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NOBLE ROMANS, INC. (NROM) – REPORTS MARCH QUARTER – UPDATED WRITEUP

NOBLE ROMANS, INC. (NROM) – REPORTS MARCH QUARTER – UPDATED WRITEUP

Indianapolis based Noble Roman’s, Inc. (NROM)  reported their first quarter, ending 3/31, as described below. Our previous writeups relative to NROM are available through the SEARCH function on our Home Page:

CONCLUSION:

Noble Roman’s (NROM) is one of the smallest publicly held restaurant companies, but  seems to enjoy a good reputation in the markets, especially Indiana and surrounding areas, where they have operated for decades. The recently improved balance sheet,  the continued profitability  of existing company operated Noble Roman’s Craft Pizza and Pub (NRCPP) locations (including the mid-pandemic exceptional opening in Brownsburg),  the maintenance of company wide operating profit through the pandemic, the ongoing prospect for successful franchising of both NRCPP units and the non-traditional venue should allow for a new growth period for the brand. The number of fully diluted shares is about 25M (down about 10% as a result of the new financing) so the enterprise value (including $8.5M of debt) is comfortably under $20M. A large portion of the $3M EBITDA the last several years has been used to service debt, but a much higher percentage should be available to support growth in the future. As we like to say, we are all living in a new world, and Noble Roman’s is no exception.

MARCH QUARTER RESULTS

Results, as with all companies, were influenced by the pandemic in the three months ending March. Total revenues were $2.719M compared to $2.922M in 2019. Operating profit before interest and taxes was $589k compared to $754k a year earlier. Heavy interest charges this year ($926k, of which $718k was non-cash), partially offset by a tax benefit of $82k,  provided a GAAP loss of $255k (vs. a GAAP profit of $476 in 2019). The weighted average shares outstanding was reduced to 22.853M vs. 25.585M, due to fewer fully diluted shares after a constructive balance sheet restructuring.

The highlights of the quarter, as outlined in the corporate release, were:  a new $8M debt package, plus obtaining a $715k loan from the PPP which is expected to be forgiven, the highly successful opening of the 5th company operated NRCPP,  the $321k Adjusted Net Income, after adding back the $658k writeoff of non-cash interest of unamortized previous debt costs.

The franchising division (royalties and fees from non-traditional locations, NRCPPs franchising, grocery store royalties and fees) provided revenues of $1.467M vs $1.593M. Royalties and fees were virtually the same for the non-traditional venue at $1.278M vs $1.287M and the decline was in the grocery segment ($189k vs $305k) as labor became an issue in the deli departments of grocery stores when the pandemic hit. The margin contribution was $.977M vs. $1.098M, a still impressive 66.6% of revenues, vs. 69.0% in 2019.

The company operated Noble Roman’s Craft Pizza and Pub division, including the latest location that opened in Brownsburg, IN on 3/25, generated $1.092M vs. $1.143M. The store level EBITDA margin (after about 1.0% of non-cash rent expense) was $121k (11.1%) vs $132k (11.5%). Revenue was increased by the Brownsburg opening on 3/25 but the State of Indiana closed all dining rooms on 3/14. We estimate that sales for the four locations  (prior to Brownsburg) were slightly positive in January and February before pandemic concerns affected sales starting in early March. Cost of sales was 21.6% vs. 20.8%. Labor expense was 29.1% vs 32.0%. Facility cost was 18.6% vs. 17.6%. Packaging cost was 2.8% vs 3.6% Delivery Fees was 3.2% vs. 1.3%. Other operating expenses was 13.6% vs. 13.2%. Total store level expenses were 88.9% vs 88.5%.

There is a third operating division, relatively immaterial, in which the company operates one non-traditional location. That location generated $154k in revenues and $2.4k in EBITDA  margin, vs. $170k and $16.8k. This division is not expected to grow.

NROM had previously announced that the Brownsburg location, opened at the peak of the pandemic on 3/25, without the normal inside dining, generated over $50k of weekly sales in its first week. The Company has since indicated  that Brownsburg is still generating weekly volume in the mid-thirties, the highest of the five existing locations, obviously very encouraging.

The new $8M five year debt package was closed, fortunately, in early February, providing liquidity to ride out the pandemic storm as well as provide growth capital once the health crisis abates. The Company has described that the interest rate is high at LIBOR plus 7.75% plus 3% of annual PIK interest, added to the loan principal, plus warrants, but there is no principal due for several years and previously issued warrants have been eliminated. The result is $33,333 of debt service on the $8M, plust $60k per year on the remaining convertible debenture for the next several years (less than half the previous debt service), reduction of about 2.5M fully diluted shares, and $1.6M of additional funds that will come in from the new warrants. The proceeds paid off all previous bank debt and the convertible debt that had not been extended and provided capital for approximately four new locations, including Brownsburg.

Per the Conference Call:

Relative to the most important growth segment, the NRCPP locations, Scott Mobley, CEO, described how dining rooms were closed on 3/14. Prior to the pandemic, off-premise sales were about 20% of the total. He had indicated previously that sales bottomed at  a relatively modest  30% decline from pre-Covid levels, as a result of the success of the year old Pizza Valet curbside pickup  service. Several weeks ago, the Governor of Indiana allowed dining rooms to open at 50% of capacity. Since then, sales have increased steadily so are most recently running down 20-25%. On-premise sales are about 30% of the total and the increase is a combination of fresh on-premise revenues, while cannibalizing a portion of the previous off-premise increase. Mobley informed listeners that it had just been announced that dining rooms can operate at 75% of capacity this coming Friday. Mobley volunteered that staffing is always a concern, but less so for NROM than many others since store level staff was largely maintained through the pandemic.

Scott Mobley also pointed out that some of the non-traditional franchisees, hospitals, c-stores, etc. were challenged by staffing over the last several months. Some, like entertainment centers and bowling alleys are completely closed. Hospitals have generally not allowed visitors. Sales within this venue are expected to recover and grow over time, but he cautioned that the rate of recovery is uncertain and could be slower than desired.

Paul Mobley, CFO, pointed out that the increase in A/R was largely the result of a $77k A/R from the landlord in Brownsburg, which was collected in April, and a $50,000 increase in A/R from manufacturers, which is now current. The Company currently has a cash balance of $1.4M so should be able to comfortably fund the addition of 3 more stores over the next nine months. In response to a question, he indicated that the Company should be cash flow positive in Q2 and the balance of the year, obviously assuming that there is no major macro-economic and/or health related disruptions. He also indicated that both existing franchisees of the NRCPP are interested in building new locations. The franchisee in Lafayette is already developing a unit in Kokomo, IN, targeted to open later this summer, and the Evansville franchisee is evaluating possible new locations, yet to be selected and financed. Mobley also indicated that he is having serious discussions with a potential new franchisee, but that is yet to be finalized.

CONCLUSION: Provided at the beginning of this article

Roger Lipton

NOBLE ROMANS, INC. (NROM) – UPDATED WRITEUP

NOBLE ROMANS, INC. (NROM) – UPDATED WRITEUP

CONCLUSION

It’s a fresh start in our new world for Noble Romans, Inc. (NROM), a fifty year old well established Midwest brand. Their flagship Noble Romans Craft Pizza and Pubs survived the pandemic relatively well and an $8M financing in early February significantly improved their balance sheet. Though NROM is one of the smallest publicly held restaurant companies, with an enterprise value of under $20 million, we continue to follow their progress because the stock seems to represent good value statistically and there continues to be substantial potential for growth.

