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 4^th 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

NOBLE ROMAN’S, INC.- UPDATE FROM PRESENTATION AT ANNUAL MEETING ON 7/15/22

There were no meaningful fundamental developments at Noble Roman’s annual meeting that took place last Friday, 7/15/22. However, CEO Scott Mobley’s presentation provided an update regarding progress over the last two years, and reviewed ongoing challenges and opportunities. The full slide presentation can be found on the Noble Roman’s website, and we provide some of the highlights below. Our previous articles regarding Noble Roman’s can be accessed through the SEARCH function on the Home Page of this website.

CONCLUSION:

Second quarter results, to be reported in early August, will obviously be instructive. It seems that, based on the presentation at last week’s Annual Meeting, the worst of the COVID and supply chain effects is in the rear-view mirror. Our expectation, therefore,  is that sales in Q2 are likely to be noticeably higher than Q1, both on a seasonal basis and also less affected by COVID variants. Operating margins at the Craft Pizza and Pubs (CPPs) should also be sequentially improved, better labor efficiency and higher sales, and commodity prices no worse than in Q1.

Non-traditional franchising results in Q2 should improve sequentially, at least modestly, with seasonally higher sales, new units signed and/or opened, and the continued recovery from COVID. Most importantly, the “total addressable market” is huge, many tens of thousands of prospects, the franchise offering has been improved, signings and openings are taking place, and a newly hired experienced sales associate could be an important addition. This division, over the long term, could be materially larger than it is today.

The new smaller CPP prototype, if successful, could provide new momentum for this division. The company has demonstrated an ability to open new locations in as little as 90 days from signing of a lease, and lease negotiations are currently taking place, so we should have feedback in this regard within perhaps six months.

NOBLE ROMAN’S CRAFT PIZZA AND PUB (CPP)

Recall that there are currently nine company operated “CPPs”, plus three franchised locations, all within an hour or so of Indianapolis. The CPP is distinctive from fast casual pizza competitors in that its menu is broader (with sandwiches, pasta, salads, desserts), three different size pies are served, there are several styles of crusts, beer and wine is offered, the dining room has more service, and the décor is modern with TV entertainment. The latest developments include: a salad bar added during June and July, which in the last week of June increased sales before 4pm by 16.8%. Potentially very important: a new 2,400 square foot prototype has been designed, allowing for 20 tables seating 89, retaining the pizza valet service entrance and the visible dough making area, with two large ovens replacing three smaller units, continued offering of domestic and imported craft beers but without the bar area. The new CPP version will save about $270k of initial hard costs (versus the previous $650-$700k), with presumably lower ongoing occupancy expense. Negotiations are in progress for the first company operated location, which could facilitate franchising by being much less costly to build and more profitable to operate.

THE NON-TRADITIONAL VENUE

Recall that there are over 600 non-traditional locations selling Noble Roman’s pizza and other products, generating over $4M in annual royalties with operating profit well over 50%. This business, mostly convenience stores and gas stations, was seriously impacted over the last two years by Covid, has been steadily recovering most recently. In addition to pizza, baked sandwiches, pasta, burgers/cheeseburger pizzas, breakfast and take-N-Bake products have been available. Honey Crisp Chicken was introduced as an “Add-On Concept” but was de-emphasized during the Covid due to supply shortages. The Total Addressable Market (TAM) In the convenience store/gas station grouping is about 150,000 units. Foodservice sales within convenience stores (industry wide) have been growing steadily right through the Covid, accounting for 22.5% of inside sales and 33.5% of gross profit, so non-traditional potential franchisees are increasingly interested in improving their food offerings. While many non-traditional franchisees are small business entities, and were obviously affected by the stay-at-home economy in 2020 and 2021, it is noteworthy that, since the onset of COVID (from 3/20 to 7/22), NROM has signed 85 franchise agreements and 61 new units have opened. In calendar 2022 through 7/15 there have been 21 signings and 17 openings. The typical non-traditional installation costs about $24,500 for equipment and signage and a $7,500 initial franchise fee. A newly instituted franchise agreement calls for a minimum weekly royalty, and expands the economic viability of lower volume locations. Lastly, a new sales associate, with operational and sales experience in the non-traditional sphere has been hired as of July 5, 2022.

