Noble Romans (NROM) 10-Q2023 Q3 Quarterly report

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 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 November 10, 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)

Nine Months Ended September 30, 2023:

Three Months Ended September 30, 2023:

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

Nine Months Ended September 30, 2022:

Three Months Ended September 30, 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 and nine-month periods ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023.  

Significant Accounting Policies

The Employee Retention Tax Credit (“ERTC”) is a refundable tax credit that the Company was eligible to apply for based 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.

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 for the last three quarters of 2020 and the first two quarters of 2021 for both Noble Roman’s, Inc. (“Noble Roman’s”) and RH Roanoke, Inc. (“Roanoke”) claiming those refunds.  The Company recognized an ERTC refund of $1.460 million, net of related expense of $258,000 in the first quarter of 2023.  During July 2023, the Company received refunds for Roanoke for all five quarters and Noble Roman’s received all three quarters of 2020 and the second quarter of 2021.  In total, in July 2023 the Company received payments totaling $1.16 million net of commissions plus interest.  The Company expects to receive approximately $507,000 additional ERTC refund for the first quarter of 2021.

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 $327,500 and $609,500 for the three-month and nine-month periods ended September 30, 2023, and $60,500 and $203,500 for the three-month and nine-month periods ended September 30, 2022.  Royalties and fees included equipment commissions of $62,950 and $115,700 for the three-month and nine-month periods ended September 30, 2023, and $12,500 and $41,300 for the three-month and nine-month periods ended September 30, 2022.  Royalties and fees, including amortized initial franchise fees and equipment commissions, were $919,800 and $2.89 million for the three-month and nine-month periods ended September 30, 2023, and $1.1 million and $3.2 million for the three-month and nine-month periods ended September 30, 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 periods within the financial statements by recording franchise fees and cost of opening the units as deferred contract costs and deferred contract income is not material as the initial franchise fee for the non-traditional franchise is intended to defray the initial contract costs, and the franchise fees and contract costs initially incurred and paid approximate the relative amortized franchise fees and contract costs for those same periods.

The deferred contract income and deferred costs were $1.12 million as of September 30, 2023.

At December 31, 2022 and September 30, 2023, the carrying value of the Company’s franchise receivables have been reduced to anticipated realizable value.  As a result of this reduction of carrying value, the Company anticipates that substantially all of its accounts receivable reflected on the consolidated balance sheets as of December 31, 2022 and September 30, 2023, will be collected.  In 2020, in light of the additional uncertainty created as a result of the COVID-19 pandemic, the Company created 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 royalty income at the time received or activity occurring which demonstrates probability of collection.

During the nine-month period ended September 30, 2023, there were no company-operated or franchised Craft Pizza & Pub restaurants opened or closed.  During this period, there were 40 new non-traditional outlets opened and 6 non-traditional outlets closed.  

Note 3 - The following table sets forth the calculation of basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2023:

The following table sets forth the calculation of basic and diluted earnings (loss) per share for the three-month and nine-month periods ended September 30, 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 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 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, SOFR, as defined in the Agreement, replaced LIBOR.

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”).  In an amendment on September 11, 2023, the exercise price of all three tranches was amended to $0.30 per share.  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 seventh 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.  On October 27, 2023, the Company entered into a Development Agreement with Majors Management, LLC for the development of 100 new non-traditional franchise locations.  The Development Agreement requires the developer to have 31 locations open by June 30, 2024, 50 locations open by December 31, 2024, with the remainder of the 100 locations to be open by September 30, 2026.  The new locations may be developed throughout the 48 contiguous states, however the concentration of those locations is expected to be in Texas, Alabama, Georgia and Tennessee. 

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, 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.  The Company can provide no assurance the phase out of restrictions will continue to 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 some potential franchisees for both the Company’s Craft Pizza & Pub and non-traditional venues.

As described in Note 1 above, the Company applied for and has received payments in respect of the ERTC provided by the CARES Act enacted to address the economic effects of the pandemic and related shut-down orders imposed on businesses.

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 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.  

As discussed under Impact of COVID-19 pandemic above, the franchising section of our revenue declined in 2021 and early 2022 due to the number of government forced closures in an attempt to prevent the spread of COVID-19.  One segment of the franchising section was made up of a number of franchises located in all types of entertainment facilities such as bowling centers and family entertainment centers.  The regulations were different in different states but for the most part that closing order was in effect for two years after which many of those franchisees did not have the financial means of reopening after that period of time.

