Rave Restaurant Group, Inc. — Fiscal 2018 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended December 23, 2018, compared with December 24, 2017. The interim financial statements are unaudited. Rave operates and franchises Pizza Inn and Pie Five restaurants and licenses Pizza Inn Express units.
Financial Results and Key Metrics
| Metric | Three months ended Dec. 23, 2018 | Three months ended Dec. 24, 2017 | Six months ended Dec. 23, 2018 | Six months ended Dec. 24, 2017 |
|---|---|---|---|---|
| Revenue | $3.195 million | $4.197 million | $6.186 million | $9.629 million |
| Income/(loss) from continuing operations before tax | $361 thousand | $(424) thousand | $519 thousand | $(542) thousand |
| Net income/(loss) | $232 thousand | $(577) thousand | $340 thousand | $(933) thousand |
| Basic and diluted EPS | $0.02 | $(0.04) | $0.02 | $(0.07) |
| Cash flow from operating activities | Not separately provided | Not separately provided | $393 thousand | $(3.474) million |
| Adjusted EBITDA | $557 thousand | $(168) thousand | $1.013 million | $505 thousand |
- Approximate net margin was 7.3% for the quarter and 5.5% year to date; approximate pretax margin was 11.3% and 8.4%, respectively.
- Revenue declined 23.9% in the quarter and 35.8% year to date, primarily because of the substantially smaller company-owned restaurant base and changes following the discontinuation of the Norco distribution division. Reported revenue also includes advertising and convention fund contributions presented gross under Topic 606.
- General and administrative expense declined to $1.640 million for the quarter and $3.054 million year to date, from $2.017 million and $4.111 million, respectively.
- Interest expense declined to $26 thousand for the quarter and $51 thousand year to date, compared with $63 thousand and $131 thousand, respectively, primarily because of prior conversions of senior convertible notes.
- Impairment and other lease charges were $155 thousand for the quarter and $170 thousand year to date, compared with $533 thousand and $681 thousand in the comparable periods.
Liquidity, Capital Structure, and Balance Sheet
- Cash and cash equivalents were $1.906 million at December 23, 2018, compared with $1.386 million at June 24, 2018.
- Current assets were $5.164 million and current liabilities were $1.991 million, implying reported current assets of approximately 2.6 times current liabilities.
- Total liabilities were $6.119 million and shareholders’ equity was $5.331 million. The principal funded debt was $1.574 million of 4% convertible senior notes due February 15, 2022, convertible at $2.00 per share and secured by pledges of the equity of two primary operating subsidiaries.
- Operating cash flow improved by $3.867 million year over year to $393 thousand. Investing activities provided $94 thousand, while financing activities provided $33 thousand.
- The company had sold 173,852 shares under its $5.0 million at-the-market offering through the reporting date, generating aggregate gross proceeds of approximately $0.3 million. Management stated that cash on hand, operating cash flow, and additional ATM proceeds should fund operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Domestic comparable-store retail sales increased 0.8% for the quarter and 0.9% year to date. Pizza Inn comparable sales increased 2.7% and 2.5%, respectively, while Pie Five comparable sales declined 3.6% and 2.7%.
- Pizza Inn domestic franchised and licensed units ended the quarter at 155, up from 153 at the beginning of the quarter. International Pizza Inn units declined from 51 to 48 due to Middle East closures.
- Domestic Pie Five units declined from 71 to 65 during the quarter, including eight closures. Pie Five system-wide retail sales fell 11.5% for the quarter and 8.8% year to date, partly because average units open declined from 82 to 69 for the quarter and from 83 to 71 year to date.
- Company-owned restaurant sales fell to $105 thousand for the quarter and $219 thousand year to date, from $1.567 million and $3.742 million, reflecting the reduction of company-owned stores. The remaining company-owned Pie Five unit generated a pretax loss of $295 thousand for the quarter and $424 thousand year to date.
- The company adopted ASC Topic 606 on June 25, 2018 using the modified retrospective method. The adoption reduced opening retained earnings by $1.622 million, increased reported revenue by $321 thousand for the quarter and $771 thousand year to date, and increased pretax income by $129 thousand and $160 thousand, respectively.
- The prior-year period included $180 thousand of quarterly and $405 thousand of year-to-date losses from discontinued operations; no such losses were reported in fiscal 2019 year to date.
Guidance, Outlook, Risks, and Unusual Items
- No formal revenue or earnings guidance was provided. Management expects the domestic Pizza Inn unit count to increase modestly, believes international Pizza Inn unit count is stabilizing, and expects the recent net decline in Pie Five units to moderate and eventually reverse. The company does not anticipate opening new company-owned Pie Five units in the near term.
- Management attributes improved profitability to closing poorly performing stores, lower closed-store expenses, increased gains on asset sales, lower impairment expense, and reduced general and administrative costs.
- Reported results were affected by the first-time application of Topic 606, gross presentation of certain advertising funds, discontinued operations, asset-sale gains, lease termination charges, stock compensation, and bad-debt provisions. These items reduce direct comparability with the prior year.
- As of December 23, 2018, gross deferred tax assets were $5.7 million, partially offset by a $2.4 million valuation allowance. Future realizability remains subject to taxable income and other assumptions.
- The company is exposed to franchisee credit and collection risk, store-level performance risk, lease termination costs, impairment risk, litigation and franchise disputes, and execution risk related to rebuilding Pie Five. Management believes pending claims are insured or not material, but actual outcomes could differ.
- The company is evaluating the new lease accounting standard, which is expected to apply beginning in fiscal 2020 and could materially change reported assets and liabilities.
- Disclosure controls and procedures were assessed as effective at period end, with no material changes to internal control over financial reporting reported during the quarter.
Investor Verification Checklist
- Reconcile revenue and profitability trends after adjusting for ASC 606 presentation and timing effects.
- Assess whether the improvement in earnings and Adjusted EBITDA is sustainable without continued asset sales, store closures, or other unusual items.
- Monitor Pie Five comparable sales, unit closures, average weekly sales, and the performance of the remaining company-owned unit.
- Evaluate liquidity against the $1.574 million convertible-note obligation due in 2022 and the company’s reliance on future operating cash flow and ATM equity proceeds.
- Review collectability of accounts and notes receivable, including the $186 thousand allowance recorded against notes receivable during the period.
- Verify the realizability of deferred tax assets and the potential balance-sheet effect of the upcoming lease standard.