NOBLE ROMAN’S (NROM) REPORTS YEAR END RESULTS – INTEREST EXPENSE IS A BURDEN BUT NON-TRADITIONAL FRANCHISING HAS GAINED MOMENTUM AND A NEW GOVERNMENT GRANT WILL PROVIDE A MARGIN OF SAFETY

Restaurant Finance Monitor
Print Friendly, PDF & Email

Our previous articles regarding Noble Roman’s are available by way of the SEARCH function on our Home Page.

THE FOURTH QUARTER

For the quarter ending Dec ’22 the company reported a net loss of $873K on Revenues of $3.3M vs. a loss in ’21 of $324k on Revenues of $3.6M. The fourth quarter revenue of ‘22 was penalized $180K and expenses were penalized by $235k of adjustments related to prior years and $150k to lower the deferred tax asset.  Combining those amounts the net loss would have been $307k for the quarter ended December 31, 2022 compared to $324k loss in the quarter ended December 31, 2021.

Revenues from the nine Craft Pizza & Pub locations was $2.33M vs. $2.44M, down 4.5%, primarily because the most recently opened two locations were comparing against their honeymoon periods in Q4’21. The EBITDA store level contribution was $230k (9.9% of revenues) vs. $277k (11.3%), largely due to facility costs (17.3% vs. 15.5%), primarily due to the latest two locations.

Revenues within the franchising division were $784k, down from $1.014M, the reduction due to an adjustment of prior years’ allowance of $180k and additional adjustments of $235k as a “reserve for possible uncollectables, which in the opinion of management were not necessary except to be ultra-conservative”. Gross margin in this venue decreased from 51.0% to 5.4%, due to “a decrease in revenues of approximately $180k and an increase in expense of approximately $235k.  Considering only current operations, the margins for this venue for the 4th quarter would have been $458k, Going forward this venue has been showing new growth activity and both the revenue and margin is expected to achieve or exceed historic levels in upcoming periods”.

THE YEAR ‘22

The full calendar year of ’22 showed a net loss of $1.056M on revenues of $14,453 vs. net income of $509k on revenues of $13.885M in ’21. Adding back the $525k of Q4 non-cash adjustments described above plus $450k of D&A and $1.626 of interest provides Adjusted EBITDA of $1.545M. This compares to about $2.5M in calendar ’21. The decline of EBITDA was due to a lower contribution from the Craft Pizza & Pubs, primarily because 2021 benefited from the PPP loan at that time, and higher G&A, much of it to support the intensified effort within the non-traditional franchising segment.

The CPP division reported $9.7M of revenues, up from $8.9M, due to the latest two openings and same store sales increases from older locations. EBITDA store level margins decreased from 19.2% of sales, to 12.3%, “primarily the result of the PPP loan in 2021 and partially the result of increase in wages and other costs, mostly offset by menu price increases. The Company initiated a second price increase during Q2’22….the largest impact was the impact of the PPP loan in ’21 to offset certain expenses.” In terms of the outlook: “Our CPP segment is now operating at much improved staffing levels, and newer managers and employees are gaining valuable tenure and experience.”

OTHER FINANCIAL DEVELOPMENTS

Management learned “well after year-end and just shortly before the beginning of the audit, of the acquisition of our auditing firm by another company…the acquiring accounting firm will not be supporting public company audits in the future….a high priority will be…..to contract with a new firm in a reasonably short timeframe.” CFO, Paul Mobley, stated on the conference call that “it is not anticipated that the statement of operations will in any way change from what has been reported and the form 10-K will be filed as soon as possible.”

The Company expects a refund, under the Employee Retention Credit government program, of $1.718M, plus accrued interest since 2020. After relevant expense the Company expects, including interest, something over $1.5M, to be received in tranches over the course of calendar ’23.

The Company has recently begun to make monthly principal payments of $83,333 against the long-term debt (including the current portion $.8M) of approximately $8.3M that becomes due in February ’25.

