Business Context and Reporting Period
Rave Restaurant Group, Inc. operates and franchises Pizza Inn buffet, delivery/carry-out and express restaurants and Pie Five fast-casual pizza restaurants. It also distributes food, equipment and supplies through Norco. This Form 10-K covers the 52-week fiscal year ended June 26, 2016, compared with the 52-week fiscal year ended June 28, 2015; it is not a quarterly filing despite the requested “2015 Q4” metadata.
At year-end, the system included 32 company-owned restaurants, 57 franchised Pie Five units and 221 franchised Pizza Inn restaurants, including 60 international units. Company-owned restaurants consisted of 31 Pie Five units and one Pizza Inn buffet unit.
Financial Results and Key Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $60.8 million | $48.2 million | +26.2% |
| Net loss | $8.9 million | $1.8 million | Loss increased $7.0 million |
| Basic loss per share | $0.86 | $0.19 | Loss increased $0.67 |
| Adjusted EBITDA | $(0.3) million | $0.6 million | Declined $0.9 million |
| Cash flow from operations | $1.9 million | $2.0 million | Down slightly |
| Capital expenditures | $8.1 million | $6.7 million | Primarily new company-owned Pie Five units |
| Cash and equivalents | $1.1 million | $6.0 million | Down $4.9 million |
| Bank debt | None | None reported at year-end | Credit facilities had expired or been repaid |
Revenue growth reflected higher food and supply sales of $34.9 million, franchise revenue of $5.4 million and company-owned restaurant sales of $20.5 million. Cost of sales increased to $53.3 million from $41.3 million. General and administrative expense increased to $7.2 million from $4.8 million, and franchise expense increased to $3.6 million from $3.2 million.
Fiscal 2016 ended with total assets of $18.5 million, total liabilities of $9.1 million and shareholders’ equity of $9.4 million. Current assets were $4.9 million versus current liabilities of $5.5 million. The filing does not provide a clear current ratio or operating margin; based on reported figures, the company had a negative operating result before taxes and a net loss margin of approximately 14.6%.
Material Changes Versus the Prior Comparable Period
- Pie Five system-wide retail sales increased 110.4% to $53.3 million, while average weekly sales declined 10.0% to $13,417 and comparable store retail sales declined 5.1%.
- Company-owned Pie Five restaurant sales increased 72.2% to $19.6 million as average units increased from 16 to 31, but average weekly sales fell 11.7% to $12,093 and restaurant operating cash flow declined 40.4% to $1.1 million.
- Domestic Pizza Inn retail sales declined 4.6% to $88.7 million. Domestic comparable store retail sales declined 1.0%, and domestic Pizza Inn units declined from 179 to 162.
- Pie Five additions increased the company-owned restaurant footprint but generated weaker performance in newer markets and increased depreciation, marketing, pre-opening and operating costs.
- The company recognized $1.7 million of pre-tax, non-cash impairment charges related to Pie Five units, compared with $0.3 million related to a Pizza Inn unit in fiscal 2015.
- A full $4.9 million valuation allowance was recorded against deferred tax assets, producing income tax expense of $2.7 million despite the pre-tax loss. The company reported $7.5 million of net operating loss carryforwards.
- Cash used in investing activities increased to $7.7 million, while equity issuance proceeds declined to $0.8 million from $8.3 million.
Guidance, Outlook, Risks and Unusual Items
Management intended to continue developing franchised and company-owned Pie Five units in fiscal 2017, expand Pizza Inn domestically and evaluate international Pizza Inn development, particularly in the Middle East. As of September 12, 2016, 23 Pie Five franchisees had development agreements covering up to 347 additional units, although the filing does not establish that all such units will open.
Management stated that cash on hand, operating cash flow and potential proceeds from the 2014 at-the-market offering or debt borrowings were expected to fund fiscal 2017 operations and planned capital expenditures. The filing does not provide formal revenue, earnings or unit-opening guidance.
- Key operating risk is the decline in comparable sales and average weekly sales at Pie Five, particularly in newer markets.
- Domestic and international Pizza Inn unit closures continued; international closures were attributed primarily to economic weakness in the Middle East.
- The company had only $1.1 million of cash at year-end and expects significant lease and operating commitments. Future minimum operating lease payments totaled $25.4 million, including $3.3 million due in fiscal 2017.
- The corporate office lease expired in December 2016; the company was negotiating an extension while evaluating alternatives. Six non-operating leased locations were being considered for sublease or termination.
- The company faces intense competition, franchisee financial and credit risks, labor and regulatory requirements, food-cost volatility, site-selection risk and dependence on qualified franchisees and suppliers.
- Discontinued operations generated a $0.1 million after-tax loss, and the company remained subject to ordinary-course legal claims that management believed were insured or immaterial.
- The company disclosed a related-party advisory agreement with an entity controlled by the chairman; accrued fees were approximately $100,000 at year-end.
Most Important Facts to Verify
- Whether Pie Five comparable sales and average weekly sales stabilized or continued declining after fiscal 2016.
- The actual opening, closure and economics of units covered by the announced Pie Five development agreements.
- Liquidity after the $7.7 million fiscal 2016 investing outflow and the availability and dilution implications of the ATM offering.
- Current status and cost of the corporate office lease and six non-operating locations.
- Whether further impairment charges, franchisee credit losses or deferred-tax valuation adjustments were recorded in subsequent filings.
- The company’s ability to generate positive adjusted EBITDA and fund growth without substantial equity issuance or new borrowings.