THE COMPANY

2019 RESULTS Noble Romans, Inc. (NROM) reported calendar 2019 results last week. We have written a number of articles describing NROM, which can be accessed through SEARCH and under Corporate Descriptions. In order of current importance: Indianapolis based NROM Romans operates five Noble Roman’s Craft Pizza & Pubs (NRCPP) in their home market, is actively looking for several additional locations, franchises two NRCPP units in Indiana with a third under development, franchise/licenses about 640 non-traditional locations (c-stores, entertainment centers, hospitals, etc.) all over the US and have licensed 2,402 grocery stores to sell Noble Roman’s products made fresh in their deli departments.

The largest source of revenues, $6.2M in 2019, comes from royalties and fees, including $1.136M from the grocery store venue. The least important segment currently is the grocery venue, declining in recent years ($1.423M in ’18) as a strong economy limited labor availability to assemble pizzas in the deli departments. Though that could improve in the post-pandemic  world,  Noble Roman’s has focused  on franchising, both the NRCPPs and non-traditional  venues. The four NRCPPs generated $4.8M in 2019. Details of these operations, as well as the 50 year history of the brand are described in our previous reports. As shown in the table below, there were a number of fourth quarter non-cash adjustments, so the full year operating results, combined with the balance sheet improvement, from ’19 to February’20, are most relevant to the prospects.

The table above is excerpted from the ’19 10-K. The Franchising division generated revenues of $6.2M in ’19, down from $6.4M, as grocery fees declined, partially offset by an increase in non-traditional and NRCPPs fees.  The margin contribution was $4.071M vs. $3.794M, up 7.3% YTY, and the margin improved sharply to 66.0% from 59.0%, as operating expenses were reduced. The 4 NRCPPs that were operating in ’19 generated $4.8M of revenues, exactly flat with ’18. Food and Packaging Cost was 24.1% vs 24.6%. Labor was 30.0% vs. 31.4%. Though those Prime Costs were well controlled, Facility Costs (including common area charges, and a $134,544 non-cash accounting required rent adjustment, ASU 2016-02 accounting for leases) jumped to 17.2% from 13.6% and Other Operating Expenses (including marketing, delivery charges, and insurance, the latter two of which are expected to be lower in ‘20) jumped to 16.7% from 11.6%. Store level margin contribution therefore declined to 12.0% from 18.8%. Adding back the $134,544 non-cash rent charge, the margin contribution was a more respectable 14.8%. The Company also operates one non-traditional location, down from three a year earlier. That small venue generated $48k of operating cash flow, up from $12k in ’18. General & Administrative Expenses were $1.74M in ’19, up 4.2% from $1.67M in ’18, preparing for growth which was delayed until the new financing  took place in February,  2020.

BALANCE SHEET

The 12/31/19 balance sheet, although important, and improving through ’19, was dramatically restructured in early February 2020. Immediately after the restructuring in early February, the company had current assets of approximately $4.4M and current liabilities of $1.1M, or net working capital of $3.3M, for a current ratio of 4-to-1. At 12/31/18 and 12/31/19, the company reported net A/R from franchisees of $4.4M and $4.0M, respectively, each of which were net of valuation allowances of $4.3M and $5.6M, respectively. These A/R adjustments  in large part go back to 2014-2015, arising from contract breaches of approximately 80 non-traditional franchisees. The receivables include NROM legal costs, as spelled out in the franchise agreements.

Immediately after the balance sheet restructuring in early February, the company had two pieces of long-term debt. The largest is an $8M note due in 2025 which has no required principal payments due until 2/28/23 at which time monthly principal payments begin in the amount of $33,333 and continue until maturity. The new note bears interest of LIBOR plus 7.75%, plus 3% payment in kind to be added to the principal. There are also principal payments due based on consolidated excess cash flow as defined. As management said on the conference call: “We know full well that this is expensive financing. However, it was the best we had available…we made the decision in early 2020..to start growing and carry out our business plan….we closed just in time…so fortunately we had the liquidity to both withstand the Covid-19 changes and continue growing our business at the same time.” Also, while warrants were attached to the new financing, retirement of warrants attached to the previously outstanding convertible notes result in a net reduction of about 2.9M shares, from about 28M to 25M. Cash provided by the exercise of the new warrants would also generate an incremental $1.6M from the new warrants, which could be used for additional growth.

The other long-term debt is $625k of subordinated convertible (at $0.50/share) unsecured notes which mature 1/31/23. With no required principal payments on either piece of debt until 2023, the annual amount of cash to service its debt is approximately $800k, versus about $1.5M previously.

Additionally, on April 25th, the Company borrowed $715k under the PPP, which the Company anticipates will be forgiven in accordance with provisions of the CARES Act.”

THE NEW WORLD FOR NOBLE ROMAN’S, ALONG WITH EVERYBODY ELSE

Management was working on the new financing package prior to the pandemic, as well as constructing their fifth NRCPP location. The first of the two successful NRCPP franchisees was also moving forward with an additional location, in Kokomo , IN, which is currently under development. The result of the above described financing is that previous debt is repaid and the Company has the funds to open four new NRCPPs in the near future, one of which has already opened. While the financing is expensive, as management says, the lack of principal payments, which the Company was making with the previous financing, provides substantial additional free cash flow for the next several years.

The pandemic has obviously produced major adjustments. Since sales at the NRCPPs were not disastrous, store level managers were maintained at full salary and most crew members were retained. The NRCPP units were previously doing about 20% of their sales off-premise. The Company had fortunately introduced a “Pizza Valet” curbside pickup approach about a year ago, as well as working with, though not promoting, third party delivery services. That emphasis served them well and sales, according the conference call, have been running down YTY a relatively modest 30%. Other changes made in the last year included a modified dough formula that travels better and a new carry out box that holds temperature more effectively. Dining rooms have reopened at 50% of capacity as of 5/11, two weeks ago today and  it is anybody’s guess how fast and how far dining room activity rebuilds.

The fifth Company operated NRCPP opened on March 25th in Brownsburg, IND,  a small city just outside of Indianapolis , and did an extraordinary $50000+ in its first week.  It goes without saying that the reception of the Brownsburg community, in the heart of the Coronavirus pandemic, speaks volumes about the value, and the potential for growth, of the Noble Romans brand. As President, Scott Mobley, described it on the conference call: “in my thirty years of industry experience I have never seen anything like it….during the first two days of opening, the entire lot, maybe 200 parking spaces were occupied at one time, with a line of cars 20 deep along the street to enter the parking lot….. we ended up having to make numerous system adjustments on the fly as well as instituting controls on the order rate”. He indicated later in the call that Brownsburg is still doing an impressive $36,000/week.