 EMERGING FROM COVID

Scott Mobley reiterated how difficult the two years ending 3/22 have been, indicating that staffing and supply chain issues have noticeably eased in the last few months. Inflation, however, remains a key issue, and good real estate is in short supply due to minimal new strip center development over the last two years. The average salary for general & assistant managers is up 18.2% since October, 2019, to $51,444, but adjustments at four company locations, reducing salaried managers from three to two, has been a partial offset. Average hourly wage in the same period has increased by 8% to $11.70/hr. As a measure of the improvement in labor productivity, Sales Per Non-Management Labor Hour (SPNMLH) has increased from $52.89 in January, 2020 to an impressive $75.59, up 43%,  in July, 2022.

COST OF GOODS

The CRB Commodity Index, after rising almost 50% from January through June, 2022, has retreated about 15% from its high in the last several weeks. Wheat, Beef, Chicken, and Tomato Paste, after substantial increases, are still at or near their recent highs. Cheddar Cheese Block price, after rising throughout ’21 to $2.00, rose further to a peak around $2.35 by April-May, has now retreated to about $2.15. Offsetting some of the higher cost of goods and in an effort to cut down on waste, operational simplifications have been put in place. Some slower moving menu items have been removed from the menu and the variety of cheese cup sizes has been reduced. To reduce power usage, only 2 of 3 ovens are used during lunch and slower weekdays. Negotiations have taken place with linen, pest control and produce suppliers, as well as their credit card processor. Relief relative to the operating costs of goods and services is “on the way”, the magnitude of which is “TBD”.

CONTINUED UNCERTAINTIES

The presentation made reference to ongoing uncertainties such as the general economy, the price of gasoline which inhibits local travel, the general rate of inflation, resurgence of COVID variants, and customer resistance to necessary menu price increases.

RECENT PERFORMANCE METRICS

Over the last year, from June to June, the average ticket is up 8.7%, the percent of sales that is Dine-In is 56.4% vs. 49.4%, 3^rd party delivery sales is 13.8% vs. 17.7%, and YTD catering is $98,996 vs. $71,735. Consumers are clearly more comfortable dining out, and entertaining groups at home, rather than picking up or getting delivery.

CONCLUSION: Provided above

NOBLE ROMAN’S (NROM) REPORTS MARCH QUARTER – OMICRON REDUCES OPERATIONAL RESULT TO BREAKEVEN EBITDA – COMPANY EXITS PANDEMIC WITH NINE COMPANY (PLUS THREE FRANCHISED) “CRAFT PIZZA PUBS” AND OVER FIVE HUNDRED NON-TRADITIONAL FRANCHISED LOCATIONS

Previous reports we have written that more completely describe Noble Roman’s, its operations and its prospects, can be accessed via the SEARCH function on our Home Page.

CONCLUSION:

Noble Roman’s (NROM) has been predictably affected by ramifications of Covid-19 and its variants, as well as supply chain, labor and inflationary challenges. However, the Noble Roman’s Craft Pizza & Pub venue moves forward with nine company operated stores, operating profitably even in their seasonally weakest quarter and still influenced by the Covid. The non-traditional venue, even as it recovers, is generating over $1M per quarter in royalties and can be expected to grow from here.

The development of a new smaller prototype of the “Pub” has the potential to provide an additional growth venue for this fifty year old  midwest brand. Noble Roman’s was generating approximately $3M EBITDA annually prior to the Covid. While a good portion of that EBITDA was consumed at that time by  legal expenses related to long gone franchising activities, that burden has seemingly run its course. At the same time, over the last two years the “Pubs” have more than doubled in size (from five to nine company locations) and could grow very fast if the new smaller prototype is successful. Additionally, the non-traditional venue seems poised to grow again.

Scott Mobley’s summation is pertinent: “…the period from mid-November ’21 through late February ’22 required a constant emergency footing…daily pricing issues, ingredient shortages, personnel shortages, . Covid-19 isolations, distribution disruptions, shortages of equipment parts and service…The necessity of managing daily emergencies has subsided dramatically, and the operating environment during March and April, although still challenging, is very good by comparison.”

