10-K: Noble Romans Inc. Reports Full Year 2023 Results, Restates Prior Financials

Noble Romans Inc. released its 2023 annual report, which includes a restatement of prior financial statements due to identified accounting errors and highlights a shift towards non-traditional franchise growth.

Summary

• Noble Romans Inc. reported a net income of $1.46 million for 2023, a significant turnaround from a net loss of $1.31 million in 2022.
• The company's total revenue for 2023 was $14.37 million, slightly down from $14.45 million in 2022.
• Restaurant revenue from company-owned locations decreased from $9.7 million to $8.7 million, while revenue from non-traditional company-owned locations increased from $712,517 to $934,662.
• Franchising revenue increased from $4.0 million to $4.7 million, driven by a focus on non-traditional franchise locations.
• The company restated its 2022 financial statements due to errors in accounts payable and accumulated deficit, which were carried forward from prior periods.
• A material weakness in internal control over financial reporting was identified, leading to the restatement.
• The company has a significant debt of approximately $8.0 million, including a senior secured promissory note of $7.4 million and convertible notes of $575,000.
• Noble Romans entered into a development agreement with Majors Management for 100 franchise locations to be developed by September 30, 2026.
• The company received an Employee Retention Credit (ERC) refund of $1.46 million, which significantly boosted the franchising margin.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While the company achieved a significant turnaround in profitability and growth in franchising, the restatement of financials, material weakness in internal controls, and high debt levels temper the positive aspects. The sentiment is cautiously optimistic.

Positives

• The company achieved a significant turnaround in profitability, moving from a net loss to a net income.
• Franchising revenue experienced substantial growth, driven by a strategic focus on non-traditional locations.
• The Employee Retention Tax Credit (ERC) provided a significant boost to the company's financial results.
• The development agreement with Majors Management indicates strong future growth potential.
• The company is actively addressing the identified material weakness in internal controls.

Negatives

• The company's total revenue slightly decreased year-over-year.
• Restaurant revenue from company-owned locations declined.
• The company had to restate its 2022 financial statements due to accounting errors.
• A material weakness in internal control over financial reporting was identified.
• The company has a significant debt load of approximately $8.0 million.

Risks

• The company faces risks related to the ongoing effects of the COVID-19 pandemic and economic uncertainties.
• Competition from larger companies in the restaurant and retail food industry could impact the company's growth.
• The company's growth strategy depends on the success of franchisees and licensees, which are independent operators.
• The company is dependent on third-party distributors and manufacturers, which could lead to supply chain disruptions.
• The company's indebtedness could impact its ability to service its obligations and may dilute shareholder value.
• The company's stock is thinly traded, which could lead to price volatility.
• The company is subject to various federal, state, and local laws and regulations, which could impact its operations.
• The company is dependent on key executives, and their loss could have a material adverse effect.

Future Outlook

The company intends to refinance its outstanding debt payable to Corbel before maturity in February 2025 and plans to continue growing its non-traditional franchising/licensing venues, operating Craft Pizza & Pub locations, and pursuing a franchising program for Craft Pizza & Pub restaurants as market conditions allow.

Management Comments

• Management believes it is more likely than not that the deferred tax assets will be utilized prior to their expiration.
• Management has concluded that the restatement resulted from material weaknesses in the company's internal control over financial reporting.
• Management is working with experts and the board of directors to design and implement a remediation plan to correct the material weakness in internal control over financial reporting.

Industry Context

The company operates in the highly competitive restaurant and retail food industry, facing competition from large national chains and local businesses. The shift towards non-traditional franchising reflects a broader trend in the industry to diversify revenue streams and adapt to changing consumer preferences.

Comparison to Industry Standards

• The company's performance is mixed when compared to industry standards. While the increase in franchising revenue and the positive net income are encouraging, the decrease in company-owned restaurant revenue and the need for a financial restatement are concerning.
• The company's debt levels are relatively high compared to some of its peers, which could limit its financial flexibility.
• The company's focus on non-traditional franchising is a strategic move that aligns with industry trends, but its success will depend on the company's ability to manage its franchise network effectively.
• The company's identified material weakness in internal control over financial reporting is a significant concern that needs to be addressed to ensure the reliability of its financial statements.

Related Party Transactions

• Paul W. Mobley, Executive Chairman, and Marcel Herbst, Director, purchased units in a private placement on the same terms as independent investors.
• Paul Mobley's notes were included in the $1,275,000 in principal amount of notes that were repaid out of the proceeds of the new financing in February 2020.
• In September 2022, Paul Mobley bought a subordinated note in principal amount of $200,000 from Marcel Herbst.
• In 2023, Paul Mobley received 10% interest from the Company at the same time as all other subordinated debt holders.

Stakeholder Impact

• Shareholders will be impacted by the improved profitability and growth in franchising, but also by the restatement of financials and the identified material weakness in internal controls.
• Employees may be impacted by the company's efforts to remediate internal control weaknesses.
• Franchisees will benefit from the company's focus on non-traditional locations and the development agreement with Majors Management.
• Customers may experience changes in the company's offerings as it continues to evolve its business model.
• Creditors will be impacted by the company's debt obligations and its plans to refinance its debt.

Next Steps

• The company will continue to implement measures to address control deficiencies and further refine and improve the remediation efforts.
• The company intends to refinance its outstanding debt payable to Corbel before maturity in February 2025.
• The company will continue to focus on growing its non-traditional franchising/licensing venues.
• The company will continue to operate Craft Pizza & Pub locations and pursue a franchising program for Craft Pizza & Pub restaurants as market conditions allow.

Key Dates

Keywords

franchising, pizza, restaurants, non-traditional locations, financial restatement, internal control, debt, employee retention credit, development agreement, Noble Romans