Relative to non-traditional locations, specifics were not given about sales levels, other than indicating that they vary widely between convenience stores, entertainment facilities, hospitals, etc. Scott Mobley did indicate that a new product extension is planned for the non-traditional venue that will target existing franchisees as well as new ones. It is an entirely new sales opportunity, has been tested, and several franchisees have already shown interest. Scott Mobley indicated that this development could be significant, indicating his comment was just a teaser in terms of potential benefits.

Another significant development is the creation of new somewhat  smaller version of the NRCPP, 3,600 sq.ft., down from about 4,200 sq.ft. This new version incorporates what has been learned about off-premise service, improving the carry out option for both the Company and the customer, at the same time maintaining the seating capacity and ambience of the full service experience.

CONCLUSION: Provided at the beginning of this article

NOBLE ROMANS, INC. (NROM) – IMPORTANT NEW FINANCING ALLOWS FOR RENEWED EXPANSION

NOBLE ROMANS, INC. (NROM) – IMPORTANT NEW FINANCING ALLOWS FOR RENEWED EXPANSION

.The following update should be read in conjunction with our previous descriptions of the corporate developments of NROM, which can be accessed with the SEARCH function on our home page. There have been no operating results reported since those of 9/30/19 so our further update in that regard awaits the audited yearend report.

Noble Roman’s announced last week the most substantial financing in recent years, allowing for consolidation of previous debt, reducing potential equity dilution, and providing funds for renewed expansion.

The new financing consists of an $8M Senior Secured Promissory Note and Warrant Purchase Agreement. It has allowed for retirement of the $4.2 million previous bank note (down from the original $6.1M) as well as $1.275M convertible subordinated debt. The portion of the $8M above the $5.5M debt repayment will be earmarked for the construction in 2020 of three new Craft Pizza and Pub (NRCPP) locations as well as general working capital and the debt issuance cost. That will bring the company-owned total NRCPP locations to seven, targeted by 12/31/20.

COMPARISON OF NEW DEBT WITH OLD

The new note bears an interest rate of LIBOR plus 7.75%, which at the current time would be about 9.4%, plus “payment-in-kind, ‘PIK'” interest of 3%, which will be added to the principal amount of the note. The note matures on 2/7/2025 and does not require principal payments until 2/28/2023 when monthly principal payments of $33,333 will commence and continue monthly until maturity. There are warrants, which mature in  6 years, attached to the new note, to purchase 1.2M shares at $0.57, 900K shares at $0.72 and 150K shares at $0.97. The purchaser is required to exercise the $0.57 warrant if the Common Stock trades over $1.40 per share for a specified period, the $0.72 warrant if the Common Stock trades over $1.50. Only the third tranche (for 150,000 shares at $0.97) can be exercised on a cashless basis, so the first two tranches will provide new funds, when exercised, to the Company at no additional transaction cost. The dilutive result of the new financing (before saving on the old) would then be a total 2.25M shares which will bring in $1.33M of funds to use for growth.

While the total interest rate on the note is obviously steep, NROM management is reacting to the  desirability to renew its expansion of NRCPP units and is confident that the return on investment will be substantially more than the cost of capital. Also, there are prepayment terms that would allow for refinancing (presumably at a more attractive rate) if the company’s financial progress takes place as management expects over the next year or two. Lastly, substantial dilution has been avoided by the retirement of $1.275M worth of convertible debentures (at $0.50/share) with warrants attached at $1.00 per share, all of which (3.82M shares)could have been exercised on a “cashless” basis, without bringing any funds into Noble Roman’s.

The comparative situation therefore provides 1.6M fewer shares of dilution and $1.33M of extra equity capital, clearly an advantageous situation. While $1.9M more debt must be paid down by 2025, the extra $1.33M of capital would provide most of it.

CONCLUSION:

This new financing amounts to what might be considered a fresh start for the expansion plans of Noble Roman’s. Management has new capital for expansion, as well as support of their franchising effort, and the next new company operated NRCPP (in Brownsburg, outside of Indianapolis) is already planned to open in late March.  According to Scott Mobley, President, this new location “will have a surprise addition”, to be described further “close to the grand opening late in March”.

While we await the final operating results from calendar 2019, if developments proceed as planned over the next year or two, NROM should have demonstrated a great deal more progress relative to the build out of company NRCPPs, expansion of the franchise network of NRCPPs, and further expansion of the 700 plus franchised non-traditional locations.

Roger Lipton

NOBLE ROMAN (NROM) REPORTS Q2 – FRANCHISING PROFIT MARGIN IMPROVEMENT IS HIGHLIGHT

NOBLE ROMAN (NROM) REPORTS Q2 – FRANCHISING PROFIT MARGIN IMPROVEMENT IS HIGHLIGHT

CONCLUSION:

Noble Roman’s is steadily earning at an annualized untaxed rate of about $.12/share, with about $15M of tax protected earnings. EBITDA is running at around $3.5M annually, the highest level over the last several years, though a variety of “clean-up” issues have eaten into that calculation.  With a total enterprise value not much more than $15M, this established mid-west brand holds growth potential both with new company operated Pub locations as well as from franchising the Pubs and non-traditional locations. Just as a bank financing several years ago “transformed” the prospects, and allowed the company to create the Pub concept and establish the present much improved situation, a larger financing currently being negotiated promises to take NROM to the next level. Absent that, slower but steady company operated growth, while servicing the current debt, should still be possible, and franchising would take the lead.

OVERALL OPERATING RESULTS

Noble Roman’s Q2 results was consistent with Q1 in terms of increased earnings and EBITDA. Progress in the franchising segment outweighed margin pressure within the Craft Pizza & Pub operation. Net Income, which is tax protected for about $15 million, was $580k, up 5.5% for the quarter and 1.21M, up 11.0% for six months. EBITDA was $877.1k for three months, up 9.2%, and $1.724 for six months, up 9.5%. Both numbers annualize to a $3.5M annual rate (almost exactly the same as calendar ’18), and could improve to a $4M rate with a strong seasonal period ahead. Franchising revenues was essentially flat for three month and six months, with growth elsewhere offsetting a continuing decline in the relatively small grocery store segment. The extreme weather in the winter and early spring affected sales and margins in the Craft Pizza & Pub company stores in the early part of the second quarter, though to a much lesser degree than in the first quarter.

