10-K: Noble Romans Reports 2024 Net Loss Amidst Strategic Shift to Non-Traditional Franchising Growth

Noble Romans, Inc. reported a net loss of $3,174 for the fiscal year ended December 31, 2024, a significant decline from the $1.46 million net income in 2023, despite strong growth in its non-traditional franchising segment.

Summary

• Noble Romans, Inc. experienced a net loss of $3,174 in 2024, a substantial decrease from a net income of $1,460,284 in 2023, which included a $1.46 million Employee Retention Credit (ERC) refund.
• Total revenue increased to $15,149,600 in 2024 from $14,373,574 in 2023, primarily driven by a significant increase in franchising revenue.
• Franchising revenue grew from $4,665,187 in 2023 to $5,540,968 in 2024, with 68 new non-traditional outlets opened during the year.
• Company-owned Craft Pizza & Pub restaurant revenue decreased slightly from $8,744,158 in 2023 to $8,577,148 in 2024, attributed to general economic conditions, high gas prices, and reduced disposable income, though same-store sales were up 2.9% in Q4 2024.
• Operating income declined sharply to $1,475,038 in 2024 from $3,439,685 in 2023.
• The company extended the maturity date of its Senior Secured Promissory Note with Corbel Capital Partners to June 30, 2026, and adjusted interest terms to SOFR plus 9.0% with no PIK interest, increasing monthly principal payments to $91,667 starting May 2025.
• The company identified material weaknesses in internal control over financial reporting related to expense reimbursement documentation, financial close reconciliation, and lack of documented policies and procedures.
• Noble Romans incurred $35,184 in 2024 for defense against an activist shareholder, down from $168,092 in 2023, following the voluntary dismissal of a lawsuit by BT Brands, Inc. and Gary Copperud.

Sentiment

Score: 4

Explanation: The company faces significant financial challenges, including a net loss and declining operating income, exacerbated by internal control weaknesses. While the strategic shift to non-traditional franchising shows promise and debt maturity has been extended, the overall financial health and governance issues present considerable concerns for investors. The positive growth in franchising is offset by the overall net loss and operational inefficiencies.

Positives

• Franchising revenue increased significantly by approximately 18.7% to $5,540,968 in 2024, driven by the opening of 68 new non-traditional locations.
• The company secured a development agreement with Majors Management LLC for 100 franchise locations to be developed by September 30, 2026, indicating strong future growth potential in the non-traditional segment.
• The Senior Secured Promissory Note's maturity date was extended to June 30, 2026, providing additional liquidity runway and financial flexibility.
• The new interest terms for the Senior Note eliminate PIK (Payment-in-Kind) interest, which previously added to the principal balance, potentially reducing future debt accumulation.
• Same-store sales for Company-owned Craft Pizza & Pub restaurants showed a positive trend, increasing by 2.9% in the fourth quarter of 2024 compared to the same period in 2023.
• The company successfully defended against an activist shareholder lawsuit, with direct expenses for defense significantly decreasing from $168,092 in 2023 to $35,184 in 2024.

Negatives

• The company reported a net loss of $3,174 in 2024, a substantial decline from the $1,460,284 net income in 2023, which was significantly boosted by a $1.46 million ERC refund.
• Operating income decreased by over 57% from $3,439,685 in 2023 to $1,475,038 in 2024.
• Company-owned Craft Pizza & Pub restaurant revenue decreased from $8,744,158 in 2023 to $8,577,148 in 2024, primarily due to economic pressures on consumer spending.
• The current ratio deteriorated from 1.1-to-1 in 2023 to 0.91-to-1 in 2024, indicating a weaker short-term liquidity position.
• The company identified material weaknesses in its internal control over financial reporting, specifically regarding expense reimbursement documentation, financial close reconciliation, and lack of documented policies and procedures.
• Cost of sales as a percentage of revenue for Company-owned Craft Pizza & Pubs increased from 20.5% in 2023 to 21.2% in 2024 due to promotional efforts and inflationary pressures, particularly on cheese prices.
• The Company-owned non-traditional venue reported a negative margin contribution of $(47,072) in 2024, compared to a positive margin of $142,130 in 2023, partly due to a temporary relocation during hospital remodeling.

