10-Q: Noble Romans Returns to Profitability in Q1 2025 Amidst Strong Franchise Growth and Refinancing Efforts

Noble Romans, Inc. reported a net income of $130,633 for the first quarter of 2025, a significant improvement from a loss in the prior year, driven by increased revenue from company-owned restaurants and accelerated non-traditional franchise growth, despite ongoing refinancing needs and internal control remediation.

Summary

• Noble Romans, Inc. achieved a net income of $130,633 ($0.01 basic and diluted EPS) for the three months ended March 31, 2025, a significant turnaround from a net loss of $86,477 ($0.00 basic and diluted EPS) in the comparable period of 2024.
• Total revenue increased to $3,760,198 in Q1 2025 from $3,666,105 in Q1 2024.
• Company-owned Craft Pizza & Pub revenue slightly increased to $2,019,418 in Q1 2025 from $1,995,524 in Q1 2024, with same-store sales up 2.7% in April and 9.3% in May year-over-year.
• Company-owned non-traditional revenue grew substantially by 23.6% to $294,573 in Q1 2025 from $238,147 in Q1 2024, with current sales experiencing approximately 25% growth.
• Franchising revenue increased to $1,445,908 in Q1 2025 from $1,425,290 in Q1 2024, despite one-time charges in December 2024 related to revenue recognition changes and a receivable charge-off.
• General and administrative expenses decreased significantly by 26.5% to $424,405 in Q1 2025 from $577,286 in Q1 2024, reflecting effective cost control.
• Interest expense decreased by 16.3% to $329,754 in Q1 2025 from $394,180 in Q1 2024 due to principal repayments, though previously offset by non-cash PIK interest.
• The company's cash balance decreased to $564,637 as of March 31, 2025, from $710,227 as of December 31, 2024.
• Noble Romans opened 10 new non-traditional outlets in Q1 2025 and anticipates opening 60 to 70 new non-traditional locations in 2025.
• Sassetti LLC resigned as the company's principal accountant effective June 18, 2025, resulting in the Q1 2025 report being unaudited.
• The company is actively pursuing new financing to repay its Senior Note, which matures in June 2026, and other outstanding convertible notes totaling $575,000.
• Management identified internal control weaknesses related to inadequate receipts, untimely/inaccurate account reconciliation, and insufficient written documentation of policies/procedures, with remediation efforts underway.

Sentiment

Score: 7

Explanation: The company achieved a significant turnaround from a net loss to net income, driven by revenue growth in key segments and strong cost control in G&A. Non-traditional franchise expansion is accelerating, and Craft Pizza & Pub same-store sales are improving. However, cash decreased, margins were pressured in some areas, and there are notable concerns regarding auditor resignation and identified internal control weaknesses that require remediation. The need for debt refinancing also presents a significant, albeit manageable, challenge.

Positives

• Achieved net income of $130,633 in Q1 2025, a significant improvement from a net loss in the prior year.
• Total revenue increased by 2.56% to $3,760,198 in Q1 2025 compared to Q1 2024.
• Company-owned non-traditional revenue saw substantial growth of 23.6% to $294,573 in Q1 2025, with current sales experiencing approximately 25% growth.
• Franchising revenue increased to $1,445,908 in Q1 2025, indicating continued expansion in this segment.
• General and administrative expenses decreased significantly by 26.5% to $424,405, reflecting effective cost control and a focus on maintaining low administrative overhead.
• Interest expense decreased by 16.3% to $329,754 due to ongoing principal repayments on debt.
• Strong growth in non-traditional franchise openings, with 10 new outlets in Q1 2025 and an expectation of 60-70 new locations in 2025, indicating a robust pipeline.
• Craft Pizza & Pub same-store sales showed positive momentum, increasing by 2.7% in April and 9.3% in May year-over-year.
• Improved labor efficiency in Craft Pizza & Pub locations due to increased average tenure and experience of the workforce, helping to offset salary increases.
• Cost of sales for Craft Pizza & Pub decreased to 18.8% from 20.9% due to effective portioning controls and strategic promotion of lower-cost large pizzas.

Negatives

• Cash balance decreased by $145,590 from $710,227 as of December 31, 2024, to $564,637 as of March 31, 2025.
• Gross margin contribution for company-owned Craft Pizza & Pub decreased to 6.4% from 8.2% due to inflationary pressures on expenses and significant discounting from value promotions.
• Gross margin contribution for the franchising venue decreased to 62.2% from 65.6%.
• One-time charges in December 2024 negatively impacted franchising revenue recognition, including a $77,000 charge due to a change in income recording method and a $75,000 charge-off of a receivable from a soft drink supplier.
• The Q1 2025 financial statements are unaudited due to the resignation of Sassetti LLC as the principal accountant, raising concerns about financial reporting oversight.
• Identified internal control weaknesses related to inadequate receipts for certain expenses, untimely/inaccurate account reconciliation, and lack of sufficient written documentation of policies/procedures, which could lead to undetected errors.
• Defense against activist shareholder incurred $7,843 in expenses during Q1 2025.

