Business Context and Reporting Period
Company: Rave Restaurant Group, Inc. (RAVE)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 25, 2017
Business Overview: The Company operates and franchises two primary brands: Pizza Inn (buffet, delivery/carry-out, and express units) and Pie Five (fast-casual pizza). As of June 25, 2017, the system included 13 Company-owned Pie Five units, 71 franchised Pie Five units, and 221 franchised Pizza Inn units (161 domestic, 60 international). The Company also operates a food and supply distribution division (Norco).
Key Financial Metrics
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Total Revenues | $57.1 million | $60.0 million |
| Net Loss | $(12.5) million | $(8.9) million |
| Loss Per Share (Basic & Diluted) | $(1.18) | $(0.86) |
| Adjusted EBITDA | $(2.7) million | $(0.1) million |
| Cash and Cash Equivalents | $0.5 million | $0.9 million |
| Total Debt (Short-term + Convertible Notes) | $3.7 million | $0.0 million |
| Operating Cash Flow | $(5.5) million | $1.9 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 4.8% to $57.1 million, driven primarily by a 22.4% drop in Company-owned restaurant sales ($15.2 million vs. $19.6 million) due to the closure of 18 Company-owned Pie Five units and lower average weekly sales.
- Increased Net Loss: Net loss widened by $3.6 million to $12.5 million. This was primarily attributable to $7.0 million in non-recurring charges, including loss on sale of assets, impairment charges, and closed store expenses.
- Impairment Charges: The Company recognized $5.9 million in pre-tax impairment charges related to the carrying value of underperforming Pie Five units and lease termination expenses for undeveloped sites, compared to $1.7 million in the prior year.
- Franchise Growth: Despite Company-owned struggles, domestic franchisee retail sales increased 6.9%, and Pie Five system-wide retail sales grew 7.2% due to an increase in the number of franchised units.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: The Company raised $3.0 million via a shareholder rights offering of 4% Convertible Senior Notes due 2022 and secured a $1.0 million short-term loan from a major shareholder. Management believes current cash and financing are sufficient for fiscal 2018 operations.
- Strategic Shift: The Company is closing underperforming Company-owned Pie Five units to strengthen the brand foundation. Future growth is expected to be driven by franchising Pie Five domestically and internationally (starting with Pakistan) and expanding Pizza Inn in the Middle East.
- Valuation Allowance: Due to cumulative losses, the Company maintains a full valuation allowance against all deferred tax assets, increasing the allowance by $4.1 million in fiscal 2017.
- Risks: Key risks include the intense competition in the restaurant industry, the financial performance of newer markets, and the ability to secure additional capital if operating cash flows remain negative.
Investor Verification Checklist
- Cash Burn Rate: Verify the sustainability of operations given the $5.5 million negative operating cash flow and low cash balance ($0.5 million) at period end.
- Debt Covenants: Review the terms of the $1.0 million short-term loan from Newcastle Partners and the $3.0 million Convertible Notes, specifically regarding maturity dates and conversion features.
- Store Closure Impact: Assess the long-term impact of closing 12 underperforming Pie Five units on future royalty revenue and brand presence.
- Franchisee Health: Monitor the increase in bad debt provision ($0.3 million vs. $0.1 million) as an indicator of franchisee financial distress.
- Equity Dilution: Note the recent September 2017 equity rights offering ($5.0 million) and the potential dilution from the convertible notes (conversion price $2.00/share).