Rave Restaurant Group, Inc. Form 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 filing covers the 13-week quarter and 39-week year-to-date period ended March 24, 2019, compared with March 25, 2018. Although the request metadata references “2018 Q3,” the filing is for the third quarter of fiscal 2019. The company had 217 domestic units and 48 international Pizza Inn units at quarter-end, including two company-owned Pie Five restaurants.
Financial Performance and Position
| Metric | Three Months Ended March 24, 2019 | Prior Year | Nine Months Ended March 24, 2019 | Prior Year |
|---|---|---|---|---|
| Revenue | $3.1 million | $2.7 million | $9.3 million | $12.3 million |
| Net income/(loss) | $(0.3) million | $(0.5) million | $0.1 million | $(1.4) million |
| Basic EPS | $(0.02) | $(0.03) | $0.01 | $(0.11) |
| Adjusted EBITDA | $0.4 million | $(0.2) million | $1.4 million | $0.3 million |
| Operating cash flow | Not separately provided | Not separately provided | $0.4 million | $(4.4) million |
- Quarterly revenue increased approximately 15% year over year, while year-to-date revenue declined approximately 25% because of the reduction in company-owned restaurants. Quarterly net margin was approximately negative 8.6%; year-to-date net margin was approximately 0.8%.
- Quarterly comparable domestic system sales increased 1.1%; year-to-date comparable sales increased 1.0%. Pizza Inn comparable sales increased 3.3% in the quarter and 2.8% year to date.
- Pie Five system-wide sales declined 18.1% in the quarter and 11.8% year to date, primarily reflecting fewer units. Pie Five comparable sales declined 4.4% and 3.2%, respectively.
- Cash and cash equivalents were $1.9 million at March 24, 2019, versus $1.4 million at June 24, 2018. Current assets were $4.9 million and current liabilities were $2.2 million, implying a current ratio of approximately 2.2.
- Total debt consisted primarily of $1.6 million of 4% convertible senior notes due February 2022. Interest expense was $77 thousand year to date.
- Total assets were $11.1 million and shareholders’ equity was $5.2 million at quarter-end. Gross deferred tax assets were $5.7 million, partially offset by a $2.4 million valuation allowance.
Material Changes Versus the Prior Comparable Period
- Year-to-date profitability improved from a $1.4 million net loss to $77 thousand of net income, driven by closing poorly performing stores, lower corporate overhead, lower impairment expense, gains on asset sales and reduced bad debt expense.
- Quarterly results improved despite higher franchise expenses and impairment charges, primarily because of increased franchise and license revenue, lower general and administrative expense and lower bad debt expense.
- Company-owned restaurant revenue fell 86.8% year to date to $0.5 million from $4.0 million, reflecting the sharp reduction in company-owned store count.
- Pie Five domestic franchised units declined from 72 at the beginning of the fiscal year to 59 at quarter-end, after 17 closures and five openings. Management attributed the closures primarily to poor performance.
- Pizza Inn domestic units increased from 153 to 156 year to date, while international Pizza Inn units declined from 58 to 48 because of Middle East closures.
- Adoption of ASC Topic 606 on June 25, 2018 reduced opening accumulated deficit by $1.6 million. For the nine months, adoption increased reported revenue by $1.1 million and pretax income by $0.4 million, principally from timing and presentation changes in franchise, development, advertising and convention fund revenues.
Cash Flow, Liquidity, Outlook and Risks
- Year-to-date operating cash flow was $0.4 million, investing cash flow was $0.1 million and financing cash flow was $32 thousand. Cash increased $0.5 million to $1.9 million.
- Management believes cash on hand, operating cash flow and potential proceeds from the at-the-market equity offering will fund operations for the next 12 months. Through March 24, 2019, the company had sold 173,852 shares under the ATM program for aggregate gross proceeds of approximately $0.3 million.
- The company expects domestic Pizza Inn unit count to increase modestly and believes international Pizza Inn unit count is stabilizing after closures. Management does not anticipate opening new company-owned Pie Five units in the near term and expects Pie Five net closures to moderate and eventually reverse.
- No formal earnings or revenue guidance is provided. Management’s outlook is subject to franchisee performance, restaurant closures and openings, comparable sales, consumer demand, execution of the Pie Five strategy and availability of financing.
- Unusual or potentially nonrecurring items included $0.4 million of year-to-date impairment charges, a $0.3 million gain on asset sales, $0.4 million of stock-based compensation and $1.1 million of revenue attributable to accelerated revenue recognition and advertising/convention fund contributions.
- The company is exposed to franchisee credit risk, bad-debt estimates, impairment of long-lived assets, store closure and lease termination costs, legal claims, tax asset realizability and execution risk associated with its restaurant portfolio. Management states that pending claims are either insured or not expected to be material.
- The company was evaluating the effect of the new lease accounting standard, which was expected to apply beginning in fiscal 2020. The filing does not provide a quantified impact.
Most Important Facts for Investors to Verify
- Whether improved profitability and adjusted EBITDA persist after excluding accelerated franchise revenue, advertising and convention fund contributions, asset-sale gains and other adjustments.
- The sustainability of the $1.9 million cash balance relative to $1.6 million of convertible notes, ongoing operating losses in company-owned restaurants and future lease or closure obligations.
- Whether Pie Five closures have stabilized and whether comparable sales can recover after the reported declines.
- The recoverability of deferred tax assets and notes receivable, including the $2.4 million deferred-tax valuation allowance and $0.2 million notes-receivable bad-debt provision recorded year to date.
- The effect of ASC Topic 606 and future lease accounting on reported revenue, liabilities, equity and comparability with prior periods.