Business Context and Reporting Period
Rave Restaurant Group, Inc. operates and franchises Pizza Inn and Pie Five restaurants and distributes food, paper products, and supplies through its Norco division. This unaudited Form 10-Q covers the three and six months ended December 27, 2015, compared with the periods ended December 28, 2014. The company was a smaller reporting company with 10.3 million common shares outstanding as of February 10, 2016.
- At December 27, 2015, the company had 249 domestic restaurants: 167 Pizza Inn units and 82 Pie Five units, plus 71 international Pizza Inn units.
- Pie Five domestic units increased from 54 at June 28, 2015 to 82 at December 27, 2015; Pizza Inn domestic units declined from 179 to 167.
Financial Results and Key Metrics
| Metric | Three months ended Dec. 27, 2015 | Three months ended Dec. 28, 2014 | Six months ended Dec. 27, 2015 | Six months ended Dec. 28, 2014 |
|---|---|---|---|---|
| Revenue | $15.3 million | $11.1 million | $29.8 million | $22.4 million |
| Loss before taxes from continuing operations | $(1.9) million | $(0.5) million | $(2.7) million | $(0.9) million |
| Net loss | $(4.8) million | $(0.4) million | $(5.4) million | $(0.7) million |
| Basic net loss per share | $(0.47) | $(0.04) | $(0.52) | $(0.07) |
| Adjusted EBITDA | $61 thousand | $5 thousand | $289 thousand | $208 thousand |
| Cash provided by operating activities | Not separately provided | Not separately provided | $1.5 million | $(28) thousand |
- Revenue increased 37.6% year over year in the quarter and 33.0% year to date, driven by higher food and supply sales, franchise revenue, and company-owned restaurant sales.
- Revenue mix for the quarter was $8.8 million of food and supply sales, $1.4 million of franchise revenue, and $5.1 million of restaurant sales.
- Net margin was approximately negative 31.6% for the quarter and negative 18.0% year to date. Loss before tax from continuing operations was approximately negative 12.5% and negative 9.0% of revenue, respectively.
- The company recorded a $1.0 million non-cash impairment charge related to three Pie Five restaurants and a $3.5 million valuation allowance against all net deferred tax assets.
- Cash and cash equivalents were $1.7 million at December 27, 2015, down from $6.0 million at June 28, 2015. Total current assets were $6.2 million versus current liabilities of $5.5 million.
- The company reported no bank debt at period-end and paid only $1 thousand of interest during the first six months. Total liabilities were $8.3 million and shareholders’ equity was $12.7 million.
- Capital expenditures were $6.5 million for the first six months, primarily for new company-owned Pie Five restaurants. Financing activities provided $0.8 million, including $0.8 million of stock-sale proceeds.
Material Changes Versus the Prior Comparable Period
- Company-owned restaurant sales rose 81.8% in the quarter and 72.8% year to date, primarily from new company-owned Pie Five openings.
- Pie Five system-wide retail sales increased 151.2% in the quarter and 157.1% year to date as average units open increased substantially. However, average weekly sales declined 9.9% in the quarter and 7.3% year to date.
- Pie Five comparable-store retail sales decreased 1.6% in the quarter and were essentially flat year to date.
- Pizza Inn domestic retail sales declined 2.9% in the quarter and 3.4% year to date; comparable-store sales declined 1.7% and 1.4%, respectively.
- Pre-opening expenses increased to $304 thousand in the quarter and $736 thousand year to date, compared with $136 thousand and $172 thousand, respectively, in the prior periods.
- General and administrative expenses increased 39.4% in the quarter and 40.4% year to date, while franchise expenses increased 26.5% and 23.4%, respectively, reflecting additional resources for Pie Five growth.
- Adjusted EBITDA improved modestly, but GAAP losses widened substantially because of impairment, the deferred-tax valuation allowance, higher expansion costs, and increased operating expenses.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal financial guidance. Management stated that accelerated Pie Five openings are expected to continue as franchise development agreements mature and company-owned stores are developed.
- Management believes cash on hand, operating cash flow, and proceeds from the 2014 at-the-market offering will fund operations for the next 12 months.
- Liquidity remains an important risk: cash declined by $4.2 million during the first six months, primarily because $6.5 million of capital expenditures substantially exceeded operating and financing cash inflows.
- Future results are exposed to the performance of newly opened Pie Five restaurants, declining average weekly sales, continued Pizza Inn closures, construction and pre-opening costs, and the company’s ability to generate taxable income sufficient to realize deferred tax assets.
- The company has an at-the-market offering that had generated $7.9 million of aggregate net proceeds through December 27, 2015. Continued equity issuance could dilute shareholders.
- Related-party advisory fees to an entity indirectly controlled by the chairman are generally $50 thousand per quarter plus potential additional fees of up to $50 thousand per quarter, subject to financial-covenant limitations.
- The company is subject to ordinary-course legal claims, which management believes are insured or immaterial. No material adverse outcome is expected based on the filing.
- Discontinued operations generated losses of $23 thousand in the quarter and $60 thousand year to date, relating to closed Pizza Inn locations.
Important Facts for Investors to Verify
- Whether cash generation can support the company-owned Pie Five expansion program without substantial additional equity financing.
- Whether Pie Five average weekly sales and comparable-store sales stabilize as the store base expands.
- The operating performance and recoverability of the three Pie Five restaurants subject to the $1.0 million impairment charge.
- The assumptions supporting the full $3.5 million deferred-tax valuation allowance and the conditions required for future tax-asset recognition.
- The remaining capacity and potential dilution from the 2014 at-the-market offering, as well as the company’s future capital requirements.
- Whether Pizza Inn domestic unit closures and negative comparable-store sales continue.