SUMMARY BY SEGMENT

The Noble Roman’s Craft Pizza & Pub remains the most promising portion of the current operations. The four existing company stores, as disclosed in the recent 10Q, generated approximately $900k of store level EBITDA margin in 2018. Considering that these locations cost about $2.4M to establish, that represents a 37.5% cash on cash return. Especially since only one of the restaurants was open more than eighteen months in Q2’19, this represents one of the most attractive returns within the fast casual restaurant industry. In Q2’19, however, the store level margin came down from 22.6% to 15.7%, much of it beyond the company control, and part of which could be recoverable over time. The good news is that prime costs were better in Q2, cost of sales 140 bp better to an impressively  low 20.9%. Salaries and wages also improved by 160 bp to 28.6%. Paper and Packaging was up 10 bp to 2.7%.  Facility costs increased by 310 bp, mostly from an unexpected increase in common area charges based on (supposedly) actual expenses in 2018 and the company has requested an audit of these numbers. While the company cannot predict the outcome of their “negotiation”, we think there could be at least some partial positive adjustment going forward and higher sales would obviously reduce this impact in any event. Other Operating Expenses increased 590 bp to 16.4%. Per the 10Q, 140 bp was an increase in insurance cost (which the company is currently renegotiating), 190 bp was advertising and 150 bp was delivery expense. The advertising expense, not a lot of dollars ($25,000) relative to $1.3M of sales, can obviously be leveraged as more company and/or franchised  locations are built within the trade area. The delivery expense burden will more likely come down than go up, in our view. From a macro standpoint, we believe that the third party delivery agents have seen their best days in terms of margin, and restaurant operators in general will carry less of a burden. Also, Noble Roman’s is doing their best to encourage use of their curbside pickup Pizza Valet service, which is increasingly being embraced by customers. Overall, we view it likely that store level margins can be improved over time, and higher sales would obviously be a big help. In the meantime, the four current operated locations at the current average annualized sales level of $1.33M, are generated an attractive cash on cash return. Relative to the franchising of the Pizza Pub, the first franchised operator, after a highly successful opening in Lafayette, IN., is exploring sites for a second location, and a second franchised operator, in Evansville, IN is expected to open late this fall.

The franchising segment, excluding grocery stores (which has been de-emphasized), reported revenues up 4.5% and 9.8% for three months and six months, respectively. Most impressively, the margin contribution from this segment increased by 850 bp to 66.4% and 960 bp to 67.6%, for three and six months, respectively. In the most recent quarter, salaries and wages came down 520 bp to 10.8%, trade show expense was reduced 80 bp to 6.5%, insurance by 50bp to 4.0%, travel and auto expense by 170 bp to 1.7%.The company noted in their quarterly release that in the period from 1/1 through 8/14, 21 new non-traditional locations have opened versus 17 a year earlier. Also: “the first two weeks’ sales of all non-traditional franchise openings in 2019 have averaged 32.8% higher than openings from previous years.”

The least important segment, in terms of revenue contribution, is the royalties and fees from grocery stores, which came down by $84k to $285k, and by $199k to $590k, for three and six months, respectively. As has been discussed previously, with the labor market tight, grocery stores have been challenged in terms of staffing deli departments, so have been reluctant to take on new products. Noble Roman’s has therefore decided to employ capital and personnel in the two other highly productive and more promising areas.

THE BALANCE SHEET

Cash improved by about $150k between 12/31 and 6/30, while paying off about $400k of bank debt and reducing accounts payable and accrued expenses by about $415k. Current Accounts Receivable went up by about $210k over six months to $1.78M but this is a seasonal factor and the amount is down by about $80k since June 30, 2018. Total Current Assets of $3.6M is 2.7x Current Liabilities. The question of the Company’s ability to repay the $1.9M remaining amount of convertible subordinated notes outstanding, which mature between November ’19 and February ’20 was raised on the Q2 conference call. $675,000 of those notes were voluntarily extended for three years. As the 10Q filing puts it: “the remaining Notes, in the amount of $1.225 million must either be converted into common stock, extended beyond the maturity of the senior debt or replaced with other like securities.” The Company has said that a new financing is being negotiated that would, if finalized, allow for repayment of all existing debt, including the convertible Notes, as well as provide funds for five additional Pizza Pubs. Should that financing not materialize, we view it as likely than any Convertible Notes remaining can be re-marketed for essentially the same terms, with an extended maturity date. It seems obvious to us that a 10% coupon, convertible at $0.50/share, with warrants attached (at $1.00) is a far better piece of paper today than when originally issued in 2017, and the general interest rate environment is even lower today than it was then.

CONFERENCE CALL

CEO and President, Scott Mobley, presided over the Q2 conference call. After financial results were provide in summary form by Chairman and CFO, Paul Mobley, Scott provided an operating summary in which he summarized operating initiatives designed to improve both sales and margins at the company operated Pubs. New sub sandwiches, combo meals and side items are being introduced, using local area marketing tactics. Online ordering, essential these days, has just been rolled out. Though the Company is not advertising the delivery option, relying on their Pizza Valet curbside pickup offering, Grubhub is now joining DoorDash as a third party vendor. A new and improved website is being introduced. Split pricing on the various pizza crusts is being added. Since the Sicilian crust is viewed as a premium product, the price is being raised by a modest $0.25 on the personal size, $0.50 for medium, $1.00 for large. Relative to the non-traditional franchising opportunity, Scott talked about a record setting location on an Indian reservation in Arizona. While no promises are being made relative to building sales at the Pubs beyond the $1.33M annualized level (Per Q2), the company clearly thinks this is possible and is bending every effort to do so.

CONCLUSION: Provided at the beginning of this article

Roger Lipton

P.S. – For more information, consult our full writeup of NROM, accessible from the Home Page @ Corporate Description, Public and Private Companies

NOBLE ROMAN’S (NROM)

Lipton Financial Services

RECENT DEVELOPMENTS, Per Q1’19 Quarterly Release and Conference Call

Our recent full writeup, dated April 3, is provided again, below, with our Conclusion updated in the wake of the Q1 report

The first quarter of 2019 was released two days ago, with management elaboration on a conference call yesterday afternoon.

The highlight of the Q1 report was an update on the post quarter opening, on 5/2, of the first franchised Noble Roman’s Pizza & Pub in Lafayette Indiana. This location, operated by Holly and Patrick O’Neil, franchisee of 18 Dairy Queens in Indiana, averaged $57,000 per week in the first two weeks, perhaps twice the most optimistic expectations. The O’Neils have already subsequently signed on to open their second location, this time in West Lafayette, adjacent to Purdue University. Relative to the first location, all observers are prepared for sales to moderate after a honeymoon period, but sales down the road should still be very impressive and highly profitable. More generally, the O’Neils obviously have the capability to build quite a few more NRCPPs and other potential franchisees will likely surface in the wake of the dramatic results in Lafayette. As demonstrated by the four company operated stores in ’18, store level EBITDA of over 20% (before royalties) is possible, at an average volume of $1.3-$1.4M so higher volumes will obviously be even more profitable.

Per Q1 operating results: As previously disclosed, the abnormally difficult winter weather affected first quarter results, and total revenues was virtually flat at $2.92M vs. $2.95M,  but income before taxes was $627k, up 16.3% year to year, as a result of good cost control in all divisions.  About $15M of earnings is tax protected so taxes will not be a consideration for a  while. EBITDA was $847K, up 9.8%, obviously annualizing to about $3.4M. We should note that cash generation was reduced by $242k, mostly from  outlays that are (contractually) added to long term receivables. Subtracting the $242k from $847k of EBITDA, the conservatively stated $605k of cash generation was promising in a quarter which should be improved upon as the year progresses.

Looking at each division, in order of importance:

The NRCPP saw store level EBITDA margins declined to 11.5% from 21.9%, obviously a function of the abnormal winter weather.  The company release did say that sales rebounded in March, with store level EBITDA at 20.5%. On the conference call, the company further said that weekly sales in April and early May have continued to improve from March levels. The 10Q revealed that March sales were $450,000 for the four stores, which would annualize to $1.35M and be consistent with  previous performance and current expectations. The new Pizza Valet and delivery through Doordash have been well received by customers and promise to add to sales over time.

