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Our initial writeup of Noble Roman’s, in November, 2016, detailed the historical background of this forty year old brand. Our subsequent update in February, 2017 made reference to the $2.4 million convertible debenture offering that had been completed, as well as the late January opening of their new prototype fast casual “Noble Roman’s Craft Pizza and Pub”. The newly opened location was intended to be their expansion vehicle of the future, both for company operated locations and franchising, but of course its success was uncertain at the opening.

We have provided our previous two writeups below  for reference purposes. The information provided at that point is largely still applicable, with the exception that the grocery distribution of Noble Roman’s product has been down slightly, while the non-traditional licensing to C-stores and other outlets has grown modestly. Of these two outlets, the latter seems to  have the most predictable potential for further expansion, at least in the short to intermediate term.

This update applies largely to the very positive performance of the first “Craft Pizza Pub”, now eight months into its first year, as well as the profoundly positive re-structuring of the corporate balance sheet.

The prototypical Westfield, Indiana (suburban Indianapolis) location is a little over 4,100 square feet, located in a strip center. While somewhat similar to other fast casual entrants into the pizza segment such as Blaze and MOD, it  is materially differentiated. Most importantly, as a strategic overview, the Noble Roman’s brand is recalled with nostalgia by midwestern consumers, as evidenced time and again by social media commentary related to the new location. The long history, serving excellent pizza products has obviously become a substantial corporate asset. In the store: ordering takes place at the counter, with a long list of toppings to be chosen, food runners deliver the product to dine-in guests. Two styles, traditional and thick (“Sicilian”) crusts are offered at the same price. Pies can be “personal”  or “family”  size. The menu also offers a selection of made-to-order salads, fresh cooked pasta, baked subs, hand-sauced wings, a selection of desserts, and the long famous breadsticks served with spicy cheese. There is a “dough room” that customers observe as they wait to order and a “Dust & Drizzle Station” in the dining rooms where guests can further customize their pies with olive oil, honey and Itialian spices. There is a children’s menu offered as well. Another distinction is the bar with a dozen seats and several TVs for sports viewing, with additional TVs strategically placed in the dining room. Beer and wine is featured with 16 different bars on tap, both national and craft brands offered. Wines include 15 affordably priced options by the bottle or glass, matching the pizza and food selections in terms of price/value. Many of the pasta, sandwiches and desserts are priced well under $10.00. The Noble Roman’s pizza products have stood the test of time, and the customer commentary seems to be positive as well relative to the other products offered.

All of the above is impressive in terms of conceptualization, but means nothing if the numbers are not produced. Fortunately, the performance has substantially exceeded expectations, with the store consistently above $35,000/week, mostly close to $40k,  in its first eight months, with an EBITDA margin in the high 20% area, even with the normal inefficiencies of a prototype in its early months. The investment in this first location approximated $500k. If the store generates $1.8M, which seems assured, with a  27% EBITDA margin, the cash flow generation would be $486k, and the store would pay for itself in about one year, obviously a very impressive performance from this first location. Plans for additional company locations are of course contemplated, and we  will come back to this subject after the following balance sheet update.

The Company has been laboring for several years under the burden of a balance sheet with too much debt at too high an interest rate. This situation has been largely the result of the abortive entry into the “Take ‘n Bake” business, which has now been discontinued. The apparent EBITDA of $3M over the last couple of years has been largely absorbed by debt service, and the $2.4M convertible debenture offered early in 2017 was a “bandaid”,  to be employed as the Company has worked on an overall long term restructuring of its balance sheet. Fortunately, and to their credit, the Company announced last week an impressive restructuring of their balance sheet, at an interest rate that will provide far less of an ongoing burden. A term loan of $4.5M has been put in place, payable on a 7 year amortization schedule, with a 5 year maturity. The interest rate will be LIBOR plus 4.25% which currently would amount to 5.5%. As a result, the monthly debt service will be reduced by more than $150,000/month. Additionally, a term loan arrangement of $1.6M is now in place to finance three additional Craft Pizza and Pub locations. Each unit will have a separate term loan, interest only for four months, than paid on a 7 year amortization schedule with a 5 year maturity. Obviously, if subsequent locations (also to be close to “home”) come anywhere close to the success of the first location, the rapid cash generation will easily service the affiliated financing.

The result of the developments described above is that Noble Roman’s can rapidly move ahead to build company stores and their franchising effort of the new type of location should have more credibility as well. An initial franchised store is under construction in Evansville, IND, to be opened by yearend. Without considering the potential from franchise fees or royalties, each company store, especially located in and around Indiana, we would expect could do at least $1.5M annually, with cash flow (EBITDA) at the store level of at least 25%. Each new location should therefore generate something like $375k of EBITDA, an obvious material addition to the cash generation at a Company of this size.

There are close to 27M shares fully diluted (including shares issued from the $2.4M convertible bond). As of 6/30/17, excluding the convertible bond, there was $3.4M of short and long term debt, to be paid off from the new financing.   At $.63 per share, the total enterprise value is just at $20M. It seems clear that the newly designed Craft Pizza and Pub has strong regional appeal, at the very least, and could usher in a new era of growth for Noble Roman’s.

It is noteworthy that just in the last few days, a Board Member, Marcel Herbst, has purchased 169,000 shares in the open market, which is (from what we can find)  the largest open market purchase by an insider in the long history of NROM public ownership. He was also a participant in the convertible debenture offering, and his total ownership is now on the order of 1 million shares.




February 22, 2017

Since full year ’16 earnings have not been reported, the writeup is still current, except for two material developments:

(1) The Company’s private placement of a convertible debenture, as described in our previous writeup,  was oversubscribed,  with $2.4M raised.

(2) The “new generation” fast casual pizza restaurant, approximately 4,000 square feet, opened on schedule on January 31st. Initial results have “exceeded expectations”, in the company’s words, as first week sales were reported to be just over $38,000. As the Company pointed out, a honeymoon period may be part of the successful opening, but major recreational, commercial, and healthcare facilities are opening within months that should benefit the location.

There will obviously be further disclosure relative to the “new” Noble Roman’s, as well as the other aspects of company operations as described in our report from several months ago. Observers and investors should take note that while the corporate finances have improved substantially with the funds recently raised, and the assumed cash flow from the new location, the number of shares outstanding, fully diluted has expanded from the area of 21 million to approximately 26 million shares. Of course, several million dollars of additional capital will come in from the exercise of the relevant warrants.


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