Overall, it seems likely that operating results, along with last vestiges of Omicron, have bottomed and the long term potential for earnings and cash flow growth should assert itself. With a total enterprise value of only about $15M, the possibility of record levels of EBITDA (which could exceed $5M in just few years), would provide a handsome return to investors at the current level.

NOBLE ROMAN’S REPORTS FIRST QUARTER RESULTS

Indianapolis based Noble Roman’s reported their March ’22 quarter, showing higher revenues versus ’21, due to two new “Craft Pizza Pubs”, with earnings and EBITDA subdued by the lingering effects (revenues and staffing) of Omicron and supply difficulties.

Total revenues in Q1’22 were $3.465M vs. $3.282M. Operating Income was $159k, down sharply from $1.161M (when $941k was received from the PPP program). There was a net loss of $137k, after interest of $342k and a $46k tax benefit, versus a profit of $827k in ’21 (as a result of the PPP). Adding back $112k of D&A, the first quarter of ’22 was virtually breakeven from an EBITDA standpoint (a loss of $25k).

NOBLE ROMAN’S CRAFT PIZZA AND PUBS

The Craft Pizza & Pub Division generated $2.283M of revenues, up from $2.108M, with nine locations operating versus seven in ’21. Cost of sales was similar at 20.8%. Salaries and wages was 31.7% of sales, higher than “normal”, due to staffing challenges, and especially higher than the 10.9% shown in ’21, when PPP was largely applied against this category. In a similar fashion, Facility Cost was 17.2% of sales versus only 5.4% shown in ’21. The total of Packaging, Delivery and “Other” Expenses was well controlled, 20.6% of sales versus 21.2% in ’21. The store level EBITDA margin contribution was 9.9% in ’22 versus a non-comparable 41.7% in ’21.

Based on commentary from both Paul and Scott Mobley, within the earnings release and on the conference call, there is reason to believe that store level margin from this division will improve noticeably in quarters to come. Per Paul Mobley: “the effect of labor shortages, supply chain disruptions, inflationary pressures and the Omicron effect have dissipated significantly starting in March (when labor expense ran 29.0% (versus 31.7% in Q1).  Scott Mobley elaborated that “through aggressive recruiting, company owned Pub restaurants all have a full complement of management staff. We are much better staffed now than many and we have no severe staffing deficits in any company operated units….we are having to pay up for that labor, however, the good news is that our hourly labor productivity has increased more dramatically than the wage increase…..the average wage for hourly employees has increased by 5% in round numbers…..however…..sales per non-management labor hour  has increased by approximately 35%. This and the menu price increase translate into a lower wage expense as a percentage of sales, a trend that began showing itself in March and has continued through April and now into May. Scott Mobley also pointed out that average salaries of managers is up about 7.5% since pre-Covid, partially offsetting the productivity gains of hourly staff.

Reinforcing the indication that sales have firmed in April and May, Scott Mobley described on the conference call that: “Organic sales of stores open well over a year or more, ‘organic’ defined as ‘total less catering and special events’, during the last six weeks are up 11% vs. last year…average check is up 5% so traffic and average check combined, is up about 6%.”.

Also supporting the likelihood of an improving store level margin was Scott Mobley’s breakdown of sales by venue during the last six weeks: Inside dining has been 49% vs 52% a year ago, carryout has been 34% vs. 33%, 3^rd party delivery 17% vs 15%. Importantly, a recent new arrangement for third party delivery will incorporate a lower charge by the agent as well as a surcharge over the in-store price, which should make the 17% of sales from 3^rd party delivery materially more profitable than it has been.

Based on the above indications, margins at the Craft Pizza and Pubs appear likely to move materially higher than was shown in Q1. The normal seasonal increase in sales, combined with the described improvement in labor costs, as well as 3^rd party delivery profitability, seem likely to move margins at the Craft Pizza Pubs at least several percentage points higher than the 10% area of the first quarter.