Risks

• Intense competition from larger national, regional, and local companies with greater financial resources in the restaurant and retail food industries.
• Dependence on the success of the company's growth strategy, which relies on opening new franchises and the viability of underlying host businesses in non-traditional locations.
• Uncertainty regarding the ability of franchisees to operate effectively, comply with regulations, and maintain brand standards, which could adversely affect the company's image and revenues.
• Dependence on third-party distributors for product supply and royalty collection, with potential disruptions or less favorable terms if quality distributors cannot be engaged or retained.
• Vulnerability to changes in consumer tastes, economic conditions, demographic trends, and negative publicity related to food quality, illness, or operating issues.
• Risks of supply chain shortages and interruptions in the delivery of food products, exacerbated by inflation and market conditions for key ingredients like cheese, wheat, and meats.
• Exposure to extensive federal, state, and local laws and regulations governing franchising, health, safety, sanitation, employment, and nutritional disclosure, with potential for adverse financial impact from changes or non-compliance.
• Dependence on key executives, Paul W. Mobley (Executive Chairman and CFO) and A. Scott Mobley (President and CEO), whose loss could materially affect the company.
• Potential for Indiana state law provisions to make it more difficult for a third party to acquire control of the company, potentially limiting stock price.
• The company's stock being thinly traded on the OTCQB, leading to lower liquidity and potential for significant price decreases from large sell-offs.
• Ongoing or renewed activities by activist investor groups, such as BT Brands, Inc., could result in additional legal expenses and interference with business relationships.
• Cybersecurity threats to the company's computer systems and networks, including those of third-party service providers, could disrupt business or compromise sensitive data.
• The company's future use of its existing net operating losses (NOLs) may be limited by a significant change in ownership.

Future Outlook

Noble Romans' future outlook is primarily based on its strategy of growing the non-traditional franchising venue, operating its existing Craft Pizza & Pub locations, and pursuing a franchising program for Craft Pizza & Pub restaurants as market conditions allow. The company believes it will have sufficient cash flow to meet its obligations and carry out its current business plan for the foreseeable future, supported by the extension of the Senior Note. Management expects the infrastructure and overhead for new growth in the franchising venue to be minimal relative to the revenue generated, leading to an expected increase in margin for this segment. The company anticipates its net operating loss carry-forward of approximately $14.7 million will be fully utilized to offset income taxes within the next four years.

Management Comments

• "The Company may open additional locations in the future but it has no plans to open any more Company-operated locations at this time."
• "The Company refocused its development plans toward selling more non-traditional franchises to convenience store operators as a result of the Covid pandemic coming to an end and the owners of such locations becoming more willing to look at expansion options and to invest in their growth and profitability."
• "The focus on selling more non-traditional franchise locations, including several locations with higher-than-average potential volumes, is proceeding, and the Company has a significant backlog of prospects to expand the franchise locations."
• "The infrastructure and overhead required to accommodate new growth in this venue should be minimal in relation to the revenue generated from such growth, so the margin is expected to increase."
• "The Company does not intend to operate any more Company-owned non-traditional locations in addition to the one location that is currently being operated."
• "In view of the extension of the Senior Note as well as the Companys cash flow projections, the Company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan for the foreseeable future."
• "The Companys cash flow projections for the next two years are primarily based on the Companys strategy of growing the non-traditional franchising venue, operating its existing Craft Pizza & Pub locations and pursuing a franchising program for Craft Pizza & Pub restaurants as market conditions allow."

Industry Context

Noble Romans operates in the highly competitive restaurant and retail food industry, facing competition from large national chains and numerous regional/local companies. The company's strategic shift towards non-traditional franchising, particularly in convenience stores, aligns with a broader industry trend of diversifying revenue streams and leveraging existing traffic in host businesses. This strategy aims to capitalize on post-pandemic expansion willingness among convenience store operators. While the Craft Pizza & Pub segment faces challenges from general economic conditions impacting consumer discretionary spending, the non-traditional model offers a lower-overhead, higher-margin growth path, differentiating Noble Romans from traditional full-service restaurant competitors.