FUNDAMENTAL DEVELOPMENTS

Non-traditional locations

The most significant tangible development is the new momentum within the franchising of non-traditional locations. In spite of the tail end of Covid still affecting potential franchisees, 31 new non-traditional locations opened in ’22, versus 24 in ’21. In the first quarter of ’23, 11 new deals have been signed, 10 have been opened and “fifteen locations are in various stages of preparing to get open, including 3 openings in the next 2 weeks.”

CFO, Paul Mobley, elaborated on the conference call that “in late 2022 and early 2023, we sold two franchises each to two different larger groups that have potential of expanding into multiple units each. One of those groups has now opened two locations and one has opened one and will be opening a second in a few days. The last group is doing extremely well with the first locations and is now discussing the likely possibility of entering a development agreement for 100 locations over the next two and one half years. The other group is extremely satisfied but is more cautious and wants those two stores to be open a few months before they do major expansion.”

According to CEO, Scott Mobley, “barring any sudden, negative changes in the economic climate, we believe it is very possible for both revenue and margins in this segment to meet or exceed historic levels.”

Craft Pizza & Pub locations

Dining room sales are up, versus last year, to 55-57%, versus 80% pre-covid. Third party delivery has fallen off, apparently as consumers react to the increased cost of that service. The Company is about to launch their own online platform, using DoorDash as the delivery provider. DoorDash will capture the delivery fee and Noble Roman’s will collect the full order amount. It will be a better value for both the guest and the Company, so hopefully will improve sales by way of this venue.

The Company is also creating its own app that will ease order placement and include a loyalty reward program, anticipated to be ready “in a matter of a few weeks”.

In terms of franchising CPP locations, the Company will be exhibiting at MUFC in Las Vegas in late April, in an attempt to develop new franchisee possibilities.

OUR SUMMARY

On the bright side:

  • Labor availability has improved, and could help to improve CPP store level margins in ’23.
  • The intensified focus on non-traditional franchising is starting to pay dividends.
  • The Company expects to receive something more than $1.5M including interest from the federal Employee Retention Credit program.
  • A new 6%+ stockholder  has proposed a short-term (two year) loan to the company to reduce a portion of its debt to Corbel. The company has declined the proposal as not in the best interest of the company and in violation of its senior note agreement with Corbel. Uncertain though it is, new interest validates the upside potential at Noble Roman’s.

CONCLUSION

The overriding corporate limitation for Noble Roman’s, especially in terms of company store expansion, is the $8M of long term debt, carrying an interest rate, including PIK, of approximately 15%. (The higher indicated interest rate is due to amortization of costs incurred in the course of acquiring that debt.) The principal is now being repaid at $83,333/month, with the total amount due in early ’25, so operating cash flow is largely absorbed in this manner.  Fortunately, the $785k of cash as of Dec ’22, augmented by anticipated operating cash flow and the receipt of over $1.5M of ERC funds, should allow for servicing of that debt, but most of that $8M will need to be replaced within 24 months, hopefully at a materially lower interest rate than is currently the case. In this regard, the Company, prior to Covid, was generating about $3M of EBITDA, though much of that was absorbed by debt service and legal expenses, the last of which is no longer a factor. Projecting forward twenty-four months, if the previous $3M of EBITDA has been re-established, $8M or more of new financing should be available at an interest rate well below the current level. The operative phrase, of course, is “if the previous $3M of EBITDA……”.

An important current positive is the newly established growth within the non-traditional venue, and the most recent possibility of signing one or more major multi-store agreements. It is worth noting that initial franchisee fees, though received up front, are amortized over the life of the contract rather than reflected in current revenues. The current cash flow from initial fees from 30-40 or more openings will, of course, be useful. The 7% royalties will be reflected as sales are generated and will be reflected in the current P&L.

The new stockholder, a publicly held company with $7.2M of cash on hand as of 9/30/22, has purchased about 6% of the common equity, and proposed a short-term loan to the company to reduce a portion of its debt to Corbel. While, as we said above, the company has declined the proposal as not in the best interest of the company, their interest validates the long-term potential at Noble Roman’s and could encourage other equity or debt participants.

Roger Lipton