NON-TRADITIONAL FRANCHISING

This portion of Noble Roman’s activities was virtually flat in the first quarter, at $1.03M vs. $1.05M in Q1’21. The EBITDA margin contribution of this segment was $573k vs. $715k in Q1’21. The flat year to year sales, in spite of new openings, is a result of closures likely affected by the ongoing Covid variants. The decline in profitability was also largely due to PPP funds in ’21 largely applied against Salaries and Wages, which was up $95k in ’22. Scott Mobley pointed out that the challenges of Omicron took certain NROM employees away from their normal efforts to support and build non-traditional results, but they have now returned to their traditional job descriptions. In the meantime, fourteen non-traditional locations have been signed in ’22 with fifteen opened and more to come. The non-traditional venue, with over six hundred locations operating before the Covid pandemic, has something less than that number operating today, but there continues to be substantial opportunity for growth. There are many thousands of convenience stores, gas stations, and entertainment centers that are prospects for Noble Roman’s products.

NEW CRAFT PIZZA & PUB PROTOTYPE

While NROM management continues to search for CRAFT PIZZA & PUB locations, they announced within the first quarter report the development of a new smaller prototype, which is contemplated to be 1,800 to 2,400 square feet in size. It would be suitable for smaller markets and potentially far more interesting to franchisees. It would have a more limited menu, therefore simpler to operate, and an initial investment far lower than the current 3,400 square foot version. As they search for the first site, management obviously feels that the opportunity is substantial and the risk is tolerable.

THE BALANCE SHEET

The current ratio was 2.5 to 1.0 on March 31, 2022, including cash of $808k, compared to 2.3 to 1.0 on 12/31/22.  Current liquidity, along with cash flow generation from operations, should allow for development of at least two Noble Roman’s Craft Pizza Pubs. There is $8M of long term debt plus $597k of convertible debt. One of the corporate objectives is to refinance the $8M, at a lower interest rate and longer term, before principal repayments (at $33,333/month) begin on February 28, 2023., allowing for more rapid expansion of company operated Pub locations.

CONCLUSION: Provided at the beginning of this article

Roger Lipton

NOBLE ROMAN’S OVERCOMES LABOR AND SUPPLY CHANNEL CHALLENGES TO GENERATE EBITDA OF ALMOST $500K IN THIRD QUARTER – OPENS EIGHTH COMPANY “PIZZA PUB” IN OCTOBER, NINTH TO COME ON DEC 6^TH

Noble Roman’s continues to build on the productive reincarnation of their fifty year old midwest brand. Overall company revenues in Q3 were $3.4M vs. $2.9M in ’20. The net income line was virtually breakeven, as in ’20 (a loss of $79k vs. a profit of $83k). The EBITDA was comfortably positive at $488k vs. $589k in ’20., the largest difference being Salaries and Wages at the Noble Roman’s Craft Pizza & Pubs (NRCPPs)  (29.2% of sales, vs 26.3% in ’20), partially offset by lower cost of sales (21.0% vs 22.5%). The bottom line EBITDA margin at the NRCPPs was 10.6% of sales vs. 13.0% in ’20.

The franchising division (non-traditional & grocery sales) showed Total Revenues of $1,177k, down just slightly from $1,252k, most of the decline due to the grocery segment, which was down $31k. Expenses were well contained and the margin contribution was $685k vs. $770k (58.2% of sales vs. 61.5%). There are still temporary closures within the non-traditional system, not all of which will reopen, but sales should recover as the Covid winds down and there is considerable untapped potential for more non-traditional outlets.

CEO, Scott Mobley, made reference to the ongoing franchising of non-traditional outlets, though potential franchisees are predictably inhibited by Covid-caution. Relative to all outlets, but NRCPPs specifically, Mobley talked about “the inflationary pressures from labor and ingredients, as well as additional costs from managing the supply chain…those restaurants open greater than one year had an AUV of $1.2M and store level EBITDA above 15%. Newer locations opened in 2020 are averaging $1.4M with store level EBITDA from 17-20%. …we anticipate continued gains in both revenue and EBITDA….a menu price increase implemented on November 10,2021 should alleviate the inflationary and supply chain management cost pressures that adversely impacted margins in the third quarter.”

Corporate expenses were well controlled. D&A was higher due to the newer stores, but G&A was up just $46k to $506k with preparation for the newest NRCPPs. The current ratio on the Balance Sheet was much improved, at 4.6 to 1, compared to 2.6 to 1 as of 12/31/20, as a result of the PPP funding in February 2021 and the cash flow from operations.

