Risk Factors - NROM

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$NROM Risk Factor changes from 00/03/22/22/2022 to 00/05/16/24/2024

ITEM 1A. RISK FACTORS All phases of the Company’s operations are subject to a number of uncertainties, risks and other influences, many of which are outside of its control, and any one or a combination of which could materially affect its results of operations. RISK FACTORS All phases of the Company’s operations are subject to a number of uncertainties, risks and other influences, many of which are outside of its control, and any one or a combination of which could materially affect its results of operations. Important factors that could cause actual results to differ materially from the Company’s expectations are discussed below. Prospective investors should carefully consider these factors before investing in the Company’s securities as well as the information set forth under “Forward-Looking Statements” in Item 7 of this report. Prospective investors should carefully consider these factors before investing in our securities as well as the information set forth under “Forward-Looking Statements” in Item 7 of this report. These risks and uncertainties include: Risks Related to Economic Conditions and Events Continuing effects of COVID-19 pandemic and continuing economic uncertainties. The COVID-19 pandemic and the governmental response had a significant adverse impact on the Company due to, among other things, governmental restrictions and forced business closures, reduced customer traffic, staffing challenges, decreased franchising interest, supply chain disruptions, inflation and product shortages. To date, consumer spending behavior has not yet returned to pre-pandemic patterns and the economic pressures resulting from the pandemic and government actions have had an adverse impact on consumer spending at the Company-operated restaurants. Additionally, several venues within the Company’s non-traditional franchising segment, particularly within the broad entertainment venue, remain unviable but the number of locations impacted have been replaced with different non-traditional locations. There is no assurance that these specific conditions will return to pre-pandemic norms. Furthermore, a resurgence of COVID, or the start of a new pandemic or other national emergencies, could result in renewed issues of the type listed above. These risks and any additional risks associated with COVID-19 or a similar outbreak may materially adversely affect the Company’s business or results of operations, and may impact the Company’s liquidity or financial condition. These risks and any additional risks associated with COVID-19 or a similar outbreak may materially adversely affect the Company’s business or results of operations, and may impact the Company’s liquidity or financial condition, particularly if these risks persist for a significant amount of time. Competition from larger companies. The Company competes with large national companies and numerous regional and local companies for franchise and license sales and with respect to its Company-owned locations. Many of its competitors have greater financial and other resources than the Company. The restaurant industry in general is intensely competitive with respect to convenience, price, product quality and service. The Company believes it has some compelling advantages to compete for franchise and license sales on the basis of several factors, including product engineering and quality, investment cost, cost of sales, distribution, simplicity of operation and labor requirements. In addition, the Company competes for franchise and license sales on the basis of several factors, including product engineering and quality, investment cost, cost of sales, distribution, simplicity of operation and labor requirements. Activities of the Company’s competitors though could have an adverse effect on the Company’s ability to sell additional franchises or licenses or maintain and renew existing franchises and licenses or the operating results of the Company’s system. Activities of the Company’s competitors could have an adverse effect on the Company’s ability to sell additional franchises or licenses or maintain and renew existing franchises and licenses or the operating results of the Company’s system. Dependence on growth strategy. The Company’s growth strategy includes continuing to sell new franchises or licenses and continuing to open the backlog of sold but unopened non-traditional locations. The Company’s growth strategy also contemplates expanding Craft Pizza & Pub locations opportunistically in the future by franchising to qualified franchisees and gradually increasing the number of Company-owned Craft Pizza & Pub locations. The opening and success of new locations will depend upon various factors, which include: (1) the traffic generated by and viability of the underlying activity or business in non-traditional locations; (2) the continued viability of the Craft Pizza & Pub locations; (3) the ability of the franchisees and licensees of either venue to operate their locations effectively; (4) the franchisee's ability to comply with applicable regulatory requirements; and (5) the effect of competition and general economic and business conditions including food and labor costs. The opening and success of new locations will depend upon various factors, which include: (1) the traffic generated by and viability of the underlying activity or business in non-traditional locations; (2) the viability of the Craft Pizza & Pub locations; (3) the ability of the franchisees and licensees of either venue to operate their locations effectively; (4) the franchisee's ability to comply with