management of the Company, as well as assumptions and estimates made by and information currently available to the Company's management. The Company's actual results in the future may differ materially from those indicated by the forward-looking statements due to risks and uncertainties that exist in the Company's operations and business environment, including, but not limited to the effects of the COVID-19 pandemic, competitive factors and pricing pressures, non-renewal of franchise agreements, shifts in market demand, the success of new franchise programs, including the Noble Roman's Craft Pizza & Pub format, the Company's ability to successfully operate an increased number of Company-owned restaurants, general economic conditions, changes in demand for the Company's products or franchises, the Company's ability to service its loans, the impact of franchise regulation, the success or failure of individual franchisees and changes in prices or supplies of food ingredients and labor as well as the factors discussed under "Risk Factors "above in this annual report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.
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