Lipton Financial Services Restaurant and Retail Review

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1 NOBLE ROMAN'S Date : April 18, 2018 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 nontraditional 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 1 / 5

2 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 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 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 2 / 5

3 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 3 / 5

4 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 4 / 5

5 Powered by TCPDF ( 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. 5 / 5