applicable regulatory requirements; and (5) the effect of competition and general economic and business conditions including food and labor costs. Many of the foregoing factors are not within the Company’s control. There can be no assurance that the Company will be able to achieve its plans with respect to the opening and/or operation of new franchises/licenses of non-traditional locations and/or Craft Pizza & Pub locations. There can be no assurance that the Company will be able to achieve its plans with respect to the opening and/or operation of new franchises/licenses for Craft Pizza & Pub or non-traditional locations. Risks Related to the Company’s Operations Dependence on success of franchisees and licensees. While a portion of its revenues are being generated by Company-owned operations, a growing portion of the Company’s revenues comes from royalties and other fees generated by its franchisees and licensees which are independent operators. While an increasing portion of its revenues are being generated by Company-owned operations, a significant portion of the Company’s revenues continues to come from royalties and other fees generated by its franchisees and licensees which are independent operators. Their employees are not the Company’s employees. The Company is dependent on the franchisees to accurately report their weekly sales and, consequently, the calculation of royalties. The Company provides training and support to franchisees and licensees but the quality of the store operations and collectability of the receivables may be diminished by a number of factors beyond the Company’s control. Consequently, franchisees and licensees may not operate locations in a manner consistent with the Company’s standards and requirements, or may not hire and train qualified managers and other store personnel. If they do not, the Company’s image and reputation may suffer and its revenues could decline. If they do not, the Company’s image and reputation may suffer, and its revenues and stock price could decline. While the Company attempts to ensure that its franchisees and licensees maintain the quality of its brand and branded products, franchisees and licensees may take actions that adversely affect the value of the Company’s intellectual property or reputation. Overall inflation, general economic conditions, initiatives to increase the Federal minimum wage and a shortage of available labor could have an adverse financial effect on the franchisees/licensees or the Company by increasing labor and other costs. Overall inflation, initiatives to increase the Federal minimum wage and a shortage of available labor could have an adverse financial effect on our franchisees/licensees or the Company by increasing labor and other cost. Dependence on distributors. The success of the Company’s license and franchise offerings depends upon the Company’s ability to engage and retain unrelated, third-party distributors. The Company’s distributors collect and remit certain of the Company’s royalties and must reliably stock and deliver products to the Company’s licensees and franchisees as well as the Company-owned operations. The Company’s distributors collect and remit certain of the Company’s royalties and must reliably stock and deliver products to the Company’s licensees and franchisees. The Company’s inability to engage and retain quality distributors, or a failure by distributors to perform in accordance with the Company’s standards, could have a material adverse effect on the Company. The COVID-19 pandemic had a materially adverse impact on many of the Company’s current distributors as well as other potential distributors, especially those located in or servicing states that had or have significant and/or prolonged restrictions. The COVID-19 pandemic has had a materially adverse impact on many of the Company’s current distributors as well as other potential distributors, especially those located in or servicing states with significant and/or prolonged restrictions. Potential disruptions in distribution could result in distribution service under less favorable terms to the Company and its franchisees and licensees. This risk is somewhat mitigated by the number of distributors in the market from which to choose. Dependence on consumer preferences and perceptions. The restaurant industry and the retail food industry are often affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. The restaurant industry and the retail food industry is often affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. The Company could be substantially adversely affected by publicity resulting from food quality, illness, an infection pandemic, injury, other health concerns or operating issues stemming from one restaurant or retail outlet or a limited number of restaurants and retail outlets. Interruptions in supply or delivery of food products. Dependence on frequent deliveries of product from unrelated third-party manufacturers through unrelated third-party distributors also subjects the Company to the risk that shortages or interruptions in supply caused by contractual interruptions, market conditions, inclement weather or other conditions could adversely affect the availability, quality and cost of ingredients. The COVID-19 pandemic created supply chain shortages that adversely impacted the Company’s operations. The COVID-19 pandemic has created supply chain shortages that have adversely impacted the Company’s operations. In addition, factors such as inflation, which has intensified significantly since the beginning of 2021, market conditions for cheese, wheat, meats, paper, labor and other items may also adversely affect the franchisees and licensees and, as a result, can adversely