Management expressed satisfaction, within the earnings release and on the conference call, in the progress made in spite of an unprecedented number of operating challenges. They pointed to the four new successful NRCPP locations opened since March ’20, with a fifth (the ninth overall) to open on December 6 and a tenth well along in lease negotiations. At the same time, the balance sheet is strong enough (with $1.8M in cash and positive cash flow) to support a continued expansion of company locations while awaiting post-Covid interest from potential franchisees for both the NRCPPs and non-traditional locations. Management declined to predict how many NRCPP locations will open in ’22 but lease negotiations are continuing and it seems reasonable that at least three more company stores could open by the end of ’22. CEO, Scott Mobley, on the conference call recounted the impressive efforts made by administrative personnel as well as store crew and field supervisors in coping with the unprecedented operating challenges.

CONCLUSION

The Covid hangs on, continuing to affect consumer dining habits as well as the availability of labor, and supply channel disruptions create an entirely different set of challenges. However, a long entrenched regional brand, with management committed to protect their personal legacy as well, should have a good chance of emerging stronger than ever and moving the Company to new heights.

Roger Lipton

P.S. We have written extensively about Noble Roman’s, its history and its prospects, which readers can find by using the SEARCH function on our Home Page.

NOBLE ROMAN’S (NROM) REPORTS 2^ND QUARTER – STAGE SEEMS SET FOR UPSWING IN CASH FLOW AND EARNINGS

We have written previously about Noble Roman’s and suggest our readers access those articles by way of the SEARCH function on our HOME PAGE.

CONCLUSION:

While NROM has moved up in price over the last few months, there continues to be potential upside. The second quarter provided about $600k of quarterly EBITDA once again, and seems to provide a base on which to build further. As outlined below, potential add-ons “in hand” could take the annual EBITDA to comfortably over $4M annually going into calendar ’22 and be at or above $5M early in ’23. The regional focus with their expanding NRCPP chain seems to minimize operational risk and the total Enterprise Value (currently about $25M) is obviously modest for a well established brand with growth potential.

SECOND QUARTER ANNOUNCEMENT

Noble Roman’s reported their 2^nd quarter results, ending 6/30/21. Since PPP loans were received in the 2^nd quarter of ’20 and the first quarter of ’21, distorting QTQ comparisons, we will first discuss the six month report, which provides a more accurate picture of the YTY recovery from the pandemic.

THE SIX MONTHS

For the six months: Restaurant Revenues, from their Craft Pizza and Pubs, were $4.4M, up from $2.5M, as a result of three new Pubs opened during calendar ’20, as well as the ongoing post-pandemic sales rebound. Operating Income was $1.586M almost exactly flat with $1.608M, with both six month periods affected by PPP loans which offset extra expenses. Depreciation was $306k in ’21, up from $164k, as a result of the three new locations, so EBITDA for H1’21 was about $1.8M, a little higher than in ’20. Still, we do not view the $1.8M in H1’21 to be a current EBITDA run rate because of the ongoing operating adjustments, especially in Q1’21. The following discussion of Q2’21 is more indicative of the income and cash flow going forward because of the diminishing, though still material, effects of the pandemic.

THE SECOND QUARTER

Revenues in the Craft Pizza and Pubs was $2.265M vs. $1.407M, as a result of the three successful new Pubs opened during ’20. The store level EBITDA was 14.5% of sales (expected, as stated by management, to improve), not comparable to the 42.8% in ’20 which was driven by the PPP loan/grant. Royalties and Fees from Franchising was $1.046M, up from $905k in ’20 and up sequentially from $890k in Q1’21. Royalties and fees from the grocery segment (becoming relatively immaterial) was down $45k to $317k. The Margin Contribution from the total Royalties Segment (Non-traditional, NRCPP, and Grocery) was $717k, down from $821k, a 59.8% Margin Contribution vs. 75.4% in ’20. This decline in margin on an increase in YTY revenues is due to the receipt in ’20 of the PPP loan, part of which was allocated to expenses of this segment. Q2’21 showed Operating Income of $424k. D&A of $142k and a few small non-cash expenses, which brought the quarterly EBITDA to approximately $600k. We will use this past quarter and first half EBITDA (about $600k/qtr., $2.4M annually) to build upon in terms of potential EBITDA over the next year or two. It is worth noting that NROM has about $15M of tax loss carryforward so that EBITDA, less interest, will approximate the after tax cash flow from operations. The balance sheet includes $2.1M of cash, about $8M of total long term debt, with a current ratio of 4.7 to 1.

