Rave Restaurant Group, Inc. — Fiscal 2020 First-Quarter 10-Q Summary
Business Context and Reporting Period
Rave operates and franchises Pizza Inn and Pie Five restaurants, including buffet, delivery/carry-out, express and kiosk formats. The quarter ended September 29, 2019 comprised 13 weeks and is compared with the 13-week period ended September 23, 2018. The company reported 208 domestic units at quarter-end, including 152 Pizza Inn units and 56 Pie Five units, plus 34 international Pizza Inn units.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $2.876 million | $2.991 million | Down 3.8% |
| Income before taxes | $310 thousand | $158 thousand | Up 96.2% |
| Net income | $237 thousand | $108 thousand | Up 119.4% |
| Basic diluted EPS | $0.02 | $0.01 | Improved |
| Adjusted EBITDA | $380 thousand | $456 thousand | Down 16.7% |
| Cash flow from operations | $132 thousand | $590 thousand | Down $458 thousand |
Net profit margin increased to approximately 8.2% from 3.6%, primarily because total costs and expenses fell to $2.566 million from $2.833 million. Adjusted EBITDA declined despite higher GAAP net income, reflecting adjustments for impairment, lease charges, franchisee default and closed-store items.
- Pizza Inn franchise revenue was approximately $1.9 million in both periods. Domestic comparable-store retail sales increased 3.1%, although total domestic retail sales declined 0.4% to $21.9 million.
- Pie Five franchise revenue decreased to $852 thousand from $963 thousand. System-wide domestic retail sales decreased 24.1% to $8.8 million, and comparable-store retail sales declined 12.2%.
- Company-owned restaurant sales were $108 thousand versus $114 thousand. The company-owned Pie Five restaurant generated a $203 thousand pretax loss and negative $44 thousand of restaurant operating cash flow.
- Impairment and other lease charges increased to $148 thousand from $15 thousand, primarily due to lease termination expenses for closed Pie Five stores.
- General and administrative expense decreased $51 thousand to $1.363 million, while franchise expense decreased $195 thousand to $866 thousand.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | September 29, 2019 | June 30, 2019 |
|---|---|---|
| Cash and cash equivalents | $2.421 million | $2.264 million |
| Total assets | $13.438 million | $10.426 million |
| Total liabilities | $8.705 million | $5.992 million |
| Shareholders’ equity | $4.733 million | $4.434 million |
| Convertible notes, net | $1.529 million | $1.584 million |
Cash increased $157 thousand during the quarter. Investing activities provided $27 thousand, primarily from $44 thousand of note-receivable collections, partially offset by $17 thousand of capital expenditures. Financing activities used $2 thousand. Management stated that cash on hand, operating cash flow and potential at-the-market equity sales should be sufficient to fund operations for the next 12 months.
The company has 4% convertible senior notes due February 2022. Notes with $64 thousand of principal were converted into common shares during the quarter; approximately $1.6 million of principal remained outstanding at quarter-end, before unamortized debt discounts and issuance costs. The company also had $3.755 million of operating lease liabilities, including $531 thousand current and $3.224 million long-term.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, driven primarily by lower Pie Five franchise and license revenue and fewer Pie Five units.
- Net income more than doubled because of lower corporate and franchise expenses, lower cost of sales and lower depreciation and amortization, partly offset by higher lease termination charges.
- Operating cash flow fell substantially because of approximately $0.4 million of lease termination payments associated with closed Pie Five stores.
- Pizza Inn domestic comparable sales improved, but the system experienced a net decrease of three domestic units and 14 international units. The international decrease primarily reflected the closure of the Saudi Arabian subfranchisee.
- Pie Five domestic units declined by two to 56, primarily because of poor-performing store closures.
- ASC 842 lease accounting was adopted effective July 1, 2019, adding $3.313 million of operating lease right-of-use assets and $3.755 million of lease liabilities at September 29, 2019. Management stated that adoption did not materially affect operations, cash flows or equity.
Outlook, Commentary, Risks and Unusual Items
Management stated that domestic and international Pizza Inn unit declines were stabilizing and expected to begin increasing in future periods. Management also expected Pie Five closures to moderate in the near term and eventually reverse. No formal earnings or unit-development guidance was provided.
- Pie Five performance remains a principal operating concern, with lower unit counts, lower comparable sales and continuing losses at the company-owned location.
- Lease termination and impairment charges may recur as underperforming locations are closed or restructured.
- Liquidity depends on continued operating cash generation and the availability of the company’s at-the-market equity facility. Through September 29, 2019, the company had sold 191,478 shares under the facility for aggregate gross proceeds of approximately $0.3 million.
- Deferred tax assets totaled $6.4 million, with a $2.4 million valuation allowance. Realization depends on future taxable income and remains subject to management’s periodic assessment.
- The company is subject to ordinary-course franchise, employment, tax and other legal claims. Management believed pending matters were insured or would not have a material adverse effect, although actual outcomes could differ.
- Forward-looking statements are subject to risks described in the company’s fiscal 2019 Form 10-K. The filing states that disclosure controls and procedures were effective at quarter-end.
Important Facts for Investors to Verify
- Whether Pie Five comparable sales and unit closures stabilize or continue to deteriorate.
- Whether Pizza Inn’s improved comparable-store sales translate into higher franchise royalties and overall unit growth.
- The sustainability of positive GAAP net income given lower operating cash flow and significant lease-related payments.
- Future impairment, lease termination and closed-store charges.
- The company’s ability to meet or refinance the convertible notes due in 2022 and manage operating lease obligations.
- Whether cash from operations and potential ATM equity proceeds remain sufficient for the next 12 months without substantial dilution.
- The realizability of deferred tax assets and the potential for changes in the valuation allowance.