NOBLE ROMANS INC (NROM)·Q2 2023 Earnings Summary

Executive Summary

• Q2 2023 delivered a return to profitability driven by franchising strength: revenue rose to $4.0M (from $3.3M in Q1), operating income to $0.70M, and net income to $0.33M ($0.02 basic; $0.01 diluted), with no ERTC benefit in Q2 (ERTC was recognized in Q1) .
• Franchising momentum accelerated: 43 non-traditional units sold and 22 opened year-to-date, lifting franchising revenue and margins; CPP margin improved to 14.7% despite inflation, though management cautioned cheese costs spiked ~45% since June .
• Cash generation improved: operating cash flow was $0.54M in Q2; management applied ERTC proceeds to early debt retirement ($600k) and is pursuing refinancing with five interested parties .
• Shareholder activism/legal overhang eased: a federal court denied BT Brands’ TRO/preliminary injunction, allowing the annual meeting to proceed; management continues to recommend ignoring dissident proxies .

What Went Well and What Went Wrong

• What Went Well

  • Non-traditional franchising re-accelerated post-pandemic: 43 units sold YTD and 22 openings in H1; franchising revenue rose to $1.37M in Q2 with margin contribution at 68.4% .
  • CPP margin recovery: margin contribution improved to 14.7% (vs. 8.4% in Q1) on cost controls, portioning, re-bidding ingredients, and staffing model tweaks. “As you can see, the margin contribution went from 8.4% in the first quarter to 14.7% in the second” .
  • Liquidity and cash flow: net cash from operations improved to ~$0.54M; current ratio strengthened to 1.84x .

• What Went Wrong

  • CPP revenue softness persisted YoY (Q2: $2.37M vs. $2.50M prior year) as new store lap effects and demand mix (delivery) pressured top-line .
  • Input cost volatility: cheese prices reversed lower trends and increased ~45% since June, raising risk to H2 restaurant margins .
  • Interest burden: interest expense increased to $0.38M in Q2 (vs. $0.35M prior year) due to PIK accruals on the Corbel loan, partially offset by monthly principal payments .

Financial Results

• Consolidated results vs. prior year and prior quarter

• Segment revenue mix

• Segment KPI and margin contribution

Notes: Q1 2023 margins in franchising and company-owned non-traditional reflect ERTC accounting recorded in Q1 (no ERTC impact in Q2) .

Guidance Changes

Management qualitative commentary:

• Expect continued non-traditional openings as sold units convert, supported by a strong lead pipeline; also noted ongoing promotions at CPP to support demand .

Earnings Call Themes & Trends

Management Commentary

• Strategic focus: “It is rewarding to see that these efforts have paid off throughout the second quarter… [we] focused more of [our] resources on non-traditional franchising… tightly control corporate level overhead expense” .
• Franchising pipeline: “With the sales effort in the first six months of this year the company generated 43 new franchised units available for opening… opened 22 new locations… significant pipeline of leads” .
• CPP margins: “Most of these initiatives were finalized… by mid- and late-March… margin contribution went from 8.4% in the first quarter to 14.7% in the second” .
• Cost risk: “Cheese… has risen about 45% [since June]” .
• Financing: “We have 5 companies seriously looking [at refinancing]… moving forward with progress” .

Q&A Highlights

• Legal costs and timing: Minimal Q2 legal expense tied to activism; larger amounts expected in Q3 .
• Refinancing: Five interested parties; process delayed by litigation but now moving forward .
• Franchising revenue spike explanation: Mix of upfront franchise fees (31 sold in H1) and unit reopenings; non-traditional appetite improving as pandemic impact fades .
• Debt paydown: Approximately $600k of long-term debt repaid using ERTC proceeds; more to come when remaining refund arrives .
• Disclosure ask: Shareholders requested clearer disclosure of total open non-traditional units; management will consider adding in future updates .

Estimates Context

• Wall Street (S&P Global) consensus for Q2 2023 EPS and revenue was not available at the time of analysis for NROM’s microcap OTC listing (attempt to retrieve via S&P Global API returned an access/limit error). As a result, we cannot provide a vs. consensus comparison for Q2 2023 at this time [functions.GetEstimates error].

Key Takeaways for Investors

• Franchising-led mix shift is the core driver: sustained selling momentum (43 sold, 22 opened H1) should lift high-margin royalty streams as sold units convert to open locations in H2/H1’24 .
• Restaurant margin rebound is tangible, but fragile: CPP margin improved to 14.7% on self-help levers; monitor cheese cost volatility and management-level labor constraints that could cap margin expansion .
• Balance sheet de-risking in motion: improved operating cash generation, early debt retirement (~$600k), and active refinancing discussions with five parties could lower cash interest and extend maturities—a potential catalyst if executed .
• Activism/legal overhang reduced: court denial of TRO allows operational focus and shareholder meeting continuity; continued vigilance warranted until governance dispute fully resolves .
• Near-term trading setup: headline catalysts include signed-to-open conversion pace, updates on large C-store chain rollouts, and any refinancing announcement; margin prints may be noisy if cheese prices remain elevated .
• Medium-term thesis: scalable non-traditional platform plus disciplined overhead supports operating leverage; execution risk centers on unit activation, franchisee economics, and commodity/labor trends .

Appendix: Additional Detail

• Additional operating and financial notes for Q2 2023:

  • General & administrative expense: $526k (Q2), $1.045M (H1), reflecting cost discipline .
  • Interest expense: $379k in Q2 (PIK accruals on Corbel loan), offset by monthly principal payments of $83,333 .
  • Current ratio: 1.84x at June 30, 2023 (vs. 1.3x at year-end 2022) .

• Cross-check vs. prior quarter and prior year:

  • Q1 2023 included $1.46M net ERTC benefit that inflated franchising/non-traditional margins; Q2 results were unaffected by ERTC and therefore reflect underlying operations .
  • CPP revenue lapped new-store opening bumps from late 2021, pressuring YoY sales, but efficiency gains and promotions supported margin recovery in Q2 .