Rave Restaurant Group, Inc. — Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019, comprising 53 weeks, compared with the fiscal year ended June 24, 2018, comprising 52 weeks. The provided filing is an annual fiscal 2019 Form 10-K rather than a standalone 2018 fourth-quarter filing.
Business Context
Rave franchises Pizza Inn buffet, delivery/carry-out and express restaurants, licenses Pizza Inn Express kiosks, and franchises and operates Pie Five fast-casual pizza restaurants. At June 30, 2019, the system included 194 franchised Pizza Inn restaurants, nine licensed PIE kiosks, 57 franchised Pie Five units and one company-owned Pie Five unit. Pizza Inn also had 48 international franchised restaurants.
The Company had substantially exited company-owned restaurant operations and did not intend to open additional company-owned restaurants in fiscal 2020. During fiscal 2019, it discontinued or closed underperforming units, particularly within Pie Five and international Pizza Inn.
Financial Performance and Key Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total revenue | $12.3 million | $15.1 million | Down $2.8 million |
| Net income/(loss) | $(0.75) million | $1.91 million | Declined $2.66 million |
| Basic and diluted EPS | $(0.05) | $0.14 basic; $0.13 diluted | Lower |
| Pre-tax loss from continuing operations | $(0.80) million | $(1.05) million | Improved $0.25 million |
| Adjusted EBITDA | $1.16 million | $0.62 million | Up $0.54 million |
| Cash flow from operations | $0.66 million | $(3.90) million | Improved $4.56 million |
| Cash and cash equivalents | $2.26 million | $1.39 million | Up $0.88 million |
| Capital expenditures | $0.08 million | $1.08 million | Lower |
Net margin was approximately negative 6.1% in fiscal 2019 versus approximately positive 12.6% in fiscal 2018. The fiscal 2018 result benefited from a $3.3 million income tax benefit, while fiscal 2019 recorded only a $0.1 million tax benefit.
Franchise and license revenue increased to $11.4 million from $10.9 million. Restaurant sales declined to $0.9 million from $4.3 million as the Company-owned Pie Five store count decreased. Corporate general and administrative expense fell to $5.3 million from $7.6 million, but franchise expenses rose to $3.8 million from $2.6 million.
Brand and Unit Trends
- Pizza Inn domestic retail sales increased 1.8% to $90.1 million, and domestic comparable-store retail sales increased 2.6%.
- Pizza Inn domestic units increased to 155 from 153, primarily due to six new PIE kiosks, partly offset by closures of buffet and Delco/Express units.
- International Pizza Inn units declined to 48 from 58 following closures of underperforming Middle East locations.
- Pie Five domestic retail sales declined 14.6% to $41.6 million, average units open fell to 67 from 81, and comparable-store retail sales declined 4.4%.
- Pie Five ended the year with 58 domestic units, including 57 franchised and one company-owned unit, after 21 domestic franchised closures and six openings.
Cash Flow, Debt and Liquidity
Operating cash flow was positive at $0.66 million, supported in part by non-cash impairment and bad-debt charges and working-capital changes. Investing activities provided $0.13 million, primarily from asset-sale proceeds and collections on notes receivable, while financing activities provided $0.09 million from stock issuance.
The Company had $1.58 million of convertible notes recorded at June 30, 2019, with $1.7 million of principal outstanding before approximately $0.1 million of unamortized debt costs and discounts. The notes bear 4% interest, mature February 15, 2022, are convertible at $2.00 per share and are secured by pledges of the equity of two primary operating subsidiaries. A $1.0 million related-party short-term loan was repaid in fiscal 2018.
Management stated that cash on hand, operating cash flow and securities sales were expected to fund fiscal 2020 operations and planned capital expenditures. The filing states that management believed liquidity was sufficient for fiscal 2020; however, the Company also had $10.5 million of future minimum operating lease payments, partly offset by $0.9 million of scheduled sublease income.
Material Changes and Unusual Items
- The Company adopted ASC Topic 606 using the modified retrospective method. The adoption reduced opening retained earnings by $1.6 million, increased fiscal 2019 reported revenue by $1.4 million and increased pre-tax income by $0.5 million.
- Impairment of long-lived assets and other lease charges increased to $1.7 million from $0.9 million, including approximately $0.8 million of non-cash impairment and $0.9 million of lease charges related to closed units.
- Bad-debt expense increased to $1.3 million from $0.4 million, including a $0.9 million allowance for notes receivable.
- The Company recorded a $0.6 million gain on asset sales, primarily from selling two Pie Five units acquired with no cost basis.
- The Norco food and supply distribution division was discontinued in fiscal 2018. The Company no longer records food, equipment and supply sales or related cost of sales, and instead records supplier incentive revenues.
- The Company had $23.9 million of tax net operating loss carryforwards, but maintained a partial valuation allowance against deferred tax assets.
- The Company disclosed 18 additional lease obligations: two subleased, 11 assigned to franchisees and five direct obligations for non-operating locations. It was pursuing subleasing or termination alternatives for four non-operating leases.
Outlook, Management Commentary and Risks
- Management planned continued domestic and international franchised Pie Five development, including an expected first international Pie Five unit in Panama during fiscal 2020.
- Management expected to evaluate additional Pizza Inn Buffet and Delco development in international markets, particularly the Middle East.
- Management believed Pie Five unit closures would moderate and eventually reverse, but the filing provides no quantitative earnings or unit-development guidance.
- Key risks include intense competition, declining Pie Five comparable sales, franchisee financial condition and collections, reliance on franchisees and master licensees, lease obligations for closed locations, regulatory and franchise-law requirements, commodity-price fluctuations, and the ability to realize deferred tax assets.
- Most leases will be brought onto the balance sheet under the new lease standard beginning in fiscal 2020; management expected a material financial-statement impact.
- On September 26, 2019, Chairman Mark E. Schwarz was appointed interim principal financial officer pending appointment of a permanent replacement.
- The Company reported that pending legal claims were either insured or not expected to have a material adverse effect, but ordinary-course litigation and franchise disputes remain contingencies.
Important Facts for Investors to Verify
- Reconcile fiscal 2019 reported revenue and earnings with the ASC 606 adoption adjustments and determine the comparable results without the new standard.
- Assess whether positive operating cash flow and $2.3 million of cash are sufficient relative to lease obligations, convertible-note maturity and ongoing corporate costs.
- Review the collectability of notes receivable, including the approximately $0.9 million allowance and the $0.2 million balloon payment due in fiscal 2020.
- Monitor Pie Five comparable-store sales, franchise closures, new openings and the pace at which management expects unit growth to resume.
- Evaluate the financial impact of bringing operating leases onto the balance sheet in fiscal 2020.
- Verify the realizability of the $4.1 million net deferred tax asset and the Company’s $23.9 million tax net operating loss carryforwards.
- Review the terms and potential dilution associated with the convertible notes, stock options, restricted stock units and the Company’s ATM equity offering.