The total non-traditional revenues were up 3.3% to $1.593M, as non-traditional franchising (C stores, gas stations,  etc.) was up 16% to $1.287M, more than offsetting a decline in the the grocery store segment (which is being de-emphasized, as previously discussed) to only $305k in Q1. It is noteworthy that effective expense control created a margin contribution of 69.0% in this segment, up 1100 bp from 58.0%. 13 new locations have opened in 2019 vs. 8 closed, and the higher volume at new vs. old locations generated the 16% increase in revenues.

In terms of further news, Paul Mobley indicated on the conference call that “we would like to open another five company owned stores over the next 18  months or so…and we’re currently in process of discussions and talks with firms, investors who are interested in that financing, but we–I can’t tell you which ones or what will happen at this point..and that will be debt financing, not equity financing”.

CONCLUSION

We need not make precise projections in terms of cash flow and earnings, other than presenting the rough parameters below, even if some of the developments as described above could affect results. Our statistical template provided above assumes only a continuation of the four company operated stores that are in place, maintenance of the other two operating segments, no material contribution from franchising, and no surprises, positive or negative. Substantial progress has been made over the last two years, both operationally and in terms of balance sheet restructuring. With $3.4M of EBITDA in the last twelve months, and the possibility of substantial growth from here, the stock is obviously cheap statistically. There would normally be a great deal of private equity interest at this kind of a valuation, but this is a very small deal in today’s environment and management has no desire to change ownership at anywhere near the current valuation. Time will obviously tell as to what extent this management team capitalizes on the current opportunity, but it seems like the necessary pieces are in place to take this reincarnated brand a great deal further.

THE COMPANY

Noble Roman’s, Inc. (NROM) is over forty years old as an Indiana Corporation, having operated, franchised and licensed versions of the “Noble Roman’s Pizza” brand. Founder and Chairman, Paul Mobley, formed NROM in 1972, still leads the company from a strategic standpoint, plays an active CFO and shareholder relations role, and his son, Scott, is President and CEO. Locations selling NROM Pizza today include 50 states and Canada. While the company has operated and franchised stores with varying degrees of success over the years, the underlying reputation for serving a high quality product has been generally maintained. This is evidenced by the most recent commentary in social media (Yelp and Facebook) relative to the openings of Noble Roman’s Craft Pizza and Pub locations (NRCPP), the most recent incarnation of the brand.

Though customers of Noble Roman’s mostly remember the brand with the nostalgia of their youth, the long operating history has included a number of starts and stops. In particular, the six years ending in ‘17 were burdened by losses related to the unsuccessful effort to build a “Take ‘N Bake” version of Noble Roman’s, and the Company paid a predictable price for the failure. We describe below, when discussing the improved balance sheet, some of those costs.

THREE OPERATING SEGMENTS

Noble Roman’s today has three primary areas of focus, in order of current emphasis: (1) Expansion of a new generation of NRCPPs, which, following the successful openings of four company operated locations, has recently begun to award franchise rights. (2) Franchises-Licenses for “non-traditional” locations, primarily in convenience stores (often affiliated with gas stations) and entertainment facilities. (3) Licenses to sell Noble Roman’s products within grocery stores.

“NOBLE ROMAN’S CRAFT PIZZA AND PUB” (NRCPP)

This is by far the most attractive expansion opportunity for the Company. The fast casual restaurant features two styles of crust, both thin and Deep Dish Sicilian, with their famous breadsticks served with spicy cheese sauce, specialty salads, four pasta dishes, all “designed to be fast, easy to prepare and delicious to eat.” New pizza oven technology provides bake times of only 2.5 minutes for the regular crust, 5.75 minutes for Sicilian, with the dough preparation room visible to customers.

The concept as we would describe it is: similar to Blaze, MOD, and so many other participants in the fast casual pizza segment, but “evolved” and “differentiated” in major ways. NRCPP serves personal size pies as well as family sized, serves traditional crust as well as Sicilian (for the same price), serves a limited number of salads, sandwiches, chicken wings, and desserts. Wine & Beer (including Craft Beers) is served at a modest but comfortable bar, where you can also dine. Half a dozen TV sets create a low key sports bar “vibe”.  Anecdotally, we have personally been to all four locations, several times to the first of them, and have been impressed with the quality of operations that has been taking place.  Social media commentary, including Yelp and Facebook, confirms our reaction, and the public’s view of The Brand seems to be a combination of nostalgia combined with admiration of the current updated approach. The hospitality quotient provided so far should presumably be replicable in the foreseeable future because the company operated stores, as well as initial franchised locations, will continue to be in NROM’s “back yard”. The first location (Westfield) opened  1/31/17. A second location (Whitestown) opened 11/17/17. The third location (Fishers) opened 1/18/18 and the fourth (Carmel) opened 5/29/18.  The Company has shown an ability to open these four stores, at budgeted cost, in only 3-4 months after lease signing. Naturally, the speed of future openings is dependent on lease negotiations, real estate variance requirements, and the configuration of the proposed site.

UNIT LEVEL ECONOMICS OF NOBLE ROMAN’S CRAFT PIZZA & PUB

The locations are about 4,000 square feet, cost about $630,000 (including about $50,000 of pre-opening expenses). The targeted average annual volume is $1.35M  with a first year store level EBITDA above 20%. Cost of Goods combined with Labor (including fringe benefits) is expected to average no more than 50% of sales. These parameters provide an immediate 43% cash on cash return, allowing for just over a 2 year cash payback. The first four locations are collectively meeting, and sometimes (Westfield) individually exceeding all these targeted parameters (ex the extreme weather in Q4) on an annualized basis, though only the first (Westfield) has been open for more than one year. It is important to note that many successful restaurant franchisors project targeted cash on cash returns in year three much lower than shown above (and don’t include pre-opening expenses in their calculation), obviously far less attractive than the indicated fully loaded immediate returns of NRCPP. Since the company, as well as the first of the franchised locations, will be located near Indianapolis, pre-opening costs and initial opening inefficiencies should continue to be minimized. 

 FRANCHISING OF NOBLE ROMAN’S CRAFT PIZZA AND PUB

While four locations in Indiana (only one of which is two years old) does not imply worldwide expansion opportunities, NROM management has many years of multi-unit operating, and franchising, experience and there are very few concepts in the restaurant industry that have generated the returns as described above. Average Unit Volumes (AUVs) could build further as the Indiana market is penetrated, or perhaps be cannibalized, but delivery (in conjunction with DoorDash) and a new curbside Pizza Valet pickup service has both just started in January, a mobile app is starting its beta test, and many other operating and marketing initiatives are in the works. Greater Indianapolis alone could support at least 20 units, the State of Indiana many more, so an obviously unlimited growth runway is in place. The Company, operationally led by President and CEO, Scott Mobley, has done an admirable job of getting NRCPP off and running, profitable from the very beginning. Noble Roman’s brand is known, to varying degrees, in all 50 states, and could no doubt succeed in well run, properly situated locations almost anywhere, but Indiana and the immediately surrounding geography represent the most obvious expansion opportunities. It is noteworthy that well located non-traditional locations in C stores and hospitals do impressive enough volumes to indicate that NROM pizzas can attract customers far from Indianapolis but stores close to the home base are naturally the current priority.