The Company refocused its development plans toward selling more non-traditional franchises as a result of the pandemic coming to an end and the owners of non-traditional locations becoming more willing to look at expansion options and to invest in their growth.  With the sales efforts in the first nine months of 2023, the Company generated 54 new franchised units available for opening.  The focus on selling more non-traditional franchise locations, including several locations with higher than average potential volumes, is proceeding and the Company has sold and still has a significant backlog of prospects to expand the franchise locations.  In addition, on October 27, 2023 the Company entered into a Development Agreement with Majors Management, LLC for 100 franchise locations to be developed over the next three years.

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.

Business Strategy

The Company is focused on revenue expansion while carefully managing corporate-level overhead expenses.  The Company refocused its development plans toward selling more non-traditional franchises as a result of the pandemic coming to an end and the owners of non-traditional locations becoming more willing to look at expansion options and to invest in their growth.  With the sales efforts in the first nine months of 2023, the Company generated 54 new franchised units available for opening.  During the first nine months of 2023, the Company opened 40 new locations with the remaining balance of the locations sold not yet open in various stages of development to be opened.  In addition, the Company has a significant pipeline of leads and prospects for future non-traditional franchise sales.

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.  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 at a price determined by the distributor agreement.  Payment terms to the distributor are agreed upon between each franchisee 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:

The following table sets forth the revenue, expense and margin contribution of the Company’s franchising venue and the percent relationship to its revenue:

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:

Results of Operations

Company-Owned Craft Pizza & Pub

The revenue from this venue decreased from $2.6 million to $2.2 million and from $7.4 million to $6.6 million for the respective three-month and nine-month periods ended September 30, 2023, compared to the corresponding periods in 2022.  The decrease in revenue for both the three-month and nine-month periods was the result of declines in same store sales due to a softening of consumer spending resulting from an increase in credit card debt, an increase in gas prices and overall inflation resulting in less disposable income for the ordinary consumer.           

Cost of sales, as a percentage of revenue from this venue, decreased from 22.0% to 19.8% for the three-month period and from 21.2% to 20.5% for the nine-month period ended September 30, 2023 compared to the corresponding periods in 2022.  The Company incurred significant increases in product cost during the first quarter but was able to offset that cost after manufacturer negotiations, with internal adjustments to operating systems and with efficiency gained in operations as staffing levels stabilized and employee experience levels increased.   

Salaries and wages, as a percentage of revenue from this venue, were 29.6% and 28.8% for the three-month and nine-month periods ended September 30, 2023, compared to 27.5% and 29.2% for the corresponding periods in 2022. The cost of salaries and wages for this venue has increased significantly due to the competitive environment for available labor caused by the general shortage of available labor in 2022, which was mostly offset by a menu price increase in early 2022.  The Company has not had a menu price increase in over a year.  Cost of salaries and wages during the three-month period ended September 30, 2023 also increased as a percentage of revenue partially caused by a decline in same store sales. 

Gross margin contribution as a percentage of revenue for this venue was 9.2% and 10.9% for the three-month and nine-month periods ended September 30, 2023 compared to 15.2% and 13.0% for the corresponding periods in 2022.  The decrease in margin during both periods was the result of same store sales decline as explained in the paragraph above regarding revenue.  

Franchising

Total revenue was $1.3 million and $3.7 million for the three-month and nine-month periods ended September 30, 2023, compared to $1.1 million and $3.2 million for the comparable periods in 2022, respectively.  Franchising revenue had a strong increase in both the three-month and nine-month periods over the corresponding periods in 2022 because of the rapid increase in number of franchises sold in these periods.  During the fourth quarter of 2022 the Company recognized that with the pandemic winding down non-traditional locations, particularly in the convenience stores and travel plazas, were strongly considering better food options to grow their business and increase their margins.  By shifting emphasis to growth in the non-traditional segment the Company was able to take advantage of that new opportunity without incurring additional overhead.  The interest in new growth opportunities in this venue are continuing, and with new franchise agreements and the backlog of prospects, this trend is expected to continue.  In addition, on October 27, 2023, the Company entered into a Development Agreement with Majors Management, LLC for the development of 100 new non-traditional franchise locations.  The Development Agreement requires the developer to have 31 locations open by June 30, 2024, 50 locations open by December 31, 2024, with the remainder of the 100 locations to be open by September 30, 2026.  The new locations may be developed throughout the 48 contiguous states, but the Company expects the concentration of those locations will be in Texas, Alabama, Georgia and Tennessee.  