Comparison to Industry Standards

• Noble Romans' focus on non-traditional franchising within convenience stores and entertainment facilities is a common strategy for smaller chains to expand without significant capital expenditure, similar to how larger brands like Subway or Dunkin' have utilized non-traditional formats.
• The company's reported net loss in 2024, following a profit heavily influenced by a one-time tax credit in 2023, suggests a challenging financial performance compared to more established, profitable restaurant chains.
• The deterioration of the current ratio from 1.1-to-1 to 0.91-to-1 indicates a weaker liquidity position, which could be below the healthy benchmarks for many well-capitalized restaurant companies that typically maintain current ratios above 1.0.
• The identified material weaknesses in internal controls over financial reporting are a significant concern, as robust internal controls are a standard expectation for publicly traded companies, regardless of size or exchange listing, and are critical for investor confidence.
• The company's competitive advantages, such as its background in traditional restaurant operations providing experience in structuring and cost control for franchisees, may differentiate it from newer non-traditional competitors lacking such foundational experience.

Management Changes

Corporate Governance

Legal Proceedings

• The company was involved in a proxy contest and lawsuit initiated by BT Brands, Inc. and its CEO, Gary Copperud, in 2023, seeking to elect Copperud to the board of directors.
• The court denied BT Brands' motions for a temporary restraining order and preliminary injunction, leading to the voluntary dismissal of the lawsuit by BT Brands in September 2023.
• The company incurred over $200,000 in direct expenses defending against BT Brands and Copperud, with $35,184 in 2024 and $168,092 in 2023.
• Currently, there are no other pending material litigation or regulatory proceedings.

Related Party Transactions

• Paul W. Mobley (Executive Chairman, CFO) and Marcel Herbst (Director) purchased Units in a private placement that began in October 2016, on the same terms as unrelated investors.
• Notes held by Paul Mobley were repaid in February 2020 as part of a new financing arrangement.
• In September 2022, Paul Mobley purchased a $200,000 subordinated note from Marcel Herbst, which is included in outstanding convertible notes payable.
• Paul Mobley received $20,000 in 10% interest from the company in 2024 on his subordinated note, at the same rate as other subordinated debt holders.
• Paul Mobley paid the company $50,000 on May 12, 2025, for American Express receipts from 2024 that could not be located, similar to a $125,000 payment made for 2023.
• Pinnacle Commercial Capital, LLC, a company owned by William Wildman (Director), received a $15,000 advance on commission for helping arrange new financing for the company.

Stakeholder Impact

• **Shareholders**: Experienced a net loss in 2024, diluted earnings per share, and face potential future dilution from warrants issued to debt holders. The thinly traded stock on OTCQB limits liquidity and may not reflect true equity value. The identified material weaknesses in internal controls could erode investor confidence.
• **Employees**: The company employs approximately 38 full-time and 128 part-time persons. The employee stock option plan aims to motivate employees by linking compensation to shareholder value.
• **Customers**: The company continues to offer its Craft Pizza & Pub and non-traditional pizza formats. Economic pressures, such as high gas prices and reduced disposable income, have negatively impacted customer counts in company-owned restaurants.
• **Franchisees**: Benefit from the company's strategic focus on non-traditional locations and support in equipment sales and proprietary ingredients. However, they are dependent on the company's distributors and subject to economic conditions affecting their own operations.
• **Creditors (Corbel Capital Partners)**: The Senior Note's maturity extension and adjusted interest terms provide continued revenue for Corbel, while the issuance of warrants offers additional equity upside. The company's ability to meet principal payments is crucial for creditors.
• **Suppliers/Manufacturers**: The company relies on third-party manufacturers for proprietary ingredients and distributors for delivery, making them key partners in the supply chain.

Next Steps

• Continue to focus on selling more non-traditional franchises, particularly to convenience store operators, and expand with mid-size chains.
• Develop the 100 franchise locations under the agreement with Majors Management LLC prior to September 30, 2026.
• Implement remediation efforts to address identified material weaknesses in internal control over financial reporting, including enhancing expense reimbursement procedures, improving financial close reconciliation, and formalizing documented policies.
• Monitor and manage the Senior Secured Promissory Note, including making increased monthly principal payments of $91,667 starting May 2025.
• Utilize the net operating loss carry-forward of approximately $14.7 million to offset future taxable income.
• Adopt ASU 2023-09 Improvements to Income Tax Disclosure for the tax year beginning January 1, 2025.

Key Dates

Recommendation

Keywords

Noble Romans, Pizza, Franchising, Restaurant Industry, SEC Filing, 10-K, Financial Performance, Non-Traditional Locations, Craft Pizza & Pub, SEC Filings, Corporate Governance, Risk Factors, Debt Management, Internal Controls, Franchise Development, Food Service, QSR, Casual Dining