Rave Restaurant Group, Inc. — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended March 26, 2017, compared with March 27, 2016. The filing represents the third quarter of fiscal 2017, although the request metadata identifies “2016 Q3.” Each comparative period contained 13 weeks for the quarter and 39 weeks year to date. The company operates and franchises Pizza Inn and Pie Five restaurants and distributes food and supplies through Norco.
Financial Performance and Position
| Metric | Three months ended Mar. 26, 2017 | Prior comparable period | Nine months ended Mar. 26, 2017 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $14.1 million | $15.3 million | $44.3 million | $45.1 million |
| Loss from continuing operations | $2.0 million | $1.2 million | $11.4 million | $6.5 million |
| Net loss | $2.0 million | $1.2 million | $11.4 million | $6.6 million |
| Basic and diluted loss per share | $0.18 | $0.12 | $1.07 | $0.64 |
| Adjusted EBITDA | $(1.0) million | $(0.2) million | $(2.3) million | $0.1 million |
| Operating cash flow | Not separately provided for the quarter | $(3.0) million | $2.1 million |
- Revenue declined 7.7% in the quarter and 1.7% year to date. The quarterly net loss margin was approximately 13.9%; the year-to-date margin was approximately 25.7%.
- Franchising and food and supply distribution revenue increased to $10.0 million from $9.8 million in the quarter and to $31.2 million from $29.9 million year to date. Company-owned restaurant revenue fell to $4.0 million from $5.5 million in the quarter and to $13.2 million from $15.2 million year to date.
- General and administrative expense increased to $2.1 million from $1.9 million in the quarter and to $6.2 million from $5.1 million year to date, primarily due to higher payroll, legal and professional fees.
- Cash and cash equivalents were $2.4 million at March 26, 2017, compared with $0.9 million at June 26, 2016. Current assets were $6.9 million versus current liabilities of $7.2 million, indicating a working-capital deficit of approximately $0.3 million.
- Total liabilities were $12.9 million versus shareholders’ deficit of $0.9 million at March 26, 2017. Debt included $1.0 million of short-term debt and $2.8 million of convertible notes.
- Investing activities used $0.2 million year to date, principally for a new company-owned Pie Five restaurant. Financing activities provided $4.7 million, including $3.0 million of convertible-note proceeds, $1.0 million of borrowing, and $0.8 million from stock-option exercises.
Material Changes Versus Prior Period
- Year-to-date impairment and other lease charges increased to $5.2 million from $0.8 million. The charges included $4.7 million related to 14 underperforming company-owned Pie Five locations and $0.5 million of lease termination expenses for 16 locations no longer considered desirable for development.
- The company closed nine company-owned Pie Five restaurants in the third quarter, including seven in Illinois and two in Minnesota. Nine franchised Pie Five restaurants also closed during the quarter.
- Pie Five system-wide retail sales increased 0.6% in the quarter and 13.8% year to date, largely reflecting unit growth; however, comparable-store retail sales decreased 15.8% and 16.0%, respectively.
- Pizza Inn domestic retail sales increased 2.9% in the quarter and 0.5% year to date. Comparable-store sales increased 0.1% in the quarter and decreased 0.1% year to date.
- Adjusted EBITDA deteriorated from a loss of $0.2 million to a loss of $1.0 million in the quarter and from income of $0.1 million to a loss of $2.3 million year to date.
- Property, plant and equipment declined to $4.4 million from $13.0 million at June 26, 2016, consistent with impairments, closures and asset dispositions. Total assets declined to $12.0 million from $18.5 million.
- The company recorded a full valuation allowance against approximately $8.7 million of deferred tax assets because management concluded realization was not more likely than not in light of cumulative losses.
Outlook, Liquidity, Risks and Unusual Items
- Management stated that funding operations for the next 12 months will likely require additional capital, in addition to cash on hand and operating cash flow. The company intends to pursue additional debt or equity financing, but no quantified financing plan or earnings guidance was provided.
- On March 3, 2017, the company completed a rights offering of $3.0 million of 4% convertible senior notes due 2022. The notes are convertible at $2.00 per share, secured by pledges of the equity of two primary operating subsidiaries, and may be settled for cash or common stock at the company’s discretion.
- The company had a $1.0 million loan from Newcastle Partners, an affiliate of the chairman, bearing interest at 10%. Subsequent to quarter-end, on May 8, 2017, the maturity was extended to the earlier of September 1, 2017, or receipt of at least $2.0 million of additional debt or equity capital.
- Management characterized recent Pie Five closures as an aberration caused primarily by overly aggressive expansion in isolated markets and expects net unit growth to resume at a moderated pace, particularly for company-owned stores. This is forward-looking commentary and is subject to execution and market risks.
- Key risks include continued negative comparable-store sales at Pie Five, underperforming company-owned locations, dependence on additional financing, working-capital pressure, franchisee credit exposure, impairment and lease obligations, and potential dilution or repayment obligations associated with convertible notes.
- Pending ordinary-course claims and legal actions were described as either adequately insured or not expected to have a material adverse effect. The filing states that disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Verify the company’s ability to raise the additional capital management says is likely required within the next 12 months.
- Review the terms, security, conversion mechanics and potential dilution from the $3.0 million convertible-note offering.
- Confirm repayment or refinancing plans for the $1.0 million Newcastle loan before its extended maturity trigger.
- Assess whether Pie Five comparable-store sales and company-owned restaurant cash flow can stabilize after the substantial closures and impairments.
- Reconcile the working-capital deficit, negative shareholders’ equity and cash-burn trajectory with available liquidity.
- Monitor additional impairment, lease termination, asset-sale and store-closure charges, as well as the recoverability of the $8.7 million deferred tax assets.