Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2023

Summary of Significant Accounting Policies

Organization

Organization: The Company, with two wholly-owned subsidiaries, 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 Pizza”, “Noble Roman’s Craft Pizza & Pub” and “Tuscano’s Italian Style Subs”. Unless the context otherwise indicates, reference to the “Company” are to Noble Roman’s, Inc. and its wholly-owned subsidiaries.

Principles of Consolidation

Principles of Consolidation: The consolidated financial statements include the accounts of Noble Roman’s, Inc. and its wholly-owned subsidiaries, RH Roanoke, Inc. and Pizzaco, Inc. (inactive). Inter-company balances and transactions have been eliminated in consolidation.

Inventories

Inventories: Inventories consist of food, beverage, restaurant supplies, restaurant equipment and marketing materials and are stated at the lower of cost (first-in, first-out) or net realizable value.

Property and Equipment

Property and Equipment:  Equipment and leasehold improvements are stated at cost.  Depreciation and amortization are computed on the straight-line method over the estimated useful lives ranging from five years to 20 years.  Leasehold improvements are amortized over the shorter of estimated useful life or the term of the lease including likely renewals.  Construction and equipment in progress are stated at cost for leasehold improvements, equipment for a new restaurant being constructed and for pre-opening costs of any restaurant not yet open as of the date of the statements.

Franchise Support Costs

Franchise Support Costs:  Certain direct costs of franchising operations are charged to franchise expense and also to deferred contract costs which are amortized over the life of each franchise. 

Leases

Leases:  The Company determines if an arrangement is a lease at inception.  Operating leases are included in right-of-use assets ("ROU"), and lease liability obligations are included in the Company's balance sheets.  ROU assets represent the Company's right to use an underlying asset for the lease term and lease liability obligations represent its obligation to make lease payments arising from the lease.  Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.  As the Company's leases typically do not provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.  The Company uses the implicit rate when readily determinable.  The ROU asset also includes in the lease payments made and excludes lease incentives and lease direct costs.  The Company's lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.  Lease expense is recognized on a straight-line basis over the lease term.

Deferred Revenue

Deferred Revenue:  The upfront fees for franchise locations are credited to deferred contract income and amortized over the life of the individual franchises.

Cash

Cash:  Includes actual cash balance.  The cash is not pledged nor are there any withdrawal restrictions.

Accounts receivables

Accounts receivables are evaluated for collectability.  The Company accounts for credit losses in accordance with Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments – Credit Losses (“ASC Topics 326”).  ASC Topic 326 impacts the impairment model of certain financial assets measured at amortized cost by requiring a current expected credit loss (“CECL”) methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase.  The Company has the ability to determine there are no expected credit losses in certain circumstances.  The Company identified accounts receivable, prepaid expenses and other assets which are carried at amortized cost as in scope for consideration under ASC Topic 326.

Advertising Costs

Advertising Costs:  The Company records advertising costs consistent with the Financial Accounting Standards Board’s (the “FASB”) ASC “Other Expense” topic and “Advertising Costs” subtopic.  This statement requires the Company to expense advertising production costs the first time the production material is used.

Fair Value Measurements and Disclosures

Fair Value Measurements and Disclosures: The Fair Value Measurements and Disclosures topic of the FASB’s ASC requires companies to determine fair value based on the price that would be received to sell the assets or paid to transfer to liability to a market participant. The fair value measurements and disclosure topic emphasis that fair value is a market based measurement, not an entity specific measurement. The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

Level One: Quoted market prices in active markets for identical assets or liabilities.

Level Two: Observable market–based inputs or unobservable inputs that are corroborated by market data.

Level Three: Unobservable inputs that are not corroborated by market data.

Use of Estimates

Use of Estimates:  The preparation of the consolidated financial statements in conformity with United States 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 could differ from those estimates.  In 2020, in light of the additional uncertainty created as a result of the COVID-19 pandemic, the Company decided to create a reserve for collectability 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 income at the time received or otherwise secured. The Company evaluates its property and equipment and related costs periodically to assess whether any impairment indications are present, including recurring operating losses and significant adverse changes in legal factors or business climate that affect the recovery of recorded value.  If any impairment of an individual asset is evident, a loss would be provided to reduce the carrying value to its estimated fair value.   

Debt Issuance Costs

Debt Issuance Costs:  Debt issuance cost is presented on the balance sheet as a direct reduction from the carrying amount of the associated liability.  Debt issuance costs are amortized to interest expense ratably over the term of the applicable debt.  The unamortized debt issuance cost at December 31, 2023 was $373,013. 

Intangible Assets

Intangible Assets:  The Company recorded goodwill of $278,000 as a result of the acquisition of RH Roanoke, Inc. of certain assets of a former franchisee of the Company. Goodwill has an indeterminable life and is assessed for impairment at least annually and more frequently as triggering events may occur.  In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data.  Any impairment losses determined to exist are recorded in the period the determination is made.  There are inherent uncertainties related to these factors and management’s judgment is involved in performing goodwill and other intangible assets valuation analysis, thus there is risk that the carrying value of goodwill and other intangible assets may be overstated or understated.  The Company has elected to perform the annual impairment assessment of recorded goodwill as of the end of the Company’s fiscal year.  The results of this annual impairment assessment indicated that the fair value of the reporting unit as of December 31, 2023, exceeded the carrying or book value, including goodwill, and therefore recorded goodwill was not subject to impairment.