The franchising strategy for NRCPPs is to sign single unit, experienced, operators close to home. Further away, only very well capitalized operators, fully committed (operationally, financially, psychologically) to building out markets, will be enrolled. Since an operating organization is in place at NROM that can support local franchisees in their startup phase, and multi-unit franchisees will pay non-refundable up front franchise fees that should more than offset support services, the franchising effort should contribute immediate incremental profits and cash flow to NROM. The initial franchisee fee is $30,000 for a single unit, $25,000 for the second, $20,000 thereafter. Ongoing royalties are 5%, plus a 2% contribution to a creative fund.

The first franchisee is under construction and should open around 5/1/19, a highly regarded Indiana based Dairy Queen franchisee, Holly and Patrick O’Neil, who currently operate nineteen DQ locations. Since they have been expanding their number of DQ locations in recent years, they seem to have the financial and operating resources to open additional NRCPP locations if the first location is successful. The excellent reputation of Holly and Patrick (who has been head of the DQ franchise association) will no doubt be encouraging to other potential franchisees. They could also provide operating expertise to the NRCPP system. Nobody has all the answers and every successful franchisor has learned a great deal from their experienced franchise partners. Their first location will be in Lafayette, Indiana, a previously successful jurisdiction for Noble Roman’s.

NON-TRADITIONAL FRANCHISING

The company has franchised about 750 units, including convenience stores, travel plazas, entertainment venues, hospitals, most several Wal-Mart and Circle K locations.  A prototype counter top unit was introduced in early ’16 and expansion within this division is picking up momentum in recent months. There is obviously a time lag from when a new license is signed to when a location opens for business. This steady source of revenues amounted to $4.5M in ’17, up from $4.4M in ’16. Revenues from this segment were flat at $4.5M in calendar ’18, but up about $100,000 (9%) in Q4, presumably a harbinger of more growth to come. 38 non-traditional franchised locations joined the system in calendar ’18, and 19 left. Since signings, reflected by “Upfront Fees” increased from $286k in ’17 to $379k (which included $30k from the first NRCPP) in ’18 (up 22% net of the NRCPP fee), an increase in non-traditional royalty revenues can be expected in the future. This momentum is continuing in Q1’19, as the company announced that, through 3/26/19, 14 new locations have been signed up versus 6 in ’18. It should be noted that non-traditional locations closed are typically older low volume units, and are being replaced by higher volume new units. It should also be understood that while a few units have opened within Circle Ks and WalMarts, those retail systems are difficult to quickly penetrate for a number of reasons and we expect independent operators to be the more predictable source of growth. Overall, the pace of signings within this segment, with tens of thousands of potential outlets throughout the country, has clearly picked up over the last eighteen months, and could be capable of, at least offsetting the current slippage in the grocery channel described below. The initial franchise fee is $7,500, except for $10,000 at hospitals. The ongoing royalty is 7% of sales, with no advertising contribution since customers in these locations are mostly on the premises for other reasons.

GROCERY STORE LICENSING

Noble Roman’s has licensed, by way of a supply agreement, sales of its products to 2,106 grocery stores. The licensed grocery store must purchase proprietary ingredients through a Noble Roman’s approved distributor. The deli department of the grocery store then assembles the products and displays them using Noble Roman’s point of sale marketing materials. The distributors collect for Noble Roman’s a fee in lieu of royalty as they sell ingredients to the grocery stores and remit this amount within ten days of each month end. While the number of grocery stores under license expanded steadily for several years, especially until the end of 2016, the labor requirement within the grocery deli departments has limited further growth, and the improving economy has reduced the number of budget driven pizza consumers, so license revenues from this segment has contracted in the last two years. It is unknown how many of the 2106 grocery locations are currently offering product, especially since stores sometimes are removed and then later return. NROM management has explored the possibility of assembling the pies at the distribution level, reducing the labor requirement at the individual grocery store, but a solution has not yet been developed. Royalties and fees from grocery store distribution was $1.4M in calendar 2018, down from $1.8M in ’17. While this division’s revenue has slipped in the last two years, the economy seems to be slowing once again, which would make deli-workers more available and consumers more interested in a take and bake product. This division can therefore be considered “counter cyclical”. With two other far larger and more promising divisions, NROM management is concentrating efforts elsewhere and a change in results from this division shouldn’t affect overall performance by much.

THE BALANCE SHEET – SUBSTANTIALLY IMPROVED

During ’15, ’16 and early ’17, as the Take ‘n Bake version was winding down, and the NRCPP version was incubating, the Company was carrying short term debt with an interest rate over 20%, especially burdensome when the company was still reporting operating losses from termination of the Take ‘N Bake adventure. $2.4M was raised in late 2016 and early 2017 in the form of 10% debentures, maturing in December 2019 and January 2020, convertible at $0.50/share, with 2.4M warrants @ $1.00 attached. It is worth noting that both Paul Mobley, Chairman, and Marcel Herbst, Director, participated in this private placement. While the terms of the convertible debt were not pretty, it was a lot better than what had been in place. More importantly, in September ’17 the Company put in place $4.5M of conventional bank debt, maturing in September 2022, at an interest rate of LIBOR plus 4.25%. Additionally, a $1.6M Development Line of credit facility was established to fund three new company operated locations.  Each tranche of the Development Line is repaid starting four months after being drawn, on a seven year amortization schedule. As described earlier, the rapid cash on cash returns from the new locations are easily capable of servicing the Development Line and generating excess cash as well. Overall, the new financing arrangements have provided NROM with adequate financial flexibility, allowing steady further development of NRCPP locations, building a franchise operation, also further developing the two other segments. Calendar 2018 results benefited from over $500k of cash interest savings YTY. It is also important to note that NROM has a Deferred Tax Asset on their balance sheet of $5.6M, sheltering about $15M of pretax earnings.

In the Q3’18 report, the Company indicated its plan to extend the maturity date of the 10% convertible (at $0.50) notes, (with warrants at $1.00/share attached), by three years, $650k of which has been accepted to date. According to the 10-K, “The Company is prohibited by its loan agreement with its senior debt lender from repaying the Notes as long as its senior debt is outstanding. In order to meet the maturity schedules in late 2019 and 2020, the Notes must either be converted to common stock, extended beyond the maturity of the senior debt or replaced with other like securities. The Company may not be able to accomplish any of those alternatives. The Company intends to extend or refinance with external capital the Notes maturing in 2019 and 2020. However, the Company may not be able to refinance its debt or sell additional debt or equity securities on favorable terms, or at all.”

The above paragraph in the 10-K is appropriately conservative in its description. We believe that the Company can “remarket” the 10% Convertible (at $.50, with warrants attached) Notes, since the balance sheet and cash generation of the Company is much improved since those securities were originally placed in late 2016.

It is noteworthy that Current Accounts Receivable, at 12/31/18, were down 12.4% to $1.574M from a year earlier, and the Company stated in their year end report that all existing franchisees are current in their payments. Non-cash writedowns of the Carrying Value of Receivables over the last several years, including the largest, $4.1M in calendar 2018, do not relate to current franchisees. While there will be an ongoing collection effort, legal expenses in this area are expected to be lower than in the past.

