Business Context and Reporting Period
Company: Rave Restaurant Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 23, 2018 (First Quarter of Fiscal 2019)
Business Overview: The Company operates and franchises pizza buffet, delivery/carry-out, and express restaurants under the "Pizza Inn" trademark and fast-casual pizza restaurants under the "Pie Five Pizza Company" trademark. The Company also licenses Pizza Inn Express kiosks. As of the period end, the Company operated 153 domestic Pizza Inn units and 71 domestic Pie Five units (including 1 company-owned).
Key Financial Metrics
| Metric (in thousands) | Q1 2019 (Ended Sep 23, 2018) | Q1 2018 (Ended Sep 24, 2017) |
|---|---|---|
| Total Revenues | $2,991 | $5,433 |
| Net Income / (Loss) | $108 | $(356) |
| Income from Continuing Operations | $108 | $(131) |
| EPS - Basic | $0.01 | $(0.03) |
| EPS - Diluted | $0.01 | $(0.03) |
| Operating Cash Flow | $590 | $(1,048) |
| Adjusted EBITDA | $456 | $676 |
| Cash and Cash Equivalents | $2,006 | $3,976 |
| Total Assets | $11,455 | $10,986 |
| Total Liabilities | $6,533 | $4,687 |
| Convertible Notes (Long-term) | $1,567 | $1,562 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 45% to $2.99 million from $5.43 million. This was primarily driven by a 94.8% drop in Company-owned restaurant sales (from $2.18 million to $0.11 million) due to the closure of 13 company-owned Pie Five stores. Franchise revenues also declined due to the absence of $0.7 million in franchise and development fees recognized in the prior year from defaulted agreements.
- Profitability Improvement: The Company reported a net income of $0.11 million compared to a net loss of $0.36 million in the prior year. This turnaround was achieved despite lower revenues, primarily due to the elimination of losses from closed company-owned stores and reduced general and administrative expenses.
- Accounting Change (ASC 606): The Company adopted the new revenue recognition standard (Topic 606) effective June 25, 2018. This resulted in a cumulative after-tax reduction of $1.6 million to retained earnings. For the current quarter, the adoption increased reported revenues by $0.45 million and pre-tax income by $0.03 million, largely due to the gross reporting of advertising fund contributions.
- Unit Count: Total domestic Pizza Inn units remained flat at 153. Total domestic Pie Five units decreased by 2 to 71, reflecting the closure of underperforming locations.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes cash on hand ($2.0 million), combined with cash from operations and proceeds from at-the-market (ATM) stock sales, will be sufficient to fund operations for the next 12 months. The Company sold 173,852 shares under its ATM program through September 23, 2018, raising $0.3 million.
- Strategic Shift: The Company continues to close underperforming company-owned stores to stabilize the brand and reduce overhead. Management anticipates the trend of net store closures will moderate and reverse in future periods.
- Discontinued Operations: The Norco distribution division was discontinued in the prior fiscal year. Current discontinued operations include losses from leased buildings and closed company-owned restaurants.
- Risks: The Company is subject to claims related to employment, franchise disputes, and taxes, though management believes these are covered by insurance or immaterial. The Company relies on franchisee performance and has significant deferred tax assets subject to valuation allowances.
Investor Verification Checklist
- ASC 606 Impact: Verify the long-term sustainability of revenue recognition changes related to advertising funds and franchise fees under the new standard.
- Company-Owned Store Strategy: Confirm the timeline for reversing the trend of store closures and the plan for future capital expenditures in company-owned units.
- Liquidity Runway: Monitor the rate of cash burn and the success of the ATM stock offering in maintaining the projected 12-month liquidity buffer.
- Franchisee Health: Review comparable store sales trends for Pizza Inn (+2.3%) and Pie Five (-1.8%) to assess franchisee stability.
- Debt Obligations: Review the terms of the $1.57 million in convertible notes and any potential conversion triggers.