10-Q: Noble Romans Inc. Reports Mixed Results in Q3 2024, Focuses on Franchise Expansion

Noble Romans Inc. saw a slight increase in revenue from company-owned restaurants but a decrease in overall profitability for the third quarter of 2024, while continuing to expand its non-traditional franchise locations.

Summary

• Noble Romans Inc. reported a slight increase in revenue from company-owned restaurants for the three months ended September 30, 2024, reaching $2.195 million compared to $2.175 million in the same period of 2023.
• However, revenue from company-owned restaurants decreased to $6.41 million for the nine months ended September 30, 2024, down from $6.64 million in the corresponding period of 2023.
• Franchising revenue showed strong growth, increasing to $1.44 million for the three months and $4.30 million for the nine months ended September 30, 2024, compared to $1.31 million and $3.67 million in the same periods of 2023.
• The company's net income for the three months ended September 30, 2024, was $193,000, compared to $154,500 for the same period in 2023.
• Net income for the nine months ended September 30, 2024, was $164,000, significantly lower than the $1.35 million reported for the same period in 2023, which was inflated by a $1.46 million Employee Retention Tax Credit (ERTC) refund.
• The company is actively pursuing new financing to repay its debt with Corbel Capital Partners and its subordinated notes, expecting a reduction in its effective interest rate.
• The company opened 51 new non-traditional franchise locations this year and plans to open an additional 20 to 25 before the end of 2024.
• The company's current ratio was 0.3-to-1 as of September 30, 2024, compared to 1.1-to-1 as of December 31, 2023.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with positive growth in franchising but concerning financial metrics and debt levels. The company is actively addressing its debt but faces challenges in profitability and liquidity.

Positives

• Franchising revenue has shown strong growth, indicating successful expansion efforts.
• The company is actively working to refinance its debt, which is expected to lower interest expenses.
• The company has a significant pipeline of prospects for future non-traditional franchise sales.
• The company has implemented a small menu price increase in October 2024, the first since early 2022, which may improve margins.
• The company has made internal adjustments to operating systems and gained efficiency in operations as staffing levels stabilized and employee experience levels increased.

Negatives

• Company-owned restaurant revenue decreased for the nine-month period.
• Net income for the nine-month period was significantly lower than the previous year due to the absence of the ERTC refund.
• The company's current ratio has decreased significantly, indicating potential liquidity issues.
• The company experienced increased costs of sales, particularly with cheese prices.
• The company experienced a decrease in margin contribution in company-owned restaurants due to increased costs and third-party delivery fees.
• The company's non-traditional company-owned location experienced a temporary shutdown which negatively impacted sales.

Risks

• The company's ability to secure new financing on favorable terms is not guaranteed.
• The company is exposed to interest rate risk due to its variable-rate debt.
• The company's financial performance is subject to economic conditions, including inflation and consumer spending habits.
• The company's success depends on the performance of its franchisees and the opening of new locations.
• The company is subject to competitive pressures and pricing challenges.
• The company's future performance could be impacted by the effects of the COVID pandemic and its aftermath.
• The company's financial results are subject to the acceptance of the amended federal Form 941 return relating to the ERTC.

Future Outlook

The company expects to continue expanding its non-traditional franchise locations and is pursuing new financing to repay its existing debt. The company anticipates a reduction in its effective interest rate as a result of the refinancing. The company expects to open an additional 20 to 25 franchise locations before the end of 2024.

Management Comments

• The company believes it will be able to complete the refinancing based on its credit metrics.
• The company is focused on revenue expansion while carefully managing corporate-level overhead expenses.
• The company refocused its development plans toward selling more non-traditional franchises as a result of the pandemic coming to an end.
• The company has a significant pipeline of leads and prospects for future non-traditional franchise sales.
• The company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan.

Industry Context

The company's focus on non-traditional franchise locations aligns with a broader trend of convenience stores and travel plazas seeking to enhance their food offerings. The company's expansion plans are also influenced by the post-pandemic recovery and the increasing willingness of businesses to invest in growth.

Comparison to Industry Standards

• The company's revenue growth in franchising is a positive sign, as many restaurant chains are focusing on franchising for expansion.
• The decrease in the current ratio to 0.3-to-1 is concerning and below industry benchmarks, indicating potential liquidity issues. Many companies aim for a current ratio of 1.5-to-2.0.
• The company's net income is significantly impacted by the absence of the ERTC refund, highlighting the importance of government support for some businesses during the pandemic.
• The company's interest expense is high, reflecting its reliance on debt financing. Many companies in the restaurant industry have lower debt levels and interest expenses.
• The company's focus on non-traditional locations is a unique strategy compared to many traditional restaurant chains, which may provide a competitive advantage.
• The company's expansion plans with Majors Management, LLC are similar to other franchise development agreements in the industry, but the delay in openings highlights the challenges of managing franchise growth.

Corporate Governance

Legal Proceedings

• The Company is not involved in material litigation against it.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the company's liquidity position.
• Employees may be affected by the company's efforts to manage operating expenses.
• Franchisees may benefit from the company's expansion plans and increased brand recognition.
• Creditors may be concerned about the company's ability to repay its debt.
• Customers may experience changes in menu prices and service offerings.

Next Steps

• The company will continue to pursue new financing to repay its debt.
• The company plans to open an additional 20 to 25 franchise locations before the end of 2024.
• The company will continue to focus on expanding its non-traditional franchise locations.
• The company will continue to monitor and manage its operating expenses.

Key Dates

Keywords

franchising, restaurant, pizza, non-traditional, revenue, debt, refinancing, interest rate, ERTC, financial results