Rave Restaurant Group, Inc. — Form 10-Q Summary
Business context and reporting period
Rave operates and franchises Pizza Inn and Pie Five restaurants and licenses Pizza Inn Express kiosks. The filing covers the 13-week fiscal quarter ended September 27, 2020, compared with September 29, 2019. The company had 146 domestic Pizza Inn units, 39 domestic Pie Five units, and 32 international Pizza Inn units at quarter-end; it had no company-owned restaurants.
Financial performance and key metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $1.903 million | $2.876 million | Down 33.8% |
| Income before taxes | $78 thousand | $310 thousand | Down 74.8% |
| Net income | $76 thousand | $237 thousand | Down 67.9% |
| Net margin | 4.0% | 8.2% | Down 4.2 percentage points |
| Adjusted EBITDA | $177 thousand | $380 thousand | Down 53.4% |
| Operating cash flow | $(7) thousand | $132 thousand | Declined $139 thousand |
| Capital expenditures | $27 thousand | $17 thousand | Increased $10 thousand |
| Basic EPS | $0.00 | $0.02 | Down $0.02 |
Revenue consisted primarily of franchise royalties of $858 thousand, supplier and distributor incentives of $767 thousand, franchise license fees of $102 thousand, advertising funds of $125 thousand, and rental income of $48 thousand. Restaurant sales were zero, compared with $108 thousand in the prior-year quarter, following the closure of all company-owned restaurants.
Cash, cash equivalents and restricted cash totaled $3.170 million at September 27, 2020, including $2.936 million of unrestricted cash and $234 thousand of restricted cash. Current assets were $4.920 million versus current liabilities of $2.512 million. Total shareholders’ equity was $576 thousand, compared with $503 thousand at June 28, 2020.
Debt included $1.556 million of convertible senior notes due 2022 and a $657 thousand Paycheck Protection Program loan. Operating lease liabilities totaled $3.951 million, including current and long-term portions. The convertible notes bear 4% interest and are convertible at $2.00 per share.
Material changes versus the prior comparable period
- COVID-19 restrictions, reduced in-store dining, temporary closures, and lower restaurant traffic reduced franchise royalties, supplier incentives, and advertising-related revenues.
- Pizza Inn domestic retail sales decreased 25.5% to $16.319 million; comparable-store retail sales decreased 21.5%.
- Pie Five system-wide retail sales decreased 49.0% to $4.507 million; comparable-store retail sales decreased 23.3%. Average domestic Pie Five units open declined from 58 to 39.
- Domestic Pizza Inn units declined by five to 146, while international Pizza Inn units declined by six to 32. Pie Five domestic units declined by three to 39.
- General and administrative expenses decreased to $1.089 million from $1.363 million, and franchise expenses decreased to $547 thousand from $866 thousand, reflecting cost controls and lower activity.
- Impairment and other lease charges declined to $17 thousand from $148 thousand. Bad debt expense increased to $27 thousand from a prior-year recovery of $8 thousand.
- Operating cash flow changed from $132 thousand provided to $7 thousand used, primarily due to operating lease-related liabilities and working-capital changes.
- The company adopted ASC 842 in the prior fiscal year, recording substantial operating lease assets and liabilities; management stated that adoption did not materially affect operations, cash flows, or equity.
Outlook, risks, contingencies, and unusual items
Management expects COVID-19-related capacity restrictions, reduced customer traffic, possible temporary closures, and related economic effects to continue adversely affecting results. The company stated that second-quarter fiscal 2021 operating cash flow was expected to be significantly reduced, although management believed cash on hand, operating cash flow, government loan proceeds, and ATM proceeds would fund operations for the next 12 months.
The $657 thousand PPP loan bears interest at 0.98%, matures April 10, 2022, and may be partially or fully forgiven subject to SBA approval. Management expected a forgiveness decision in the second half of fiscal 2021; the filing does not provide a definitive forgiveness outcome.
After quarter-end, the company sold 2,539,682 common shares at an average price of $1.48 per share, generating $3.8 million of gross proceeds and $3.6 million of net proceeds. The ATM offering expired on November 6, 2020. The issuance increased liquidity but diluted existing shareholders.
A former chief executive officer sued the company seeking, among other remedies, 928,000 shares, $300 thousand of severance, or alternatively $2.4 million of actual damages, plus additional amounts. The company believes the claims lack merit and intends to defend the case. A motion to dismiss was pending, discovery was ongoing, and trial was scheduled for April 5, 2021.
The company maintained a full $6.5 million valuation allowance against deferred tax assets. It reported $2 thousand of current state income tax expense and used net operating loss carryforwards to offset federal taxes.
Important facts for investors to verify
- Whether COVID-19 restrictions, restaurant closures, and lower in-store demand continued to reduce franchisee sales and royalty income after the reporting date.
- The final SBA determination on forgiveness of the $657 thousand PPP loan and any resulting repayment obligation.
- The effect of the 2.54 million-share ATM issuance on dilution, share count, and capital adequacy.
- The company’s ability to maintain positive operating cash flow while carrying $3.951 million of operating lease liabilities and debt due in 2022.
- The status and potential financial exposure of the former CEO’s litigation.
- Whether continued domestic and international unit closures stabilize or reverse as management anticipated.