RECENT DEVELOPMENTS – Q4 AND FULL YEAR ’18 RESULTS

2018 as a whole demonstrated significant corporate progress. Adjusted Net Income was $2.5M, up 70% from 2017. Adjusted EBITDA was $3.4M, up 6.6% from 2017.

The largest addback adjustments to the GAAP net loss of $3.1M were $4.1M non-cash adjustment of receivables from 2014 and 2015, and $930k adjustment of the value of deferred tax credits. Adjusted EBITDA was affected by the same items, with Depreciation and Interest comparisons added. We supply the full tables of Adjustments to Net Income and EBITDA as an Appendix to this article.

The dominant portion of fourth quarter results was the operation of four NRCPP units versus two a year earlier, which obviously affected revenues and related costs. Weather, especially in December, affected sales, so store level EBITDA margin was 10.5% from 18.4% in Q4’17. Store level EBITDA for the year was 18.9% (vs.23.7%), still impressive considering the inefficiencies of operating three units less than a year old and the Q4 weather. Most importantly, the Company stated in their latest  release that March sales were running 23% over the December level and “the margin is expected to move back above 20% in the coming months”. While Q4 average annualized sales were about $1.15M, the full year annualized average volume was $1.36M by our calculation of operating store-weeks. The demonstrated recovery in March, combined with the customer (and staff) enthusiasm over the Pizza Valet service, delivery through DoorDash, and other operating and marketing initiatives, should continue to support the targeted average annual run rate of $1.35M per unit.

Up front fees, reflecting franchise signups were up 13.6% for the quarter and 32.5% for the year. Non-traditional franchise fees (ongoing royalties) were flat for the year but up 9.1% in Q4. As the signups convert to operating units, and with new signups in ’19 (14 vs 6 as of 3/26), both of these categories should build further.

Grocery store license fees were down 28.2% in Q4 and 22.2% for the year. As discussed earlier, this division can be considered counter cyclical and could at least stabilize in a slowing economy. Moreover, with only $1.4M of revenues for all of ’18, $323k in Q4, this division is far less important going forward than non-traditional locations generating $4.5M annually and now growing and, of course,  the expansion of the NRCPP division.

The conference call discussion briefly discussed the results, talked about the recovery of sales and margins in March, estimated that the first franchised location in Lafayette, IN, will open around May 1st. Most importantly, CEO, Scott Mobley, discussed the success of the Pizza Valet curbside pickup and the implementation of delivery through DoorDash. He described at length a large number of recent and planned initiatives, including: a bar enhancement program, expansion of an already successful catering effort, introduction of daily food specials, pending introduction of online ordering,  expansion of their award winning social media effort, and others. Paul Mobley, Executive Chairman, indicated that two new company operated locations could open later this year. He disclosed, as we have already  referenced,  the signup rate of non-traditional locations and the recovery in NRCPP sales in March.

THE CURRENT BALANCE SHEET AND ENTERPRISE VALUE

There is currently about $6.8M of total debt, and about 21.6M shares currently outstanding. The debt consists of $4.8M bank debt, including the current portion, and $2.0M of convertible debt (at $0.50/share). There are 2.4M warrants, that were attached to the original convertible debentures, at $1.00 per share, which would obviously bring in $2.4M of equity if exercised. There are about 1M additional shares due to various options and warrants, which would bring in roughly $500k if exercised. In total therefore, about 27M shares would be outstanding, fully diluted, but that would have brought in over $5M of equity, reducing the current $6.8M of current debt very substantially. We can therefore consider that the total enterprise value of NROM is something like ($0.47/share x 27M shares=$12.7M) plus $1.8M of remaining debt after cash generated from exercise of all options and warrants, or a total enterprise value of about $14.5M. Dividing by the $3.4M of trailing twelve month EBITDA, the Enterprise Value is 4.3x TTM EBITDA.  When questioned on the conference call about the possibility of broadening the Board of Directors (currently four members, two of which are independent, plus Paul and Scott Mobley), Paul Mobley indicated that this is under active consideration.

CONCLUSION – Provided at the beginning of this article

 

 

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NOBLE ROMAN’S

Noble Roman’s is a 45-Year-Old Brand, Well Regarded in the Midwest – Poised For Unprecedented Success

Summary

Social media reviews, along with sales, confirm the brand’s reputation in Indiana core market

Balance Sheet is profoundly improved over the last twelve months

Three new company operated Craft Pizza & Pub locations are highly successful, setting the stage for more company units as well as productive franchising.

The earnings and cash flow generation should steadily increase from this point forward

We wrote a little over year ago with the stock at $0.40/share that “Noble Roman’s was attempting to Re-establish a Growth Trajectory”. We acknowledged at the time that stocks don’t trade at $0.40 for no reason, and we talked about the historical problems as well as the weak balance sheet. In the fifteen months since, the balance sheet has been profoundly improved and most of the problems of the past have faded (or been written) away. Most importantly, a seemingly predictable, and relatively low risk path forward to grow cash flow and earnings, rebuilding (and expanding upon) the brand’s Midwest roots has been established. The plan revolves around replication of the now well demonstrated Noble Roman’s Craft Pizza & Pub (NRCPP).

The Legacy  Businesses

While the last half dozen years have been burdened by an unsuccessful effort to build a “Take ‘N Bake” version of Noble Roman’s, and the Company has paid a predictable price for the failure, at the same time they have built a network of 2,768 franchised/licensed grocery store and “non-traditional” locations (e.g.convenience stores, gas stations, etc.) that sell Noble Roman’s branded products. Of that total, 2086 were grocery stores, which generated royalties and fees of $1.8M in calendar ‘17 (down from $2.1M YTY). The balance of stores, about 700 non-traditional locations, generated royalties and fees of $4.5M, up from $4.4M YTY. The exact number of grocery stores selling NROM products is a bit uncertain, since individual locations within a licensed chain come and go without notice, and NROM gets paid through the local raw ingredient distributor. We do not intend to go into great detail about these businesses here, since the major future potential for NROM is the Craft Pizza & Pub initiative. Overall, we view the grocery store/non-traditional “legacy” business to be fairly stable, not without its challenges, but also with remaining potential.  Growth in the grocery segment has been hampered by the industry wide labor issue at the store level, since individual deli departments have to assemble the pies. NROM management is exploring ways in which the pies can be assembled at the distributor level, removing the burden at the deli counter.  Should this effort be successful, a new round of grocery growth is possible. The non-traditional business has its own set of problems, not the least of which is collection of fees from licensees. Substantial legal expenses have been incurred in the collection effort, though those fees have been reduced lately. While the individual amounts to be collected are not large, writing them off without a collection effort would send the wrong signal to other licensees. On the positive side, a new “prototype” has been developed and more new locations of this type were opened in ’17 than in recent years. Collection results seem to have stabilized, and successful units have been opened within Walmart and Circle K stores, both with obviously larger potential. Viewing the “legacy” business as a whole, we consider it to be fairly predictable in a statistically reliable way, since no individual licensee or affiliated group controls a material portion of licensed locations. We consider that growth in this segment will be a plus if it happens, and have no reason to expect a material downturn.