THE CONFERENCE CALL

Paul Mobley, CFO, expressed his satisfaction that facility cost in  Q2 was lowered to 10.4% from 15.5% last year, due to the higher sales of the first four NRCPPs, the well above average sales at the three new locations, and the new leases. At the end of the call, he interjected that July sales for the seven NRCCPs were up 4.6% over June. Additionally, “August is a transition period where weekends are getting larger, weekdays a little smaller….but it looks like August will be a pretty decent month as well.”

Scott Mobley, President and CEO, described how supply chain (i.e.chicken and packaging) and labor issues were second quarter hurdles but operations were maintained without major disruptions. He noted that when Indiana opted out of the unemployment bonus payments, there was an immediate resurgence of job applications, but the applications dried up when the court reversed the opt out policy. Logically, the labor situation  (for all) will hopefully improve when the Federal programs expire in September. He described the two new announced NRCPP locations with enthusiasm and  noted that signups for non-traditional units are increasing, 19 so far in ’21.

The current sales mix is 47% dine-in, 18% third party delivery (which is not promoted) and 35% takeout (the pizza valet program). In the most recent weeks, carry-out has firmed up as the Covid variant has been in the news. There are no new mask mandates but some customers are obviously concerned.

Scott Mobley talked about a new flatbread pizza that has worked well in test, will be rolled out shortly, and can be done without new operational complexity. He also expressed an expectation that third party delivery charges can be reduced by way of a new local agent.

POTENTIAL ADDITIONAL EBITDA

We build, below, upon the current run rate of EBITDA, to develop expectations over the next year or so.

Three new NRCPPs to come on stream in Q4’21. Two leases are signed, the first to open in late September, the 2^nd in October, the 3^rd in late Q4. If the three stores average $1.4M of revenues annually, as the last three have done, and generate a store level EBITDA margin of 18-20%, that would contribute $252k-$280k each annually, or $756k-$820k ($788 at the midpoint) for the three locations.

It seems reasonable to assume an additional sales recovery of 5-10% from the existing seven NRCPPs, or $65k/store, bringing the current $1.3M run rate to about $1.4M. The Company has said that the most recent 14.5% store level EBITDA can be improved, especially with the recent 5% menu price rise. If we assume two points of margin improvement on $1.4M, that would be $28k per store, or $196k annually on the existing seven locations.

The non-traditional franchised segment, primarily C-stores and gas stations, numbered close to 650 locations two years ago. Including the royalties and fees from NRCPPs, that segment contributed $1.3-$1.4M of royalties on a quarterly basis, with a margin contribution well above 60%. This segment has been improving sequentially, from a low of $846k in Q4’20 to $890k in Q1’21 to $1046k in Q2’21. If we assume this segment will continue its recovery back to about $1.3M quarterly, that would be about $300k quarterly, with an incremental margin of at least 75%, $225k quarterly, or $900k annualized.

Potentially offsetting the above potential add-ons could be a continued deterioration in the royalties from grocery stores, which could be perhaps $200k of revenues and $150k of EBITDA.

Adding together the above contributions, we get $1.734M of additional EBITDA within the next year or eighteen months. On top of the current annual run rate of $2.4M, that would total $4.134M. This can be considered “in hand” potential over the next twelve months, essentially going into calendar ’22. It can be expected, looking out more than twelve months, that there will be additional NRCPP openings, a new high of non-traditional locations, and additions to the current three franchised NRCPPs.

It does not seem to be a “reach” to think that annual EBITDA could be at a run rate of $5M or more by the beginning calendar ’23. The biggest single variable, which could help or hurt, would be the rate of sales at the fleet of NRCPPs. Mitigating the risk is the fact that the entire fleet of NRCPPs (10 company operated and 3 franchised), are within an hour’s drive of Indianapolis, with the attendant operational focus.

CONCLUSION: Provided above

Roger Lipton