affect the Company’s ability to add new franchised or licensed locations. In addition, factors such as inflation, which has intensified since the beginning of 2021, market conditions for cheese, wheat, meats, paper, labor and other items may also adversely affect the franchisees and licensees and, as a result, can adversely affect the Company’s ability to add new franchised or licensed locations. Federal, state and local laws with regard to the operation of the businesses. The Company is subject to regulation by the FTC and various state agencies pursuant to federal and state laws regulating the offer and sale of franchises. Several states also regulate aspects of the franchisor-franchisee relationship. The FTC requires the Company to furnish to prospective franchisees a disclosure document containing specified information. Several states also regulate the sale of franchises and require registration of a franchise disclosure document with state authorities. Substantive state laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor-franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions and the ability of a franchisor to terminate or refuse to renew a franchise. Some foreign countries also have disclosure requirements and other laws regulating franchising and the franchisor-franchisee relationship, and the Company would be subject to applicable laws in each jurisdiction where it seeks to market additional franchise units. Each franchise and Company-owned location is subject to licensing and regulation by a number of governmental authorities, which include health, safety, sanitation, building, alcohol, employment and other agencies and ordinances in the state or municipality in which the facility is located. The process of obtaining and maintaining required licenses or approvals can delay or prevent the opening of a franchise location. Vendors, such as the Company’s third-party production and distribution services, are also licensed and subject to regulation by state and local health and fire codes, and U. S. Department of Transportation regulations. The Company, its franchisees and its vendors are also subject to federal and state environmental regulations. Failure of the Company or its franchisees to comply with these laws and regulations could have an adverse impact on the Company, its operations, financial results or reputation. Additionally, expenses related to compliance with these laws and regulations could have an adverse impact on the Company’s financial results. Additionally, expenses related to the compliance of these laws and regulations could have an adverse impact on the Company’s financial results. Material Weaknesses in Our Internal Control Over Financial Reporting That Resulted in Restatement of Our Financial Statements For the Year Ended December 31, 2022 As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Effective internal control over financial reporting is necessary for us to provide reliable financial reports and is designed to prevent fraud. Any failure to maintain or implement required new or improved controls, or difficulties encountered in implementation could cause us to fail to meet our reporting obligations. As disclosed in the explanatory note at the beginning of this report and Note 2 of our Consolidated Financial Statements, we have identified material weaknesses in our internal control over our financial reporting, which pre-dated our balance sheet as of January 1, 2022. The material weakness was caused by an ineffective control environment resulting from a former employee, who lacked a sufficient level of accounting knowledge and training to appropriately analyze the records and disclose this particular matter accurately. Management of the Company thought they were provided sufficient oversight but on this particular matter they obviously were not. The material weakness is described in more detail under the heading Part II, Item 9kA, Controls and Procedures, in this report. This material weakness resulted in the error discussed in the Explanation Note and elsewhere in this report and the Company concluded that our prior statements should be restated. Risks Related to the Company’s Indebtedness Ability to service outstanding indebtedness and the dilutive effect of the Company’s outstanding warrants. Risks Related to the Company’s Indebtedness Ability to service our outstanding indebtedness and the dilutive effect of our outstanding warrants. As of February 19, 2024, the Company had approximately $8.0 million in principal amount debt obligations. Of that debt, $7.4 million is in the form of a senior secured promissory note (as amended, the “Senior Note”) and $575,000 is in the form of convertible, subordinated, unsecured promissory notes (the “Notes”), each as described below.5 million is in the form of a senior secured promissory note (the “Senior Note”) and $625,000 is in the form of convertible, subordinated, unsecured promissory notes (the “Notes”), each as described below. In February 2020, the Company entered into a Senior Secured Promissory Note and Warrant Purchase Agreement (as amended, the “Agreement”) with Corbel Capital Partners SBIC, L. On February 7, 2020, the Company entered into a Senior Secured Promissory Note and Warrant Purchase Agreement (the “Agreement”) with Corbel Capital Partners SBIC, L. P. (the “Purchaser”). Pursuant to the Agreement, the Company issued to the Purchaser the Senior Note in the initial principal amount of $8. Pursuant to the Agreement, the Company issued to the Purchaser 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 was in the original amount of $6.2 million was used to repay the Company’s then-existing bank debt which was in the original amount of $6. 