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

General Information

Noble Roman’s, Inc., an Indiana corporation incorporated in 1972, sells and services franchises and licenses and operates Company-owned foodservice locations for stand-alone restaurants and non-traditional foodservice operations under the trade names “Noble Roman’s Craft Pizza & Pub,” “Noble Roman’s Pizza,” “Noble Roman’s Take-N-Bake,” and “Tuscano’s Italian Style Subs.” References in this report to the “Company” are to Noble Roman’s, Inc. and its two wholly-owned subsidiaries, Pizzaco, Inc. and RH Roanoke, Inc., unless the context requires otherwise. Pizzaco, Inc. currently does not own any locations and has no income or expense. RH Roanoke, Inc. operates a Company-owned non-traditional location.

The Company has been operating, franchising and licensing Noble Roman’s Pizza operations in a variety of stand-alone and non-traditional locations across the country since 1972. Its first Craft Pizza & Pub location opened in January 2017 as a Company-operated restaurant in a northern suburb of Indianapolis, Indiana. Since then, the Company opened a total of eight more Company-operated locations in 2017, 2018, 2020 and 2021, with two additional locations now in the site procurement stage. The Company-operated locations serve as the base for what it sees as the potential future growth driver franchising to experienced, multi-unit restaurant operators with a track record of success. In 2019, the Company executed an agreement with the first such operator, Indiana’s largest Dairy Queen franchisee with 19 franchised Dairy Queen locations at the time. The franchisee opened the first franchised Craft Pizza &Pub location in May 2019 and another location in November 2020. In November 2019, another franchisee, with an operations background in McDonald's, opened a Craft Pizza & Pub in Evansville, Indiana.

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

Noble Roman’s Craft Pizza & Pub

The Noble Roman’s Craft Pizza & Pub utilizes many of the basic elements first introduced in 1972 but in a modern atmosphere with up-to-date systems and equipment to maximize speed, enhance quality and perpetuate the taste customers love and expect from a Noble Roman’s.

The Noble Roman’s Craft Pizza & Pub provides for a selection of over 40 different toppings, cheeses and sauces from which to choose. Beer and wine also are featured, with 16 different beers on tap including both national and local craft selections. Wines include 16 affordably priced options by the bottle or glass in a range of varietals. Beer and wine service is provided at the bar and throughout the dining room.

The Company designed the system to enable fast cook times, with oven speeds running approximately 2.5 minutes for traditional pizzas and 5.75 minutes for Sicilian pizzas. Traditional pizza favorites such as pepperoni are options on the menu but also offered is a selection of Craft Pizza & Pub original specialty pizza creations. The menu also features a selection of contemporary and fresh, made-to-order salads and fresh-cooked pasta. The menu also incorporates baked sub sandwiches, hand-sauced boneless wings and a selection of desserts, as well as Noble Roman’s famous Breadsticks with Spicy Cheese Sauce, which have been offered in its locations since 1972.

Additional enhancements include a glass enclosed “Dough Room” where Noble Roman’s Dough Masters hand make all pizza and breadstick dough from scratch in customer view. Kids and adults enjoy Noble Roman’s self-serve root beer tap, which is also part of a special menu for customers 12 and younger. Throughout the dining room and the bar area there are many giant screen television monitors for sports and the nostalgic black and white shorts historically featured in Noble Roman’s.

The Company designed its curbside service for carry-out customers, called “Pizza Valet Service,” to create added value and convenience. With Pizza Valet Service, customers place orders ahead, drive into the restaurant’s reserved valet parking spaces and have their pizza run to their vehicle by specially uniformed pizza valets. Customers who pay when they place their orders are able to drive up and leave with their order very quickly without stepping out of their vehicle. For those who choose to pay after they arrive, pizza valets can take credit card payments on their mobile payment devices right at the customer's vehicle. With the fast baking times, the entire experience, from order to pick-up can take as little as 12 minutes.

Noble Roman’s Pizza For Non-Traditional Locations

In 1997, the Company started franchising non-traditional locations (a Noble Roman’s pizza operation within some other business or activity that has existing traffic) such as entertainment facilities, hospitals, convenience stores and other types of facilities. These locations utilize the two pizza styles the Company started with, along with its great tasting, high quality ingredients and menu extensions.

The hallmark of Noble Roman’s Pizza for non-traditional locations is “Superior quality that our customers can taste.” Every ingredient and process has been designed with a view to produce superior results.