Salaries and wages, trade show expense, insurance and other operating costs as a percentage of revenue from this venue were 30.2% and (.1%) for the three-month and nine-month periods ended September 30, 2023 compared to 44.6% and 44.9%, respectively, for the corresponding periods in 2022.  The decrease in those costs as a percentage of revenue in the three-month period was a result of the growth in revenue, as discussed in the previous paragraph, while actually reducing the dollar cost of those expenses as well.  The negative cost in the nine-month period was both the result of the growth in revenue, as explained in the previous paragraph, but also a reflection of the Employee Retention Tax Credit received which was designed to reimburse companies for payroll and other costs for the  negative economic effects of the pandemic and related shutdown orders imposed on businesses.  This credit is further described in Note 1 above.

Margin contribution was 69.8% and 101%, as a percentage of revenue from this venue, for the three-month and nine-month periods ended September 30, 2023, compared to 55.4% and 55.1% for the comparable periods in 2022, respectively.  The increase in margin contribution during the three-month period ended September 30, 2023, was a result of the growth in revenue, as described above, plus a corresponding reduction of operating expenses.  The growth in revenue in the nine-month period was partially the growth in revenue, as described above, in addition to receipt of the Employee Retention Tax Credit under the CARES Act, as discussed in the previous paragraph.

Company-Owned Non-Traditional Locations

Gross revenue from this venue was $247,000 and $707,000 during the three-month and nine-month periods ended September 30, 2023, compared to $196,000 and $506,000 for the comparable periods in 2022, respectively.   The primary reason for the increase during both periods was the withdrawal of restrictions placed on hospital locations as a result of the COVID-19 pandemic that prevented hospitals from having outside visitors and staff inside the hospital restricted from going from one area of the hospital to another.  The Company does not intend to operate any more Company-owned non-traditional locations except the one location that it is currently operating. 

Total expenses were $240,000 and $566,000 for the three-month and nine-month periods ended September 30, 2023, compared to $201,000 and $504,000 for the comparable periods in 2022, respectively.  The primary reason for the increase in both periods was the increase in revenue as a result of lifting restrictions on the hospital due to the COVID-19 pandemic, as explained above. 

Corporate Level Results of Operations

Depreciation and amortization were $96,000 and $287,000 for the three-month and nine-month periods ended September 30, 2023, compared to $113,000 and $338,000 for the comparable periods in 2022, respectively.  The depreciation decrease was the result of not opening any new corporate-owned locations to date in either 2022 or 2023.

General and administrative expenses were $519,000 and $1.6 million for the three-month and nine-month periods ended September 30, 2023, compared to $518,000 and $1.6 million for the comparable periods in 2022, respectively.  The Company maintained tight control of its operating expenses while growing its franchising revenue.

Operating income was $514,000 and $2.74 million for the three-month and nine-month periods ended September 30, 2023 compared to $382,000 and $823,000 for the comparable periods in 2022, respectively.    

Interest expense was $359,000 and $1.1 million for the three-month and nine-month periods ended September 30, 2023 compared to $378,000 and $1.1 million for the comparable periods in 2022, respectively.  The interest expense was reduced by the monthly principal payments required by the loan agreement in addition to voluntary payments to reduce principal totaling approximately $579,000, offset by an increase in principal by adding the PIK note interest to the principal amount each month.

As a result of the above factors, net income (loss) was $155,000 and $1.3 million for the three-month and nine-month periods ended September 30, 2023, compared to $4,000 and $(183,000) for the comparable periods in 2022, respectively.  

Liquidity and Capital Resources

The Company’s current ratio was 1.8-to-1 as of September 30, 2023 compared to 1.3-to-1 as of December 31, 2022.    

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. In April 2023, the holder of $50,000 principal amount of the subordinated convertible notes were repaid by the Company leaving $575,000 outstanding.  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 725,000 shares were re-priced to $.30 per share as a result of the adjustment required in the Warrants.

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 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 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 July 2023, the Company made non-required principal payments of approximately $579,000.  In addition, SOFR replaced LIBOR.

See Note 1 to the Company’s condensed consolidated financial statements for discussion of funds received from the ERTC.

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 payable to Corbel before maturity 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 or the openings contemplated by the Development Agreement not occurring, 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, 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, other changes in prices or supplies of food ingredients and labor and 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.   If activist stockholder activities ensue, our business could be adversely impacted.

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, 2023, 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, SOFR replaced LIBOR.

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.

Not applicable.

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.