Long Lived Assets

Long Lived Assets:  The Company reviews long lived assets on an annual basis to determine if there has been any impairment in value. The Company has determined there has been no impairment of value in the recorded fixed assets.

Franchising Revenue

Franchising Revenue:  This includes royalty income, amortized franchise fee income in accordance with ASC 606, commissions on equipment, marketing allowances and other miscellaneous income.  Royalties are generally recognized as income monthly based on a percentage of monthly sales of franchised or licensed restaurants and from audits and other inspections as they come due and payable by the franchisee.  Fees from the retail products in grocery stores are recognized monthly based on the distributors’ sale of those retail products to the grocery stores or grocery store distributors.  Administrative fees are recognized as income monthly as earned.  The Company adopted Accounting Standards Update (“ASU”) 2014-09 effective January 2018 which did not materially affect the Company's recognition of royalties, fees from the sale of retail products in grocery stores, administrative fees or sales from Company-owned restaurants.  However, initial franchise fees and related contract costs, as defined in the franchise agreements, are now deferred and amortized on a straight-line basis over the term of the franchise agreements, generally five to ten years. 

Income Taxes

Income Taxes:  The Company provides for current and deferred income tax liabilities and assets utilizing an asset and liability approach along with a valuation allowance as appropriate.  The Company, at December 31, 2022 and December 31, 2023, had net deferred tax assets on its balance sheet totaling $3.4 million.  Based on the Company’s review of its available tax credits and 2023 taxable income, the Company believes it is more likely than not that the deferred tax assets will be utilized prior to their expiration.

U.S. generally accepted accounting principles require the Company to examine its tax positions for uncertain positions.  Management is not aware of any tax positions that are more likely than not to change in the next 12 months, or that would not sustain an examination by applicable taxing authorities.  The Company’s federal and various state income tax returns for 2020 through 2023 are subject to examination by the applicable tax authorities, generally for three years after the later of the original or extended due date.

Basic and Diluted Net Income Per Share

Basic and Diluted Net Income Per Share:  Net income (loss) per share is based on the weighted average number of common shares outstanding during the respective year.  When dilutive, stock options and warrants are included as share equivalents using the treasury stock method.

The following table sets forth the calculation of basic and diluted loss per share for the year ended December 31, 2022:

	Loss (Numerator)			Shares (Denominator)		Per Share Amount
Net loss per share – basic
Net loss	$	(1,313,996	)		22,215,512	$	(.06	)
Effect of dilutive securities
Options and warrants		-			47,038
Convertible Notes		62,500			1,250,000
Diluted net loss per share
Net loss (1)	$	(1,251,496	)		23,512,550	$	(.06	)

(1) Net loss per share is shown the same as basic loss per share because the underlying dilutive securities have anti-dilutive effect.

The following table sets forth the calculation of basic and diluted income per share for the year ended December 31, 2023:

	Income (Numerator)		Shares (Denominator)		Per Share Amount
Net income per share – basic
Net income	$	1,460,284		22,215,512	$	.07
Effect of dilutive securities
Options and warrants		-		134,341
Convertible Notes		57,500		1,250,000
Diluted net loss per share
Net income	$	1,517,784		23,599,853	$	.06

Stock-based compensation

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.

Employee Retention Credit

Employee Retention Credit:  The employee retention credit (“ERC”) is a refundable tax credit that businesses can claim on qualified wages paid to employees.  The program was introduced in March 2020 in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to incentivize employees 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.

When first established under the CARES Act, the tax credit was equal to 50% of the qualified wages an eligible employer paid to employees after March 12, 2020 and before January 1, 2021. The credit was also limited to a maximum annual per employee credit of $5,000. The credit was then extended through June 30, 2021 by the Tax Payer Certainty and Disaster Relief Act (“Relief Act”) (Division EE of the Consolidated Appropriations Act). The Relief Act modified the credit to be 70% of up to $10,000 of qualified wages per quarter in 2021 through June 30, 2021.  The program was further extended through December 31, 2021 by the American Rescue Plan Act of 2021 (“ARPA”) but was retroactively cut short by the Infrastructure Investment and Jobs Act, ending effective September 30, 2021. 

During the first quarter 2023 the Company determined that it is entitled to an ERC of $1.718 million and has submitted amended federal Form 941 returns claiming that refund.  The ERC refund is treated as a government grant reducing appropriate expenses for the $1.718 million less expenses for applying for the refund of $258,000 or a net of $1.460 million which primarily affected franchising venue as other operating expenses. This refund applied both to Noble Roman’s, Inc. and its subsidiary, RH Roanoke, Inc. To date the Company has received all five quarterly refunds for Roanoke, Inc. and three refunds for 2020 and one of the two quarterly refunds for 2021 for Noble Roman’s, Inc.  In recent communications, the Internal Revenue Service, indicated the final refund claim had been received and was in process, but the Commissioner had put a temporary hold on all additional returns while IRS addresses administrative issues in processing refunds generally.