Rave Restaurant Group, Inc. — Form 10-Q Summary
Business context and reporting period
Rave operates and franchises Pizza Inn and Pie Five restaurants and distributes food, paper products, and supplies through its Norco division. The filing covers the three and six months ended December 25, 2016, representing the second quarter and first six months of fiscal 2017. Each period contained 13 weeks and 26 weeks, respectively. The company had 221 total restaurant units at quarter-end, including 161 domestic Pizza Inn units, 99 domestic Pie Five units, and 60 international Pizza Inn units.
Financial performance and liquidity
| Metric | Three months ended Dec. 25, 2016 | Prior comparable period | Six months ended Dec. 25, 2016 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $14.792 million | $15.311 million | $30.248 million | $29.847 million |
| Net loss | $7.925 million | $4.830 million | $9.421 million | $5.387 million |
| Basic net loss per share | $0.74 | $0.47 | $0.89 | $0.52 |
| Adjusted EBITDA | $(1.179) million | $0.061 million | $(1.363) million | $0.289 million |
| Cash flow from operations | Not separately provided | Not separately provided | $(1.640) million | $1.473 million |
- Quarterly revenue declined 3.4%, while six-month revenue increased 1.3%.
- Food and supply sales rose to $9.120 million for the quarter and $18.264 million year to date. Franchise revenue was $1.445 million for the quarter and $2.858 million year to date.
- Company-owned restaurant sales declined 16.9% for the quarter and 6.0% year to date, primarily because of store closures and lower comparable sales.
- Total costs and expenses were $22.731 million for the quarter and $39.652 million year to date. The filing does not provide a clear consolidated gross-margin measure.
- Cash and cash equivalents were $1.098 million at December 25, 2016, compared with $1.104 million at June 26, 2016.
- Current liabilities were $6.847 million against current assets of $4.632 million. The company had $1.000 million of short-term debt, compared with none at fiscal year-end.
- Total liabilities were $10.151 million and shareholders’ equity was $0.878 million at quarter-end.
Material changes versus the prior comparable period
- Net loss increased by $3.095 million in the quarter and $4.034 million year to date.
- Impairment of long-lived assets and other lease charges increased to $5.197 million in the quarter and $5.366 million year to date, compared with $1.010 million in the prior-year periods. The quarter included approximately $4.8 million of non-cash impairment charges related to 14 Pie Five restaurants and one Pizza Inn restaurant, plus approximately $0.4 million of lease termination expenses.
- The company recorded $0.656 million of loss on sale of assets in the quarter and $0.699 million year to date; no comparable prior-year loss was reported.
- General and administrative expense increased to $2.175 million for the quarter and $4.078 million year to date, attributed primarily to recruiting fees for a new CEO and higher legal fees.
- Adjusted EBITDA deteriorated from positive $61,000 to negative $1.179 million for the quarter and from positive $289,000 to negative $1.363 million year to date.
- Pie Five system-wide retail sales increased 9.7% for the quarter and 21.6% year to date, driven by unit growth, but comparable-store retail sales decreased 17.4% and 16.1%, respectively.
- Pizza Inn domestic comparable-store retail sales declined 1.2% for the quarter and 0.5% year to date. Domestic Pizza Inn unit count declined by one during both the quarter and six-month period.
- Cash used in operations changed from $1.473 million of cash provided in the prior-year six-month period to $1.640 million used in the current period.
Outlook, contingencies, and unusual items
- On December 22, 2016, the company borrowed $1.0 million from Newcastle Partners, an affiliate of Chairman Mark E. Schwarz. The note bears interest at 10% and is due April 30, 2017.
- The company approved a rights offering for 4% convertible senior notes due 2022, with expected proceeds of $1.0 million to $3.0 million. The notes are convertible at $2.00 per share. Subscription rights were exercisable through February 13, 2017, subject to a possible 30-day extension.
- Management stated that cash on hand, operating cash flow, proceeds from the 2014 ATM offering, and proceeds from the rights offering would be sufficient to fund operations for the next 12 months. This assessment depends in part on obtaining the anticipated financing.
- The company recorded a full valuation allowance against deferred tax assets. Deferred tax assets totaled approximately $8.2 million at December 25, 2016, reflecting recent cumulative losses and uncertainty regarding future taxable income.
- Legal claims arise in the ordinary course of business. Management believes they are insured or not expected to materially affect financial condition, cash flows, or annual results.
- The filing provides no formal revenue, earnings, unit-development, or margin guidance. Management described Pie Five unit growth as continuing but moderating and Pizza Inn domestic unit counts as stabilizing.
- Related-party arrangements include advisory fees payable to an affiliate of the Chairman, subject to financial covenant limitations, and the Newcastle loan.
Important facts for investors to verify
- Completion and proceeds of the rights offering, and repayment of the $1.0 million Newcastle loan by its April 30, 2017 maturity.
- Cash-burn trends and the company’s ability to fund operations given negative operating cash flow, limited cash, and current liabilities exceeding current assets.
- Whether Pie Five comparable-store sales and company-owned restaurant operating cash flow recover after substantial declines.
- Whether additional impairments, lease termination costs, store closures, or asset-sale losses are required.
- The realizability of approximately $8.2 million of deferred tax assets and the potential for continued valuation allowances.
- The terms, covenants, and availability of the company’s financing arrangements and ATM capacity.