Business Context and Reporting Period
Rave Restaurant Group, Inc. operates and franchises Pizza Inn and Pie Five restaurants and licenses Pizza Inn Express kiosks. The filing is a Form 10-Q for the 13-week quarter and 26-week year-to-date period ended December 29, 2019, compared with December 23, 2018. This corresponds to fiscal 2020 second quarter, although the request metadata labels it “2019 Q2.”
At quarter-end, the system included 153 domestic Pizza Inn units, 53 domestic Pie Five units, one company-owned Pie Five restaurant, and 34 international Pizza Inn units.
Key Financial Metrics
| Metric | Three Months Ended December 29, 2019 | Prior Comparable Period | Six Months Ended December 29, 2019 | Prior Comparable Period |
|---|---|---|---|---|
| Revenue | $2.830 million | $3.195 million | $5.706 million | $6.186 million |
| Income before taxes | $10 thousand | $361 thousand | $320 thousand | $519 thousand |
| Net income | $14 thousand | $232 thousand | $251 thousand | $340 thousand |
| Basic EPS | $0.00 | $0.02 | $0.02 | $0.02 |
| Adjusted EBITDA | $2 thousand | $91 thousand | $382 thousand | $547 thousand |
| Cash flow from operations | Not separately provided | Not separately provided | $(353) thousand | $393 thousand |
Net margin was approximately 0.5% for the quarter and 4.4% year to date, compared with approximately 7.3% and 5.5%, respectively, in the prior comparable periods. The filing does not present a conventional gross margin because the company is primarily a franchisor and reports only limited company-owned restaurant sales.
- Cash and cash equivalents were $1.971 million at December 29, 2019, compared with $2.264 million at June 30, 2019.
- Total current assets were $4.096 million and total current liabilities were $2.355 million, implying reported current assets exceeded current liabilities by approximately $1.741 million.
- Total liabilities were $8.218 million and shareholders’ equity was $4.663 million.
- Convertible notes were $1.535 million net of debt issuance costs and discounts; approximately $1.6 million of principal remained outstanding. The notes bear 4% interest and mature February 15, 2022.
- Operating lease liabilities totaled $3.634 million, including $499 thousand current and $3.135 million long term. The company adopted ASC 842 in fiscal 2020, recognizing a $3.198 million operating lease right-of-use asset at quarter-end.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 11.4% and year-to-date revenue declined 7.8%, primarily because of lower Pie Five franchise and license revenue and fewer units.
- Quarterly net income fell $218 thousand, or approximately 94%, while year-to-date net income declined $89 thousand, or approximately 26%.
- Adjusted EBITDA declined $89 thousand for the quarter and $165 thousand year to date.
- Pie Five system-wide retail sales declined 26.8% for the quarter and 25.4% year to date. Comparable-store retail sales declined 11.0% and 10.8%, respectively. Average domestic Pie Five units open fell from 69 to 54 for the quarter and from 71 to 56 year to date.
- Pizza Inn domestic retail sales declined 1.7% for the quarter and 1.1% year to date, but comparable-store retail sales increased 2.4% and 2.7%, respectively.
- Domestic Pie Five units declined to 53 from 58 at the start of the fiscal year after eight closures and three openings. International Pizza Inn units declined by 14 year to date, primarily because of Middle East closures.
- Impairment and other lease charges increased to $193 thousand for the quarter and $341 thousand year to date, primarily from lease termination expenses related to closed Pie Five stores.
- Operating cash flow shifted from $393 thousand provided in the prior year-to-date period to $353 thousand used, primarily because of approximately $0.7 million of lease termination payments related to closed Pie Five stores.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects domestic and international Pizza Inn unit counts to increase modestly in future periods.
- Management expects Pie Five closures to remain moderate in the near term and eventually reverse, but the filing provides no quantitative store-growth or earnings guidance.
- Management believes cash on hand, operating cash flow, and potential proceeds from its at-the-market equity offering will be sufficient to fund operations for the next 12 months.
- The company had sold 191,478 shares under its $5.0 million ATM program through December 29, 2019, generating approximately $0.3 million of gross proceeds.
- On January 6, 2020, former Chief Executive Officer Scott Crane filed an employment-related lawsuit seeking, among other remedies, 928,000 shares, $300,000 of severance, or alternatively $2.4 million of actual damages plus other amounts. The company disputes the claims and intends to defend the action.
- Deferred tax assets were $6.4 million, with a $2.4 million valuation allowance. Management concluded no adjustment was necessary but will continue to assess realizability.
- The filing identifies ordinary-course claims and contingencies involving employment, franchise disputes, lawsuits, taxes, food contracts, and other matters. Management believes existing matters are insured or would not have a material adverse effect.
- Unusual items affecting comparability included lease termination charges, impairment charges, severance of $119 thousand, stock-based compensation credit of $85 thousand, and prior-year gains on asset sales.
Investor Verification Priorities
- Verify the pace and economics of Pie Five store closures, comparable-store sales, franchisee health, and the timing of any anticipated recovery.
- Reconcile the company’s liquidity outlook against negative year-to-date operating cash flow, lease obligations, lease termination payments, and the 2022 convertible-note maturity.
- Monitor the former CEO litigation for potential share issuance, severance, damages, legal costs, or other dilution and cash exposure.
- Assess the recoverability of the $4.0 million net deferred tax asset and the adequacy of the $2.4 million valuation allowance.
- Distinguish recurring operating performance from non-GAAP Adjusted EBITDA adjustments, particularly impairments, lease charges, severance, franchisee defaults, and closed-store items.
- Confirm the remaining capacity and potential dilution under the ATM equity offering and the company’s ability to use it without materially affecting shareholder value.