Rave Restaurant Group, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 28, 2021, compared with March 29, 2020. Although the request identifies “2020 Q3,” the filing is for fiscal third quarter 2021. Rave operates and franchises Pizza Inn and Pie Five restaurants and licenses Pizza Inn Express kiosks. At quarter-end, the system included 172 domestic franchised/licensed units and 33 international Pizza Inn units; there were no company-owned restaurants.
Financial Performance and Position
| Metric | Three months ended March 28, 2021 | Prior comparable period | Nine months ended March 28, 2021 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $2.183 million | $2.705 million | $6.214 million | $8.411 million |
| Income (loss) before taxes | $417 thousand | $(507) thousand | $599 thousand | $(187) thousand |
| Net income (loss) | $416 thousand | $(4.515) million | $594 thousand | $(4.264) million |
| Basic EPS | $0.02 | $(0.30) | $0.03 | $(0.28) |
| Adjusted EBITDA | $397 thousand | $6 thousand | $780 thousand | $388 thousand |
- Revenue declined 19.3% for the quarter and 26.1% year to date. The company reported no company-owned restaurant sales after closing all remaining company-owned Pie Five stores in fiscal 2020.
- Net income margins were approximately 19.1% for the quarter and 9.6% year to date, versus net loss margins of approximately 166.9% and 50.7%, respectively, in the prior periods. The comparisons were significantly affected by the prior-year $4.1 million income-tax expense related to deferred tax valuation allowances.
- Quarterly general and administrative expense decreased to $1.250 million from $1.655 million; franchise expense decreased to $629 thousand from $860 thousand. No quarterly impairment charge was recorded, compared with $495 thousand in the prior year.
- Cash used in operating activities was $357 thousand year to date, compared with $803 thousand used in the prior year. Investing activities provided $11 thousand, while financing activities provided $3.630 million, principally from stock issuance.
- Cash and cash equivalents were $6.487 million at March 28, 2021, up from $2.969 million at June 28, 2020. Total current assets were $8.984 million versus current liabilities of $2.176 million.
- Debt included $1.569 million of convertible notes and a $657 thousand PPP loan. Operating lease liabilities totaled $3.118 million, including current and long-term portions.
- Total assets were $12.456 million and shareholders’ equity was $4.766 million at quarter-end, compared with $9.705 million and $503 thousand, respectively, at June 28, 2020.
Material Changes Versus Prior Comparable Period
- Pizza Inn domestic retail sales decreased 11.9% in the quarter and 20.9% year to date. Pizza Inn comparable-store retail sales decreased 3.1% and 14.8%, respectively.
- Pie Five system-wide retail sales decreased 27.0% in the quarter and 41.1% year to date. Quarterly comparable-store sales were relatively stable, but year-to-date comparable-store sales decreased 14.2%.
- Domestic Pizza Inn units declined from 142 to 137 during the quarter and from 151 to 137 year to date. Pie Five domestic franchised units declined from 37 to 35 during the quarter and from 42 to 35 year to date.
- The company issued 2.540 million common shares during the nine months, generating $3.761 million of proceeds before $131 thousand of issuance costs. Shares outstanding increased to 18.005 million at May 4, 2021.
- A $156 thousand gain on sale of assets was recorded in the quarter and year to date, compared with losses in the prior periods. Bad debt recovery was $97 thousand in the quarter, compared with $11 thousand of expense previously.
- The company’s full $6.5 million valuation allowance against deferred tax assets remained in place. Federal net operating losses offset federal taxes; reported year-to-date tax expense was $5 thousand, primarily state taxes.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects reduced operating cash flow during the remainder of fiscal 2021 because of the COVID-19 pandemic, but believes cash on hand and operating cash flow will fund operations for the next 12 months.
- COVID-19 restrictions, capacity limits, temporary closures, reduced in-store dining, changes in carry-out and delivery demand, labor and economic conditions, and potential outbreaks could materially adversely affect future sales, franchise royalties, supplier incentives, liquidity, and unit counts. Management cannot presently predict the pandemic’s ultimate impact.
- Management expects modest domestic Pizza Inn and Pie Five closures to continue in the near term, with a potential future reversal; international Pizza Inn units are expected to increase moderately.
- The $657 thousand PPP loan matures April 10, 2022, bears interest at 0.98%, and may be forgiven subject to SBA approval. Management expected a forgiveness decision in the fourth quarter of fiscal 2021. Unforgiven amounts would require repayment.
- The $1.6 million of 4% convertible notes mature February 15, 2022. Notes are convertible at $2.00 per share, and the company may elect to pay principal and interest in cash or common stock, subject to the note terms.
- The 2017 at-the-market offering expired November 6, 2020 after aggregate gross proceeds of approximately $4.5 million.
- A former chief executive officer’s lawsuit seeks, among other remedies, 928,000 shares, $300 thousand of severance, or alternatively $2.4 million of actual damages plus other amounts. Rave’s summary-judgment motion was pending, discovery was ongoing, and trial was scheduled for August 2021. Management considers the claims without merit.
Important Facts for Investors to Verify
- Reconcile the requested “2020 Q3” label with the filing’s actual March 28, 2021 fiscal-quarter reporting date.
- Confirm the status and amount of PPP loan forgiveness and any remaining repayment obligation.
- Assess the February 2022 convertible-note maturity, potential dilution, and the company’s ability to repay or settle in shares.
- Monitor COVID-19 effects on franchisee retail sales, royalties, supplier incentives, restaurant capacity, and unit closures.
- Review the former CEO litigation for developments, potential share issuance, damages, and legal costs.
- Evaluate the sustainability of positive earnings and Adjusted EBITDA given declining revenue, reliance on cost controls and equity financing, and negative year-to-date operating cash flow.