Rave Restaurant Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rave operates and franchises Pizza Inn and Pie Five restaurants, distributes food and supplies through its Norco division, and earns franchise royalties and fees. The filing covers the 13-week quarter ended September 24, 2017, with comparison to the quarter ended September 25, 2016. The period is described in the filing as the first quarter of fiscal 2018.
- At quarter-end, the system included 159 domestic Pizza Inn units, 83 domestic Pie Five units, and 60 international Pizza Inn units.
- The Company had 14,282,558 common shares outstanding as of November 6, 2017.
Financial Results and Key Metrics
| Metric | Q1 Fiscal 2018 | Q1 Fiscal 2017 |
|---|---|---|
| Revenue | $13.157 million | $15.264 million |
| Loss from continuing operations | $356 thousand | $1.410 million |
| Net loss | $356 thousand | $1.496 million |
| Basic and diluted loss per share | $0.03 | $0.14 |
| Cash used in operating activities | $1.048 million | $1.468 million |
| Adjusted EBITDA | $449 thousand | $(123) thousand |
- Revenue declined 13.8%, primarily because Company-owned restaurant sales fell 53.8% to $2.175 million following a reduction in store count.
- Food and supply sales were approximately $9.017 million, compared with $9.144 million; franchise revenue increased to $1.965 million from $1.413 million, primarily due to higher domestic development fees.
- Cost of sales declined to $10.840 million from $13.656 million. Reported revenue less cost of sales implies a gross margin of approximately 17.6%, versus 10.5% in the prior-year quarter.
- The net loss margin improved to approximately 2.7% from 9.8%.
- General and administrative expense decreased to $1.291 million from $1.877 million, while pre-opening expense increased to $115 thousand from $19 thousand.
- The Company recorded $148 thousand of impairment and other lease charges, $124 thousand of bad debt expense, and $68 thousand of interest expense.
- Cash and cash equivalents were $3.976 million at September 24, 2017, compared with $451 thousand at June 25, 2017.
- Total debt consisted of $1.000 million of short-term debt and $2.675 million of convertible notes. Cash exceeded reported debt by approximately $301 thousand.
- Current assets were $8.298 million versus current liabilities of $6.005 million, implying a current ratio of approximately 1.4x.
- Shareholders’ equity improved to $2.603 million from a deficit of $2.079 million, principally reflecting a $4.943 million stock issuance.
Material Changes Versus the Prior Comparable Period
- Net loss improved by $1.140 million, and adjusted EBITDA improved by $572 thousand, primarily from closing poorly performing stores, higher franchise fees, lower closed-store expenses, and lower lease termination costs.
- Pie Five system-wide domestic retail sales decreased 17.3% to $12.441 million. Comparable Pie Five retail sales also decreased 17.3% to $7.344 million, while average units open declined from 90 to 84.
- Company-owned Pie Five average weekly sales increased 4.8% to $12,331, reflecting the closure of underperforming stores, but restaurant operating cash flow declined to a negative $74 thousand from positive $36 thousand.
- Pizza Inn domestic retail sales decreased 0.9% to $21.894 million, while comparable-store sales increased 1.4%. Domestic Pizza Inn units declined net by two during the quarter.
- Operating cash usage improved by $420 thousand, but the Company remained cash-flow negative from operations.
- Investing cash usage increased to $370 thousand from $157 thousand, primarily for opening one new Company-owned Pie Five restaurant.
- Financing cash inflow increased to $4.943 million from $806 thousand, primarily from a shareholder rights offering.
- The advisory services agreement with NCM Services, an entity indirectly controlled by the Chairman, was terminated at the end of fiscal 2017.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that cash on hand, operating cash flows, and proceeds from potential offerings under its shelf registration are expected to fund operations for the next 12 months.
- A Form S-3 shelf registration for up to $5.0 million of common stock was declared effective on November 6, 2017, creating potential future equity dilution and financing capacity.
- Management continued a full valuation allowance against deferred tax assets. Deferred tax assets were approximately $9.2 million at September 24, 2017, and the valuation allowance increased during the quarter.
- Impairment and lease charges related to two Pie Five sites no longer considered desirable for future development.
- Bad debt expense primarily reflected collectibility concerns regarding a promissory note from the prior sale of two Company-owned Pie Five units.
- The Company reported ordinary-course claims and contingencies involving employment matters, franchise disputes, lawsuits, taxes, and food-product contracts. Management believes these matters are insured or would not materially affect operations or financial condition, although adverse outcomes could differ from that assessment.
- Forward-looking statements are subject to risks involving franchisee performance, comparable-store sales, restaurant closures, liquidity, financing availability, receivable collectibility, impairment estimates, and the realization of deferred tax assets.
- Results are unaudited and the Company cautioned that interim results are not necessarily indicative of full-year performance.
Most Important Facts to Verify
- Whether the $3.976 million cash balance and anticipated financing capacity are sufficient while operating cash flow remains negative.
- The terms, maturity, conversion provisions, and collateral arrangements associated with the $2.675 million of convertible notes and $1.000 million short-term borrowing.
- Whether Pie Five comparable-store sales and restaurant operating cash flow stabilize after store closures.
- The collectibility of the promissory note and the adequacy of the $243 thousand allowance for accounts receivable and related bad-debt assumptions.
- The potential dilution from the shelf registration, outstanding options covering 478,056 shares, and other equity instruments.
- Whether the full valuation allowance against approximately $9.2 million of deferred tax assets will remain necessary.
- The status and ultimate cost of lease terminations, impairment charges, legal claims, and other contingencies.