The Balance Sheet

In late ’16 when we wrote our last report for Seeking Alpha, the Company was burdened with short term debt carrying a simple interest rate over 20%, especially burdensome when the company was still reporting operating losses from termination of the Take ‘N Bake adventure. $2.4M was raised in late 2016 and early 2017 in the form of 10% debentures, maturing in December 2019 and January 2010, convertible at $0.50/share, with 1.2M warrants attached @1.00. It is worth noting that both Paul Mobley, Chairman, and Marcel Herbst, Director, participated in this private placement. While the terms were not pretty, they are lot better than what had been in place. More importantly, in September ’17, the Company put in place $4.5M of conventional bank debt, maturing in September 2022, at an interest rate of LIBOR plus 4.25%. Additionally, a $1.6M Development Line of credit facility was established to fund three new company operated locations.  Each tranche of the Development Line will be repaid starting four months after being drawn, on a seven year amortization schedule. As described later when discussing the CPP stores, the rapid cash on cash returns from the new locations appear to be easily capable of servicing the Development Line and generating excess cash as well. Overall, the new financing arrangements have provided NROM with adequate financial flexibility, allowing steady, even fairly rapid development of CPP locations, building a franchise operation, also protecting and building upon the legacy businesses. The Company has stated that annual interest savings will be on the order of $650k annually versus the burden carried prior to late 2017. Calendar 2018 results should benefit from about $500k of cash interest savings YTY.

The Future

Noble Roman’s Craft Pizza & Pub (NRCPP) was but a “plan” back in November 2016 when my previously article was written. The plan seemed sound, but the risks were also obvious. The first location opened in January ’17, the second in November ’17, the third in January ’18, all in greater Indianapolis.

The concept as I would describe it is: similar to Blaze, MOD, Pieology, and so many other participants in the fast casual pizza segment, but “evolved” and “differentiated in major ways. NRCPP serves personal size pies as well as family sized, serves traditional crust as well as Sicilian (for the same price), serves a limited (and tasty) number of salads, sandwiches, and desserts. Wine & Beer is served at a modest but comfortable bar, where you can also dine. Half a dozen TV sets create a low key sports bar “vibe”.  Most importantly, I have personally been to all three locations, several times to the first of them, and can attest to the quality of operations that has been taking place.  Social media commentary, including Yelp and Facebook, confirms my reaction, and public’s view of The Brand is a combination of nostalgia from their youth combined with admiration of the current updated concept. The hospitality quotient provided so far should be replicable in the foreseeable future because the company operated stores will be in NROM’s “back yard”.  It is clear to this observer that, in Indiana, at the very least, the Noble Roman’s Brand, as represented by NRCPP is “money”.

 Unit Level Economics

Tthe locations are about 4,000 square feet, cost about $500,000 to build (give or take $50,000), are averaging upwards of $35,000 weekly as confirmed by company public statements. Cost of Goods combined with Labor (including fringe benefits) is averaging about 50% of sales. EBITDA at the store level is on the order of 25% (24.1% for the first twelve months of the first store, from a standing start). At that level of EBITDA generation, $1.8M ($34.6k/wk.) would be about $450k, annually, the store paying for itself in just over a year. While acknowledging that three locations does not create a worldwide empire, and the success away from Indiana may not be nearly as dramatic, there are very few concepts in the restaurant industry that have generated that kind of return. Sales could build further as the market is penetrated, or perhaps be cannibalized, but there has been no effort at delivery, or introduction of a mobile app or many other typical operating and marketing initiatives. We believe that greater Indianapolis alone could support 30 or more locations, the State of Indiana many more, so an obviously unlimited growth runway is in place, and continued successful operation so close to their forty five year old home base should be manageable. The Company, led by President and CEO, Scott Mobley, has done an admirable job of getting NRCPP off and running.

The Corporate Earnings Power

Operating results over the years, including the last few, have been muddied with lots of unattractive moving parts. While the apparent EBITDA has been over $3M annually in each of the last several years, the free cash flow has been much less due to losses from the aborted Take ‘N Bake operation, exorbitant interest charges, and legal expenses associated with license fee collection. Since the Take N’ Bake location is gone, the interest savings from the newly structured balance sheet should save about $650k annually in interest, and legal fees are coming down, we think a reasonable base of EBITDA should conservatively be $1.5M-$2.0M before allowing for cash flow from new company operated stores or franchising of same. Calendar 2018 will include the contribution from the first three new NRCPP locations for virtually a full year, plus over half a store year from the fourth (Carmel, IN., to open in late May), EBITDA of 24% on average sales of $1.8M, for 3.5 store-years would generate an incremental $1.5M of EBITDA in calendar ’18. The Company has made no comment regarding further openings, but we believe that at least two more company locations could open by early ’19, perhaps another store or two by late ’19, which would allow for a contribution of at least six store-years for calendar ’19, or a total EBITDA addition of $2.6M on the ’17 base. Additionally, based on the very attractive store level economics as demonstrated, we view franchising of the NRCPP model to be an attractive opportunity, both for NROM and franchisees. The stated strategy is to sign up either multi-unit or individual operators (with experience and capital) in markets close to home.  Further away, only highly experienced, very well capitalized operators, fully committed (psychologically and financially) to building out markets, will be enrolled. Since an operating organization is in place at NROM that can support local franchisees in their startup phase, and multi-unit franchisees will pay non-refundable up front franchise fees that should more than adequately offset support services, we expect that the franchising effort will contribute incremental profits and cash flow to NROM at even the earliest stage. Over time, we believe the franchising potential can match, and even exceed the profit and cash flow generation of company operated locations.

The Current Balance Sheet and Capitalization

There is currently about $7.5M of total debt, and about 21M shares currently outstanding. The debt consists of the $4.5M five year debt, $2.3M of convertible debt (at $0.50/share), and the Development Credit Line (for store development).  Between now and late 2019 and 2020, the $2.3M of convertible debt will either turn into 4.6M new shares or be refinanced (which we believe will be practical, considering the current successful development of NRCPP locations).  There are 2.4M warrants, that were attached to the convertible debentures, at $1.00 per share, which would obviously bring in $2.4M of equity if exercised. There are about 1M additional shares due to various options and warrants, which would bring in roughly $500k if exercised. In total therefore, about 27M shares would be outstanding, fully diluted, but that would have brought in over $5M of equity, obviously reducing the current $7.5M of current debt very substantially. We can therefore consider that the total enterprise value of NROM is something like ($0.70/share x 27M shares) plus $2.5M of remaining debt after cash generated from exercise of all options and warrants, or a total of 21.4M.

Conclusion

We need not make precise projections in terms of cash flow and earnings, other than presenting the rough parameters above. It is obvious that the potential for substantial growth of revenues and cash flow is in place, and the enterprise value is modest relative to that potential. A tremendous amount of progress has been made over the last year or so, both in operationally and in terms of balance sheet restructuring. At this point, the potential for this “microcap” to play on a much larger stage seems to be in place. Time will tell as to how quickly the fundamentals develop, and to what extent this management team, with an admittedly checkered history, capitalizes on the opportunity, but NROM management must  be given credit for an impressive “re-launch” of The Brand.