Business Strategy

The Company is focused on revenue expansion while continuing to minimize corporate-level overhead.  To accomplish this the Company will continue developing, owning and operating Craft Pizza & Pub locations and franchising to qualified franchisees.  At the same time, the Company will continue to focus on franchising/licensing for non-traditional locations by franchising primarily to convenience stores and entertainment centers. 

The initial franchise fees are as follows:

(1) With the sale of multiple traditional stand-alone franchises to a single franchisee, the franchise fee for the first unit is $30,000, the franchise fee for the second unit is $25,000 and the franchise fee for the third unit and any additional unit is $20,000.

The franchise fees are paid upon signing the franchise agreement and, when paid, are non-refundable in consideration of the administration and other expenses incurred by the Company in granting the franchises and for the lost and/or deferred opportunities to grant such franchises to any other party.

The Company’s proprietary ingredients are manufactured pursuant to the Company’s specifications, recipes or formulas by third-party manufacturers under contracts between the Company and its various manufacturers.  These contracts require the manufacturers to produce ingredients meeting the Company’s specifications and to sell them to Company-approved distributors at prices negotiated between the Company and the manufacturer.

The Company utilizes distributors it has strategically identified across the United States.  The distributor agreements require the distributors to maintain adequate inventories of all ingredients necessary to meet the needs of the Company’s franchisees and licensees in their distribution areas for weekly deliveries.

Business Operations

Distribution

The Company’s proprietary ingredients are manufactured pursuant to the Company’s specifications or recipes by third-party manufacturers under contracts between the Company and its various manufacturers.  These contracts require the manufacturers to produce ingredients meeting the Company’s specifications and to sell them to Company-approved third-party distributors at prices negotiated between the Company and the manufacturer.

The Company has third-party distributors strategically located throughout the United States.  The agreements require the distributors to maintain adequate inventories of all ingredients necessary to meet the needs of the Company’s franchisees and licensees in their distribution areas for weekly deliveries to the franchisee/licensee locations and to its grocery store distributors in their respective territories.  Each of the primary distributors purchases the ingredients from the manufacturers at prices negotiated between the Company and the manufacturers, but under payment terms agreed upon by the manufacturers and the distributors, and distributes the ingredients to the franchisee/licensee at a price determined by the distributor agreement.  Payment terms to the distributor are agreed upon between each franchisee/licensee and the respective distributor.  

Financial Summary

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results may differ from those estimates.  The Company periodically evaluates the carrying value of its assets, including property, equipment and related costs, accounts receivable and deferred tax assets, to assess whether any impairment indications are present due to (among other factors) recurring operating losses, significant adverse legal developments, competition, changes in demand for the Company’s products or changes in the business climate which affect the recovery of recorded value.  If any impairment of an individual asset is evident, a charge will be provided to reduce the carrying value to its estimated fair value.

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

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

Margin contribution from this venue was decreased by $5,692 for non-cash expense related to the adoption of Accounting Standards Update ("ASU 2016-02") accounting for leases which became effective after January 1, 2019 for publicly reporting companies.

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

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

The following table sets forth the revenue, expense and margin contribution of the Company-owned non-traditional venue and the percent relationship to its revenue:

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

Results of Operations

Company-Owned Craft Pizza & Pub

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

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

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

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

Franchising

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

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

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

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

Company-Owned Non-Traditional Locations

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

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

Other Expenses

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

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

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

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

Liquidity and Capital Resources

The Company’s strategy is to grow its business by concentrating on franchising/licensing non-traditional locations, franchising its updated stand-alone concept, Craft Pizza & Pub, and operating Company-owned Craft Pizza & Pub restaurants. The Company added new Company-operated Craft Pizza & Pub locations in January and November of 2017, January and June of 2018, March, October and December of 2020, and October and December of 2021. The Company intends to open two more Company-owned Craft Pizza & Pub locations in 2022.

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

The Company’s current ratio was 2.5-to-1 as of March 31, 2022 compared to 2.3-to-1 as of December 31, 2021.   

