RAVE RESTAURANT GROUP, INC. quarterly report, Q2 FY2021

Rave Restaurant Group, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Rave operates and franchises Pizza Inn pizza buffet, delivery/carry-out and express restaurants, Pie Five fast-casual pizza restaurants, and Pizza Inn Express kiosks. The filing covers the 13-week quarter and 26-week year-to-date period ended December 27, 2020, compared with December 29, 2019. The financial statements are unaudited. At December 27, 2020, the system included 142 domestic Pizza Inn units, 37 domestic Pie Five units and 32 international Pizza Inn units.

Financial Performance and Key Metrics

Metric	Three Months Ended Dec. 27, 2020	Three Months Ended Dec. 29, 2019	Six Months Ended Dec. 27, 2020	Six Months Ended Dec. 29, 2019
Revenue	$2.128 million	$2.830 million	$4.031 million	$5.706 million
Income before taxes	$104 thousand	$10 thousand	$182 thousand	$320 thousand
Net income	$102 thousand	$14 thousand	$178 thousand	$251 thousand
Net margin	Approximately 4.8%	Approximately 0.5%	Approximately 4.4%	Approximately 4.4%
Adjusted EBITDA	$205 thousand	$2 thousand	$383 thousand	$382 thousand
Cash used in operating activities	Not separately provided	Not separately provided	$(307) thousand	$(353) thousand

Quarterly revenue declined 24.8%, while year-to-date revenue declined 29.4%.
Quarterly net income increased by $88 thousand, despite lower revenue, primarily because total expenses declined by $796 thousand.
Year-to-date net income declined by $73 thousand as the $1.675 million revenue reduction exceeded the $1.537 million expense reduction.
Quarterly and year-to-date interest expense was $23 thousand and $46 thousand, respectively.
Cash, cash equivalents and restricted cash totaled $6.527 million at December 27, 2020, including $6.292 million of unrestricted cash and cash equivalents. Cash and cash equivalents increased from $2.969 million at June 28, 2020.
Total assets were $12.779 million and total liabilities were $8.467 million at December 27, 2020. Shareholders’ equity was $4.312 million.

Debt, Liquidity and Cash Flow

Operating activities used $307 thousand of cash during the first six months of fiscal 2021.
Investing activities generated no net cash; $26 thousand of capital expenditures were offset by $26 thousand of collections on notes receivable.
Financing activities provided $3.631 million, primarily from the issuance of common stock, net of $130 thousand of issuance costs. The company issued 2.540 million shares during the quarter.
Convertible notes of $1.562 million were outstanding at December 27, 2020. The notes bear interest at 4%, are convertible at $2.00 per share and mature February 15, 2022.
The company had a $657 thousand Paycheck Protection Program loan outstanding. The loan bears interest at 0.98%, matures April 10, 2022, and may be forgiven subject to Small Business Administration approval and qualifying expenditure documentation.
Operating lease liabilities totaled $3.796 million, including current and long-term portions. Contractual operating lease payments totaled $4.229 million before $433 thousand of imputed interest.
Management expects significantly reduced operating cash flow during the remainder of fiscal 2021 because of COVID-19, but believes cash on hand and operating cash flow will fund operations for the next 12 months.

Material Changes Versus the Prior Comparable Period

Pizza Inn domestic retail sales decreased 24.6% in the quarter and 25.1% year to date. Domestic comparable-store retail sales decreased 18.4% and 20.0%, respectively.
Pie Five system-wide retail sales decreased 42.1% in the quarter and 45.8% year to date. Comparable-store retail sales decreased 15.5% and 19.6%, respectively.
Pie Five average domestic units open declined from 54 to 37 in the quarter and from 56 to 46 year to date. The company-owned Pie Five restaurants were closed during the prior fiscal year, resulting in no company-owned restaurant sales in the current periods.
Domestic Pizza Inn units declined from 151 to 142 during the first six months, while international Pizza Inn units declined from 38 to 32. Pie Five domestic units declined from 42 to 37.
Pizza Inn franchise and license revenue was stable at $1.624 million in the quarter but declined year to date from $3.512 million to $3.004 million. Pie Five franchise and license revenue declined from $1.021 million to $456 thousand in the quarter and from $1.873 million to $932 thousand year to date.
General and administrative expense decreased 24.3% in the quarter and 22.3% year to date, reflecting expense reductions in response to COVID-19. Franchise expense decreased 27.7% in the quarter and 32.3% year to date.
Impairment and other lease charges decreased to $4 thousand in the quarter and $21 thousand year to date, compared with $193 thousand and $341 thousand in the prior comparable periods.
Bad debt expense increased to $88 thousand in the quarter and $115 thousand year to date, compared with $36 thousand and $28 thousand, respectively.

Guidance, Outlook, Risks and Unusual Items

COVID-19 materially reduced in-store sales, particularly at buffet and Pie Five restaurants, while increased carry-out and delivery sales only partially offset the decline. Capacity restrictions, temporary closures, reduced consumer demand and potential future outbreaks remain significant risks.
Management expects modest Pizza Inn and Pie Five unit closures to continue in the near term, although it expects closures eventually to reverse. It expects international Pizza Inn units to increase moderately in future periods.
The company participated in the PPP and expects a forgiveness decision during the second half of fiscal 2021. Any unforgiven amount will require repayment.
Adjusted EBITDA increased to $205 thousand for the quarter from $2 thousand in the prior period and was essentially flat year to date at $383 thousand versus $382 thousand. This non-GAAP measure excludes specified non-operating and unusual items and should not be viewed as a substitute for GAAP results.
The company maintains a full $6.5 million valuation allowance against deferred tax assets. It recorded $4 thousand of current state income tax expense for the first six months and used net operating losses to offset federal taxes.
A former chief executive officer filed an employment-related lawsuit seeking, among other relief, 928,000 shares, $300 thousand of severance or alternatively $2.4 million of actual damages, plus fees and other amounts. The company’s summary judgment motion was pending, discovery was ongoing and trial was scheduled for April 5, 2021. Management considers the claims without merit.
The 2017 at-the-market offering expired November 6, 2020. Through December 27, 2020, the company had sold 3.064 million shares under the program for aggregate gross proceeds of $4.5 million.

Important Facts for Investors to Verify

Whether COVID-19 restrictions, consumer behavior and restaurant closures cause operating cash flow to fall below management’s 12-month liquidity expectations.
The timing and amount of PPP loan forgiveness and the resulting repayment obligation, if any.
The company’s ability to meet the February 2022 convertible-note maturity and ongoing operating lease obligations.
Whether Pizza Inn and Pie Five unit closures stabilize or continue, and whether comparable-store sales recover.
The outcome and potential financial or equity dilution impact of the former CEO’s lawsuit.
The sustainability of reported profitability and Adjusted EBITDA given declining revenue, increased bad debt expense and reliance on cost reductions and equity financing.
The effect of the increased share count on future per-share results; outstanding shares increased to 18.005 million from 15.465 million at June 28, 2020.