Rave Restaurant Group, Inc. — Fiscal 2018 Third Quarter Form 10-Q
Business context and reporting period
Rave operates and franchises Pizza Inn and Pie Five restaurants in the United States and internationally. The unaudited filing covers the 13-week quarter and 39-week year-to-date period ended March 25, 2018, compared with March 26, 2017. The company had 152 domestic Pizza Inn franchised units, 76 domestic Pie Five franchised units, two company-owned Pie Five units, and 60 international Pizza Inn units at quarter-end.
During the second quarter of fiscal 2018, the company discontinued its Norco food and supply distribution division. It also redefined its operating segments as Pizza Inn Franchising, Pie Five Franchising, and Company-Owned Restaurants.
Financial performance and key metrics
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Revenue | $2.665 million | $6.498 million | $12.294 million | $20.744 million |
| Loss from continuing operations | $475 thousand | $1.704 million | $1.003 million | $10.410 million |
| Net loss | $492 thousand | $1.962 million | $1.425 million | $11.383 million |
| Net loss per share | $0.03 | $0.18 | $0.11 | $1.07 |
| Adjusted EBITDA | $(216) thousand | $(571) thousand | $289 thousand | $(1.510) million |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $4.429 million | $3.032 million |
- Quarterly revenue declined approximately 59% and year-to-date revenue declined approximately 41%, primarily because of the reduction in company-owned restaurants and the discontinued distribution division.
- Net loss margin was approximately 18.5% in Q3 FY2018 versus 30.2% in the prior-year quarter; year-to-date net loss margin was approximately 11.6% versus 54.9%.
- Pizza Inn domestic comparable-store retail sales increased 2.3% in the quarter and 2.0% year to date, despite severe weather during the quarter. Total domestic Pizza Inn retail sales declined 3.6% in the quarter and 2.6% year to date.
- Pie Five comparable-store retail sales declined 12.6% in the quarter and 14.9% year to date. System-wide Pie Five retail sales declined 19.6% and 18.5%, respectively, partly due to fewer average units open.
- General and administrative expense declined to $1.698 million in the quarter from $2.902 million and to $5.809 million year to date from $8.427 million.
- Impairment and other lease charges were $70 thousand in the quarter and $751 thousand year to date, compared with a prior-year quarterly credit of $110 thousand and year-to-date charges of $5.116 million.
Balance sheet, debt, liquidity, and cash flow
- Cash and cash equivalents were $979 thousand at March 25, 2018, compared with $451 thousand at June 25, 2017.
- Total assets were $7.083 million versus $9.546 million at fiscal year-end. Shareholders’ equity was $2.891 million, compared with a deficit of $2.079 million at June 25, 2017.
- Current liabilities declined to $1.679 million from $6.743 million. Trade accounts payable declined to $713 thousand from $4.165 million.
- Short-term debt was eliminated, declining from $1.0 million to zero. Convertible notes were $1.557 million, down from $2.749 million.
- Year-to-date operating cash use of $4.429 million exceeded the prior-year use of $3.032 million. Investing activities provided $813 thousand, primarily from asset sales, while financing activities provided $4.144 million, primarily from common-stock sales.
- The company filed an effective shelf registration for up to $5.0 million of common stock and began at-the-market sales. Management stated that cash on hand, operating cash flow, and expected ATM proceeds should fund operations for the next 12 months.
Material changes, outlook, risks, and unusual items
- Management attributed the improvement in losses primarily to closing poorly performing company-owned stores, lower closed-store expenses, reduced corporate overhead, lower impairment and lease termination costs, and gains on asset sales.
- The company closed underperforming Pie Five stores and does not anticipate opening additional company-owned Pie Five units in the near term. Management describes the Pizza Inn domestic store count as stabilizing.
- Company-owned restaurant sales fell 92.5% in the quarter and 68.1% year to date because of the reduced store base. Company-owned Pie Five restaurant operating cash flow remained negative: $(37) thousand in the quarter and $(277) thousand year to date.
- Discontinued operations include the Norco division, leased buildings associated with previously closed restaurants, and other closed company-owned restaurants.
- The company recognized $477 thousand of bad-debt expense year to date, including approximately $200 thousand related to a promissory note from the prior sale of two company-owned Pie Five units.
- The company recorded a full valuation allowance against deferred tax assets. The filing references approximately $6.0 million and, elsewhere, approximately $7.2 million of deferred tax assets; the source text does not provide a clear reconciled value.
- The company expects to adopt the new revenue-recognition standard in fiscal 2019 and expects changes primarily to the timing of license-fee recognition and the gross presentation of franchise advertising activity. It is evaluating the future lease-accounting standard, effective for the company in fiscal 2020.
- Risks include continued operating losses and negative operating cash flow, dependence on equity financing and asset sales, franchisee credit and bad-debt exposure, store closures and lease obligations, impairment risk, adverse comparable-store sales, and ordinary-course legal and franchise disputes. Management states pending claims are insured or not expected to be material.
- No formal financial guidance was provided. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
Important facts for investors to verify
- Reconcile the sharp revenue decline with the Norco discontinuation and substantial reduction in company-owned stores.
- Assess whether the stated 12-month liquidity outlook is achievable given $4.429 million of year-to-date operating cash use and reliance on ATM equity sales.
- Review the terms, maturity, conversion provisions, and security arrangements of the $1.557 million of convertible notes.
- Evaluate Pie Five comparable-store sales, unit closures, franchisee growth, and the continued negative cash flow of company-owned stores.
- Reconcile the conflicting deferred-tax-asset amounts and monitor the effect of the full valuation allowance and Tax Cuts and Jobs Act accounting.
- Review lease termination obligations, impairment charges, franchisee receivables, and the collectability of notes receivable.