1 million; (ii) $1.275 million to repay the portion of the Company’s outstanding subordinated convertible debt the maturity date of which most had not previously been extended; (iii) payment of debt issuance costs; and (iv) for working capital or other general corporate purposes, including development of new Company-owned Craft Pizza & Pub locations.275 million was used to repay the portion of the Company’s outstanding subordinated convertible debt the maturity date of which most had not previously been extended; (iii) debt issuance costs; and (iv) the remaining net proceeds were used 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 SOFR, as defined in the Agreement, plus 7.75%. Interest is payable in arrears on the last calendar day of each month. In addition, the Note requires non-cash payment-in-kind interest (“PIK Interest”) of 3% per annum, which is added to the principal amount of the Senior Note. In addition, the Note requires payment-in-kind interest (“PIK Interest”) of 3% per annum, which is added to the principal amount of the Senior Note. The Senior Note matures on February 7, 2025. Beginning February 28, 2023, the Senior Note requires fixed principal payments in the amount of $33,333 per month during February 2023 and $83,333 per month continuing until maturity. In conjunction with the Senior Note, the Company issued to the Purchaser a warrant (as amended, the “Corbel Warrant”) to purchase up to 2,250,000 shares of Common Stock. In conjunction with the Senior Note, the Company issued to the Purchaser a warrant (the “Corbel Warrant”) to purchase up to 2,250,000 shares of Common Stock. The Corbel Warrant, as amended in September 2023, entitles the Purchaser to purchase from the Company, at any time or from time to time: (i) 1,200,000 shares of Common Stock at an exercise price of $0. The Corbel Warrant entitles the Purchaser to purchase from the Company, at any time or from time to time: (i) 1,200,000 shares of Common Stock at an exercise price of $0. 30 per share (“Tranche 1”), (ii) 900,000 shares of Common Stock at an exercise price of $0.57 per share (“Tranche 1”), (ii) 900,000 shares of Common Stock at an exercise price of $0. 30 per share (“Tranche 2”), and (iii) 150,000 shares of Common Stock at an exercise price of $0.30 per share (“Tranche 3”).97 per share (“Tranche 3”). The Purchaser is required to exercise the Corbel Warrant with respect to Tranche 1 if the Common Stock is trading at $1.40 per share or higher for a specified period, and is further required to exercise the Corbel Warrant with respect to Tranche 2 if the Common Stock is trading at $1.50 per share or higher for a specified period. Cashless exercise of the Corbel Warrant is only permitted with respect to Tranche 3. The Purchaser has the right, within six months after the issuance of any shares under the Corbel Warrant, to require the Company to repurchase such shares for cash or for put notes, at the Company's discretion. The Corbel Warrant expires on the seventh anniversary of the date of its issuance. The Corbel Warrant expires on the sixth anniversary of the date of its issuance. Additionally, the Company previously issued certain units (the “Units”) consisting of a Note in an aggregate principal amount of $50,000 and warrants (the “Warrants”) to purchase up to 50,000 shares of the Company’s Common Stock at a price of $1.00 per share.57 per share. Following the refinancing described above, $575,000 in principal amount of Notes and the associated Warrants remain outstanding, however, per the terms of the agreement, the Warrants were re-priced to $0.30 per share.57 per share. Notes with an outstanding principal balance of $150,000 matured and accompanying Warrants expired January 31, 2023, however a $50,000 note was repaid to Margaret Huffman with the approval of Corbel. The principal amount of $100,000 such Notes cannot be repaid until Corbel’s loan is paid because the Notes are subordinate to such loan. The maturity of the Notes with an outstanding principal balance of $475,000, and accompanying Warrants, have been extended to February 28, 2025 or the repayment of the Senior Secured Loan, whichever comes first. Risks Related to Human Capital Dependence on key executives. Risks Related to Human Capital Dependence on key executives. The Company’s business has been and will continue to be dependent upon the efforts and abilities of its executive staff generally, and particularly Paul W. Mobley, its Executive Chairman and Chief Financial Officer, and A. Scott Mobley, its President and Chief Executive Officer. The loss of either of their services could have a material adverse effect on the Company. Risks Related to the Company’s Common Stock Indiana law with regard to purchases of the Company’s stock. Certain provisions of Indiana law applicable to the Company could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could also limit the price that certain investors might be willing to pay in the future for shares of its Common Stock. These provisions include prohibitions against certain business combinations with persons or groups of persons that become “interested shareholders” (persons or groups of persons who are beneficial owners of shares with voting power equal to 10% or more) unless the board of directors approves either the business combination or the acquisition of stock before the person becomes an “interested shareholder.” Inapplicability of corporate governance standards that apply to companies listed on a national exchange. The Company’s stock is quoted on the OTCQB, a Nasdaq-sponsored and operated inter-dealer automated quotation system for equity securities not included on the Nasdaq Stock Market. The Company is not subject to the same corporate