Rave Restaurant Group, Inc. Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and nine months ended March 27, 2016, each comprising 13 and 39 weeks, respectively. Rave operates and franchises Pizza Inn and Pie Five restaurants and distributes food and supplies through its Norco division. The company had 35 company-owned restaurants, 211 domestic franchised units, and 60 international franchised Pizza Inn units at quarter-end.
Financial Performance and Liquidity
| Metric | Three Months Ended March 27, 2016 | Prior Comparable Period | Nine Months Ended March 27, 2016 | Prior Comparable Period |
|---|---|---|---|---|
| Revenue | $15.3 million | $11.9 million | $45.1 million | $34.3 million |
| Loss from continuing operations | $1.2 million | $0.5 million | $6.5 million | $1.1 million |
| Net loss | $1.2 million | $0.6 million | $6.6 million | $1.2 million |
| Basic net loss per share | $0.12 | $0.06 | $0.64 | $0.13 |
| Adjusted EBITDA | $(0.2) million | $0.1 million | $0.1 million | $0.3 million |
- Revenue increased 28.2% for the quarter and 31.3% year to date, primarily from new company-owned Pie Five restaurants, higher Pie Five franchise activity, and increased food and supply sales.
- Cost of sales was $13.8 million for the quarter and $39.3 million year to date. The implied cost-of-sales margin was approximately 90.2% for the quarter and 87.0% year to date; the filing does not present a conventional gross margin.
- Cash provided by operating activities was $2.1 million year to date, compared with $2.6 million in the prior period.
- Capital expenditures were $7.6 million, primarily for new company-owned Pie Five restaurants, resulting in a $4.7 million net decrease in cash. Cash and cash equivalents declined to $1.3 million from $6.0 million at June 28, 2015.
- The company reported no bank debt at March 27, 2016; the filing states that bank credit facilities were paid off in the first quarter of fiscal 2015. Total liabilities were $8.5 million and shareholders’ equity was $11.5 million.
- Management stated that cash on hand, operating cash flow, and proceeds from the 2014 at-the-market offering were expected to fund operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Quarterly net loss widened to $1.2 million from $0.6 million; year-to-date net loss widened to $6.6 million from $1.2 million.
- The company recognized $0.8 million of non-cash impairment charges related to three Pie Five restaurants during the nine-month period.
- The company recorded a $4.0 million valuation allowance against all net deferred tax assets, including a $0.5 million increase during the quarter. This produced $2.6 million of year-to-date income tax expense despite pre-tax losses.
- General and administrative expenses increased to $1.9 million for the quarter and $5.1 million year to date, while franchise expenses increased to $0.9 million and $2.7 million, respectively, reflecting resources devoted to Pie Five expansion.
- Pre-opening expenses increased to $0.9 million year to date from $0.4 million, primarily due to company-owned Pie Five stores under development.
- Pie Five domestic system-wide retail sales increased 117.9% for the quarter and 140.5% year to date as average units open increased. However, average weekly sales declined 8.6% for the quarter and 8.1% year to date, and comparable-store sales decreased 4.0% for the quarter.
- Company-owned Pie Five average weekly sales declined 13.3% for the quarter and 11.0% year to date. Company-owned Pie Five restaurant operating cash flow declined 69.2% for the quarter and 10.9% year to date.
- Pizza Inn domestic retail sales declined 9.0% for the quarter and 5.3% year to date, with comparable-store sales down 2.2% and 1.4%, respectively. Domestic Pizza Inn units declined by six during the quarter and 18 year to date.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal revenue, earnings, unit-opening, or other quantitative guidance was provided.
- Management described continued Pie Five system growth through franchise development agreements and company-owned restaurant openings in selected metropolitan areas, but reported weaker sales and financial performance at company-owned stores in newer markets.
- Liquidity risk increased because cash declined substantially while capital expenditures remained high. Continued access to operating cash flow and equity-market proceeds is important to management’s stated 12-month liquidity assessment.
- The company’s principal operating risks include continued comparable-store sales declines, underperformance of newer Pie Five locations, franchisee and unit closures, expansion costs, impairment of restaurant assets, and the ability to realize deferred tax assets.
- Pending legal claims arise in the ordinary course of business. Management believes they are insured or would not materially affect results, cash flows, or financial condition if resolved unfavorably.
- Discontinued operations generated a $0.1 million loss year to date, relating to two previously closed Pizza Inn locations in Texas.
- The company had an advisory agreement with an entity indirectly controlled by its chairman, involving quarterly fees of $50,000 plus potential additional fees, subject to financial-covenant limitations.
Important Facts for Investors to Verify
- Verify the sustainability of liquidity given $1.3 million of cash, $7.6 million of year-to-date capital expenditures, and continued operating losses.
- Assess whether Pie Five store growth can overcome declining average weekly sales and negative company-owned restaurant profitability.
- Review the assumptions supporting the $4.0 million deferred-tax-asset valuation allowance and the potential effect of future taxable income.
- Evaluate the recoverability of company-owned Pie Five assets following the $0.8 million impairment charge on three restaurants.
- Confirm the remaining availability and future dilution implications of the 2014 at-the-market offering; cumulative gross proceeds through March 27, 2016 were $8.1 million.
- Review comparable-store sales, unit closures, franchisee health, and the related impact on Norco food and supply sales and franchise revenue.