Rave Restaurant Group, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13-week second fiscal quarter and 26-week year-to-date period ended December 24, 2017, with comparisons to December 25, 2016. Rave operates and franchises Pizza Inn and Pie Five restaurants in the United States and internationally. At quarter-end, the system included 3 company-owned restaurants, 233 domestic franchised restaurants and 62 international Pizza Inn units.
The financial statements are unaudited. The company is a smaller reporting company.
Financial performance and condition
| Metric | Three months ended Dec. 24, 2017 | Three months ended Dec. 25, 2016 | Six months ended Dec. 24, 2017 | Six months ended Dec. 25, 2016 |
|---|---|---|---|---|
| Revenue | $4.197 million | $6.780 million | $9.629 million | $14.246 million |
| Loss from continuing operations | $397 thousand | $7.535 million | $528 thousand | $8.706 million |
| Net loss | $577 thousand | $7.925 million | $933 thousand | $9.421 million |
| Net loss per share | $0.04 | $0.74 | $0.07 | $0.89 |
| Adjusted EBITDA | $(168) thousand | $(1.026) million | $505 thousand | $(939) thousand |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $3.474 million | $1.640 million |
Revenue declined 38.1% in the quarter and 32.4% year to date, primarily because of the reduced company-owned store base and the discontinuation of the Norco distribution division. Net loss margins were approximately 13.7% in the quarter and 9.7% year to date, compared with approximately 116.9% and 66.1%, respectively, in the comparable periods. These comparisons were materially affected by prior-year impairment and closure-related charges.
Quarterly cost of sales decreased to $1.055 million from $3.858 million, and general and administrative expense decreased to $2.017 million from $2.967 million. Impairment and other lease charges were $533 thousand versus $5.057 million in the prior-year quarter. Year-to-date impairment and other lease charges were $681 thousand versus $5.226 million.
At December 24, 2017, cash and cash equivalents were $1.428 million, total assets were $8.195 million, total liabilities were $4.933 million and shareholders’ equity was $3.262 million. Short-term debt was zero, while convertible notes totaled $1.459 million, compared with $2.749 million at June 25, 2017. The company repaid a $1.0 million promissory note during the six-month period.
Cash increased $977 thousand during the first six months, largely because of $4.942 million of stock-sale proceeds and $509 thousand of investing cash inflows, partially offset by $3.474 million of operating cash use. Capital expenditures were $421 thousand, and proceeds from asset sales were $939 thousand.
Material changes versus the prior comparable period
- The company closed poorly performing company-owned stores, reducing restaurant sales by 61.4% in the quarter and 57.3% year to date.
- Pizza Inn domestic comparable-store retail sales increased 2.7% in the quarter and 2.2% year to date, although total domestic retail sales declined 3.3% and 2.1%, respectively.
- Pie Five system-wide retail sales declined 18.8% in the quarter and 18.0% year to date. Comparable-store retail sales declined 13.7% and 15.5%, respectively.
- Average Pie Five units open declined to 82 from 97 in the quarter and to 83 from 93 year to date. Management stated that additional company-owned Pie Five openings are not anticipated in the near future.
- Adjusted EBITDA improved by $858 thousand in the quarter and by $1.444 million year to date, but remained negative for the quarter.
- The company discontinued the Norco food and supply distribution division and now records supplier and distributor incentive revenues rather than food, equipment and supply sales. Operating segments were redefined as Pizza Inn Franchising, Pie Five Franchising and Company-Owned Restaurants.
- The company completed a shareholder rights offering and generated $4.942 million from stock sales. It also filed an effective shelf registration for up to $5.0 million of common stock and entered into an at-the-market sales agreement.
Guidance, outlook, risks and unusual items
Management did not provide quantitative earnings or revenue guidance. Management expects cash on hand, operating cash flow and proceeds from at-the-market stock sales to fund operations for the next 12 months, but operating activities consumed $3.474 million during the first six months.
Management believes closing underperforming stores will create a stronger foundation for future Pie Five growth and described the increase in franchised Pie Five units as evidence of strategic commitment to franchising. Company-owned Pie Five restaurant losses improved substantially, but restaurant operating cash flow decreased year over year.
Unusual items included $681 thousand of year-to-date impairment charges, lease termination expenses for Pie Five sites, a $213 thousand bad-debt provision, including approximately $200 thousand related to a promissory note from a prior store sale, and $405 thousand of losses from discontinued operations year to date. The company also recorded a full valuation allowance against deferred tax assets. The Tax Cuts and Jobs Act reduced the corporate tax rate to 21%; related deferred tax assets and the valuation allowance were each adjusted by $3.3 million. Approximately $6.0 million of deferred tax assets remained at quarter-end.
The company is subject to ordinary-course claims involving employment matters, franchise disputes, lawsuits, taxes and supply contracts. Management believes pending matters are insured or would not materially affect results, cash flows or financial condition if resolved adversely. Key risks include continued operating cash outflows, dependence on equity financing, franchisee and receivable credit quality, store closures and impairment charges, weak Pie Five comparable sales, and the effect of the Norco discontinuation on revenue comparability.
Most important facts for investors to verify
- Whether operating cash flow improves sufficiently to reduce reliance on stock sales and other financing.
- The terms, dilution potential and actual utilization of the $5.0 million shelf registration and at-the-market program.
- The carrying amount, conversion terms and maturity provisions of the $1.459 million of convertible notes.
- Whether Pie Five comparable-store sales and unit growth stabilize after the store closures.
- The collectability of notes and accounts receivable, including the promissory note tied to the prior store sale.
- The financial and reporting effects of discontinuing Norco and changing revenue recognition and segment presentation.
- The sustainability of the company’s liquidity assumption that available cash and financing proceeds will fund operations for the next 12 months.