governance requirements that apply to exchange-listed companies. These requirements include: (1) a majority of independent directors, although the company does have a majority of independent directors; (2) an audit committee of independent directors, instead the Board as a whole acts as the audit committee; and (3) shareholder approval of certain equity compensation plans or equity issuances. As a result, stockholders do not have the same governance protection as they would for a stock traded on a national exchange. Thinly traded stock. The market for the Common Stock is limited, meaning that an investment in the Company’s stock is less liquid than in a stock listed on a national exchange with a higher average trading volume. Thinly traded stock The market for the Common Stock is limited, meaning that an investment in the Company’s stock is less liquid than in a stock listed on a national exchange with a higher average trading volume. Because of this, attempts by one or more stockholders of the Company to sell significant amounts of stock may result in an imbalance in the market that materially decreases the trading price of the stock which could continue for an indefinite period of time. Accordingly, the traded price of the stock may not reflect the Company’s equity value. Additionally, there is no assurance that the Company’s stock will continue to be authorized for quotation by the OTCQB or any other market in the future. Activities of activist group of investors. BTB Brands, Inc. (“BT Brands”) and its CEO and principal shareholder, Gary Copperud (“Copperud”), launched a proxy contest to elect Copperud to the Company’s board of directors at its 2023 annual meeting. BT Brands, Copperud and Kennth Brimmer, BT Brands CFO, reported beneficial ownership as a group of 1.9 million Company shares. BT Brands, (NASDAQ; BTBD), purports to operate 18 restaurants of various formats. For the fiscal year ended December 31, 2023, BT Brands reported a net loss of $887,368 ($0.14 per share) on sales of $14 million after tax benefit of $145,000. BTBD stock price has declined by over 42% over the past 52 weeks and its market capitalization currently is approximately $10.7 million.0 million. Upon review, the Company determined that BT Brands had not complied with the express requirements for a shareholder nomination and had misrepresented its record ownership of the Company’s shares in their submission to the Company for the nomination required under the Company’s By-laws. Accordingly, Copperud was disqualified as a nominee. The Company’s Board determined that Mr. Copperud was not a suitable Board candidate given his background of unsuccessful business ventures and misconduct in pursuing the election contest. BT Brands and Mr. Copperud filed a lawsuit in Federal Court and also filed for a temporary restraining order and preliminary injunction requiring the Company to permit Copperud to stand for election despite admitting that he had not met the requirements to do so. The Company has to date incurred $181,570 of direct expenses in successfully defending against BT Brands and Copperud. The Company may incur additional expenses if BT Brands or Copperud again takes action the Board determines is not in the best interest of all shareholders. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM IC. ITEM 1B. CYBERSECURITY In many areas, the Company is dependent upon computer systems, devices and communications networks to efficiently collect, process and store data necessary to conduct many aspects of its business. For example, the Company: This list is not exhaustive and is only meant to provide a sampling of the types of information the Company collects, stores and processes directly. Failure of the Company or its franchisees to comply with these laws and regulations could have an adverse impact on the Company, its operations, financial results or reputation. Additionally, the Company uses third parties to assist in some services, such as health insurance, third-party home delivery services and third-party web ordering services. These third parties are also subject to cybersecurity risks, and the Company can have no assurance that their cybersecurity measures would prevent security threats from being successful. The Company recognizes the importance of protecting both its information and operations from threats that could disrupt its business or compromise the Company’s customer, franchisee and employee data. the Company’s cybersecurity is implemented and maintained using security procedures, hardware, software and services that are reviewed and updated as needed on a periodic basis. As of the date of this Annual Report, the Company is not aware of any previous cybersecurity breaches that have materially affected the Company. However, the Company acknowledges that cybersecurity threats are continually proliferating and evolving, and the possibility of future cybersecurity incidents remains. Security measures cannot guarantee that a significant cybersecurity attack will not occur. While the Company intends to devote increasing resources to its cybersecurity measures beyond those currently in place and designed to protect systems and information, no security measure is infallible. As discussed, the Company relies on many third parties for various aspects of its data collection, processing and storage, and thus also relies on those third parties to provide continuing cybersecurity but does not control their ability to do so. The Company’s management, as a result of efforts by Company employees as well as external experts, who may be consulted from time to time, will report on the Company’s cybersecurity efforts to the entire Board of Directors on a periodic basis. . S.