Risks

• The company's ability to refinance the Senior Note on favorable terms or at all prior to its June 2026 maturity is not assured.
• Exposure to competitive factors and pricing/cost pressures within the highly competitive restaurant industry.
• Potential adverse impact from the emergence or spread of human or animal pandemics (e.g., COVID-19, Avian Bird Flu).
• Risk of non-renewal of franchise agreements or the failure of new openings contemplated by the Development Agreement to occur as planned.
• Vulnerability to shifts in market demand for the company's products or franchises.
• Impact of general economic conditions, including inflation, on consumer spending and operational costs.
• Challenges arising from changes in demand for the company's products or franchises.
• Potential adverse effects from the impact of franchise regulation.
• Risks associated with the success or failure of individual franchisees.
• Ongoing inflation and other changes in prices or supplies of food ingredients and labor.
• Potential adverse impact on the company's business from activist stockholder activities or interference in business relationships.
• Exposure to interest rate risk due to its variable-rate debt, which is tied to SOFR plus 9.0% per annum, meaning a 1% increase in SOFR would incur approximately $65,000 in increased interest expense over 12 months.

Future Outlook

Noble Romans, Inc. projects continued growth in its non-traditional franchising venue, with an expectation to open 60 to 70 new locations in 2025. The company plans to continue operating its existing Craft Pizza & Pub locations and pursue a franchising program for this format as market conditions permit. Management believes it will have sufficient cash flow to meet obligations and execute its business plan for the foreseeable future, primarily based on the growth of the non-traditional franchising segment and ongoing refinancing efforts for its Senior Note. The company also expects to recognize $25,000 of related revenue from a soft drink supplier allowance in each of 2025, 2026, and 2027.

Management Comments

• "The Company believes it will be able to complete the refinancing [of the Senior Note] based on its credit metrics, including its recent and forecasted earnings before interest, taxes and depreciation and amortization."
• "The Companys continued focus on quality service and speed in the Craft Pizza and Pub locations has resulted in May 2025 being the most profitable month of operations on a combined basis since August 2022."
• "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 host facilities becoming more willing to look at expansion options and to invest in their growth."
• "The Companys franchising business model allows it to substantially grow the number of open units without any material increase in overhead."
• "The Company does not intend to operate any more Company-owned non-traditional locations except the one location that it is currently operating."
• "Management is committed to remediating [internal control weaknesses] as quickly and efficiently as possible, validating those efforts will require time, operating over a sustained period and validation during the next audit."

Industry Context

The restaurant industry, particularly the quick-service and fast-casual segments, continues to navigate challenges such as inflationary pressures on food ingredients and labor costs, and shifts in consumer spending habits. Noble Romans' focus on expanding its non-traditional franchise model, especially in convenience stores and travel plazas, aligns with a trend towards diversified revenue streams and leveraging existing traffic. The company's experience with COVID-19 related closures and labor shortages highlights the ongoing volatility and operational complexities within the foodservice sector, particularly for entertainment-based locations. The emphasis on value promotions in Craft Pizza & Pub locations reflects a broader industry response to weak consumer spending.

Comparison to Industry Standards

• The document does not provide specific comparable companies, projects, or results to assess Noble Romans' performance against global industry benchmarks. Therefore, a direct comparison to industry standards is not possible based solely on the provided information.

Management Changes

Corporate Governance

Legal Proceedings

• Currently, there are no material pending legal or regulatory proceedings against the company.

Related Party Transactions

• No specific related party dealings were detailed in the document beyond the existing employment agreements with Paul W. Mobley (Executive Chairman, Chief Financial Officer, and Principal Accounting Officer) and A. Scott Mobley (President and Chief Executive Officer), and the Senior Note and Warrants with Corbel Capital Partners SBIC, L.P., which are disclosed as part of the company's financing structure.

Stakeholder Impact

• Shareholders: Positive impact from the net income turnaround and revenue growth, but potential dilution from warrants/convertible notes and uncertainty from the auditor resignation and internal control issues. Expenses related to defense against activist shareholders were also noted.
• Employees: Benefit from more efficient labor use and increased average tenure and experience in Craft Pizza & Pub locations, which helps offset salary increases.
• Customers: Benefit from value promotions and improved service initiatives in Craft Pizza & Pub locations, designed to enhance convenience and experience.
• Franchisees: Opportunities for growth through non-traditional expansion, but faced challenges from COVID-19 related closures and labor shortages that impacted development.
• Creditors: The company is actively managing its debt obligations, including ongoing principal payments and pursuing refinancing for the Senior Note, which has an extended maturity date, providing more time for repayment.

Next Steps

• The Board of Directors will evaluate and retain alternative independent accountants to serve as the company's auditor for 2025.
• The company will file an amendment to this Form 10-Q to include reviewed financial statements and any additional disclosures once a new auditor completes their review.
• Continue efforts to obtain new financing to repay the Senior Note and other outstanding Notes.
• Continue to expand the number of non-traditional franchise locations, with an expectation of 60 to 70 new openings in 2025.
• Remediate identified internal control weaknesses related to inadequate receipts, account reconciliation, and documentation of policies and procedures.
• Continue to focus on quality service and speed in Craft Pizza & Pub locations.
• Recognize $25,000 of related revenue from a soft drink supplier allowance in each of 2025, 2026, and 2027.

Key Dates

Recommendation

Keywords

Noble Romans, pizza, restaurant, franchising, Craft Pizza & Pub, non-traditional, SEC filing, 10-Q, financial report, Q1 2025, SOFR, ERTC, Corbel Capital Partners, restaurant industry, quarterly earnings, financial performance, debt refinancing, internal controls, franchise development