In January 2017, the Company completed the private placement of $2.4 million principal amount of the Notes convertible to common stock at $0.50 per share and Warrants to purchase up to 2.4 million shares of the Company’s common stock at an exercise price of $1.00 per share, subject to adjustment. In 2018, $400,000 principal amount of Notes was converted into 800,000 shares of the Company’s common stock, in January 2019 another Note in the principal amount of $50,000 was converted into 100,000 shares of the Company’s common stock, and in August 2019 another Note in the principal amount of $50,000 was converted into 100,000 shares of the Company’s common stock, leaving principal amounts of Notes of $1.9 million outstanding as of December 31, 2019.  Holders of Notes in the principal amount of $775,000 extended their maturity date to January 31, 2023.  In February 2020, $1,275,000 principal amount of the Notes were repaid in conjunction with a new financing leaving a principal balance of $625,000 of subordinated convertible notes outstanding due January 31, 2023.  These Notes bear interest at 10% per annum paid quarterly and are convertible to common stock any time prior to maturity at the option of the holder at $0.50 per share.  The remaining Warrants to purchase 775,000 shares were re-priced to $0.57 per share as a result of the financing completed in February 2020.

On February 7, 2020, the Company entered into the Agreement, pursuant to which the Company issued to the purchaser the Senior Note in the initial principal amount of $8.0 million. The Company has used the net proceeds of the Agreement as follows: (i) $4.2 million to repay the Company’s then-existing bank debt which were in the original amount of $6.1 million; (ii) $1,275,000  to repay the portion of the Company’s existing subordinated convertible debt the maturity date of which most had not previously been extended; (iii) debt issuance costs; and (iv) the remaining net proceeds for working capital or other general corporate purposes, including development of new Company-owned Craft Pizza & Pub locations.

The Senior Note bears cash interest of LIBOR, as defined in the Agreement, plus 7.75%. In addition, the Senior Note requires PIK Interest of 3% per annum, which is being added to the principal amount of the Senior Note. Interest is payable in arrears on the last calendar day of each month. The Senior Note matures on February 7, 2025. The Senior Note does not require any fixed principal payments until February 28, 2023, at which time required monthly payments of principal in the amount of $33,333 begin and continue until maturity. The Senior Note requires the Company to make additional payments on the principal balance of the Senior Note based on its consolidated excess cash flow, as defined in the Agreement.

On April 25, 2020, the Company received a loan of $715,000 under the PPP.  In accordance with the applicable accounting policy adopted, the Company accounted for the loan as a government grant and presented it in the Condensed Consolidated Statement of Operations as a reduction of certain qualifying expenses incurred during the three-month period ended June 30, 2020.  On February 19, 2021, the Company received formal notice from the SBA that the entire $715,000 loan was forgiven in accordance with the provisions of the CARES ACT which the Company had already treated as a grant because forgiveness was probable.

On February 5, 2021, the Company received an additional loan of $940,734 under the PPP.  The Company used the proceeds of this loan for qualifying expenses under the CARES ACT.  On November 19, 2021, the Company received formal notice from the SBA that the entire $940,734 loan was forgiven in accordance with the provisions of the CARES ACT.  The Company had already treated the loan as a grant because forgiveness was probable.  

As a result of the financial arrangements described above and the Company’s cash flow projections, the Company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan.  The Company’s cash flow projections for the next two years are primarily based on the Company’s strategy of growing the non-traditional franchising/licensing venues, operating Craft Pizza & Pub locations and pursuing a franchising program for Craft Pizza & Pub restaurants.

The Company does not anticipate that any of the recently issued pronouncements relating to the Statement of Financial Accounting Standards will have a material impact on its Consolidated Statement of Operations or its Consolidated Balance Sheet.

Forward-Looking Statements

The statements contained above in Management’s Discussion and Analysis concerning the Company’s future revenues, profitability, financial resources, market demand and product development are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to the Company that are based on the beliefs of the management of the Company, as well as assumptions and estimates made by and information currently available to the Company’s management.  The Company’s actual results in the future may differ materially from those indicated by the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment, including, but not limited to the effects of the COVID-19 pandemic, the availability and cost of hourly and management labor to adequately staff Company-operated and franchise operations, competitive factors and pricing pressures, accelerating inflation and the cost of labor, food items and supplies, non-renewal of franchise agreements, shifts in market demand, the success of new franchise programs, including the Noble Roman’s Craft Pizza & Pub format, the Company’s ability to successfully operate an increased number of Company-owned restaurants, general economic conditions, changes in demand for the Company’s products or franchises, the Company’s ability to service its loans, the impact of franchise regulation, the success or failure of individual franchisees and changes in prices or supplies of food ingredients and labor as well as the factors discussed under “Risk Factors " contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.