Rave Restaurant Group, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended March 29, 2020, compared with March 24, 2019. The supplied metadata references “2019 Q3,” but the filing is for fiscal 2020 third quarter. The financial statements are unaudited.
Business Context
Rave operates and franchises Pizza Inn and Pie Five restaurants, including buffet, delivery/carry-out, express and licensed kiosk formats. At March 29, 2020, the system included 152 domestic Pizza Inn units, 43 domestic Pie Five units, 37 international Pizza Inn units and 36 company-owned units, although all remaining company-owned Pie Five restaurants were closed during the quarter.
Financial Results and Key Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | Nine Months FY2020 | Nine Months FY2019 |
|---|---|---|---|---|
| Revenue | $2.705 million | $3.070 million | $8.411 million | $9.256 million |
| Income before taxes | $(0.507) million | $(0.254) million | $(0.187) million | $0.265 million |
| Net income (loss) | $(4.515) million | $(0.263) million | $(4.264) million | $0.077 million |
| Basic EPS | $(0.30) | $(0.02) | $(0.28) | $0.01 |
| Adjusted EBITDA | $6 thousand | $166 thousand | $388 thousand | $713 thousand |
| Cash flow from operating activities | Not separately presented | Not separately presented | $(803) thousand | $421 thousand |
Revenue declined 11.9% in the quarter and 9.1% year to date. Approximate net margins were negative 166.9% for the quarter and negative 50.7% year to date, primarily because of deferred tax valuation adjustments rather than ordinary operating costs. Pre-tax margins were negative 18.7% and negative 2.2%, respectively.
- Pizza Inn franchise and license revenue increased to $1.942 million in the quarter and $5.454 million year to date.
- Pie Five franchise and license revenue declined to $665 thousand in the quarter and $2.539 million year to date.
- Company-owned restaurant sales declined to $36 thousand in the quarter and $240 thousand year to date following store closures.
- Pizza Inn domestic retail sales decreased 10.5% in the quarter and 4.3% year to date; comparable sales decreased 7.8% and 1.2%, respectively.
- Pie Five system-wide retail sales decreased 40.8% in the quarter and 30.1% year to date; comparable sales decreased 21.4% and 14.4%, respectively.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $1.535 million at March 29, 2020, down from $2.264 million at June 30, 2019.
- Current assets were $4.012 million versus current liabilities of $2.603 million, implying an approximate current ratio of 1.5x.
- Total liabilities were $8.827 million versus shareholders’ equity of only $141 thousand.
- Convertible notes were $1.542 million, net of discounts and issuance costs, with a 4% coupon and maturity in February 2022. Notes with $64 thousand of principal were converted into common shares during the first nine months.
- Operating lease liabilities totaled $4.255 million, consisting of $620 thousand current and $3.635 million long term. The company adopted ASC 842 in fiscal 2020, recognizing a $3.712 million right-of-use asset.
- Operating cash flow was negative $803 thousand, primarily due in part to $1.0 million of lease termination payments related to closed company-owned Pie Five stores.
Material Changes Versus the Prior Comparable Period
- The company moved from a nine-month net income of $77 thousand to a net loss of $4.264 million.
- A $4.1 million income tax expense was recorded, including a $4.3 million increase in the valuation allowance on deferred tax assets. Deferred tax assets of $6.7 million were fully offset by a $6.7 million valuation allowance.
- Impairment and other lease charges increased to $495 thousand in the quarter and $836 thousand year to date, primarily due to lease termination expenses.
- Adjusted EBITDA declined from $166 thousand to $6 thousand in the quarter and from $713 thousand to $388 thousand year to date.
- Domestic Pie Five franchised units declined from 57 at the beginning of the fiscal year to 43 at quarter-end; 16 units closed during the first nine months. Domestic Pizza Inn units declined from 155 to 152.
- Company-owned Pie Five operations were effectively exited, reducing restaurant revenue and cost of sales but generating closure, impairment and lease-related costs.
Outlook, Risks and Unusual Items
- Management expects the COVID-19 pandemic to materially adversely affect operations and liquidity during the fourth quarter of fiscal 2020 and into fiscal 2021. Restrictions reduced in-store dining, retail sales, franchise royalties and supplier rebates, although carry-out and delivery partially offset the decline.
- Two domestic franchised Pizza Inn buffet units and 11 domestic franchised Pie Five units had closed at least temporarily because of pandemic-related conditions as of the filing.
- Management furloughed employees, reduced base salaries by 20% for remaining employees and reduced other expenses. Management stated that cash on hand, operating cash flow, government loan proceeds and potential ATM offering proceeds should fund operations for the next 12 months, but future cash flow is expected to be significantly reduced.
- On April 13, 2020, after quarter-end, the company received a $656,830 Paycheck Protection Program loan bearing 0.98% interest and maturing April 10, 2022. Some or all of the loan may be forgiven subject to SBA requirements.
- A former chief executive officer filed a lawsuit seeking, among other remedies, 928,000 shares, $300 thousand of severance or alternatively $2.4 million of actual damages, plus other amounts. The company disputes the claims; a motion to dismiss was pending and trial was scheduled for April 5, 2021.
- The company has no formal quantitative revenue or earnings guidance in the filing. Management expects modest future Pizza Inn unit growth but expects Pie Five unit closures to continue in the near term.
Facts Investors Should Verify
- Whether COVID-19-related declines in restaurant retail sales, royalties and supplier incentives persist beyond fiscal 2020.
- The company’s ability to maintain liquidity with only $1.535 million of quarter-end cash, negative year-to-date operating cash flow and substantial lease obligations.
- The timing and amount of any forgiveness of the $656,830 PPP loan and the related repayment obligations.
- Whether the fully reserved deferred tax assets can become realizable and whether additional tax valuation adjustments are required.
- The pace of Pie Five closures, the sustainability of Pizza Inn franchise performance and the company’s ability to improve Adjusted EBITDA.
- The potential financial and equity dilution consequences of the former CEO litigation and the outstanding convertible notes.