Rave Restaurant Group, Inc. Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 29, 2015, compared with March 30, 2014. Although the request identifies “2014 Q3,” the filing is for fiscal third quarter 2015. The financial statements are unaudited. Rave operates and franchises Pizza Inn restaurants, operates and franchises Pie Five restaurants, and distributes food and supplies through Norco.
Business Context and Operations
- At March 29, 2015, the system had 253 total units: 182 domestic Pizza Inn units, 40 domestic Pie Five units and 71 international Pizza Inn units.
- Company-owned restaurants totaled 19, including 2 Pizza Inn and 17 Pie Five locations; domestic franchised restaurants totaled 203.
- Pie Five expansion was the primary growth initiative. Domestic Pie Five units increased from 16 at the beginning of the fiscal year to 40 at quarter-end.
- The Company changed its distribution model during the third quarter, shifting responsibility for system-wide inventory from Norco to third-party distributors.
Financial Results and Key Metrics
| Metric | Three Months Ended March 29, 2015 | Three Months Ended March 30, 2014 | Nine Months Ended March 29, 2015 | Nine Months Ended March 30, 2014 |
|---|---|---|---|---|
| Revenue | $11.9 million | $10.9 million | $34.3 million | $31.3 million |
| Loss from continuing operations | $0.5 million | $0.4 million | $1.1 million | $1.2 million |
| Net loss | $0.6 million | $0.5 million | $1.2 million | $1.2 million |
| Basic net loss per share | $0.06 | $0.05 | $0.13 | $0.14 |
| Adjusted EBITDA | $0.147 million | $(0.173) million | $0.312 million | $(0.264) million |
| Cash provided by operating activities | Not separately provided | Not separately provided | $2.6 million | $(0.6) million |
- Revenue increased 9.1% for the quarter and 9.8% for the nine-month period.
- Approximate net loss margins were negative 4.8% for the quarter and negative 3.6% year to date. Adjusted EBITDA margins were approximately 1.2% and 0.9%, respectively.
- Revenue composition for the quarter was food and supply sales of $7.5 million, franchise revenue of $1.2 million and company-owned restaurant sales of $3.2 million.
- Total Pizza Inn domestic retail sales increased 3.0% for the quarter and 0.8% year to date. Comparable domestic Pizza Inn retail sales increased 6.0% and 5.6%, respectively.
- Pie Five system-wide retail sales increased 109.1% for the quarter and 114.7% year to date. Comparable store retail sales increased 9.5% and 13.8%, respectively.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $8.6 million at March 29, 2015, compared with $2.8 million at June 29, 2014.
- Operating activities generated $2.6 million of cash year to date, primarily reflecting working-capital benefits from the distribution-model change, including lower inventory requirements and higher accounts payable.
- Investing activities used $3.8 million year to date, primarily for new company-owned Pie Five restaurants.
- Financing activities provided $7.0 million, including $7.3 million of stock-sale proceeds, partly offset by $0.8 million of bank-debt repayments.
- Bank debt was zero at March 29, 2015. The revolving facility expired August 28, 2014, and the remaining term loan was paid in full by September 28, 2014.
- Through March 29, 2015, the 2014 at-the-market offering had generated $6.1 million of net proceeds from the sale of 699,177 shares. The offering authorization had been increased to $10.0 million.
- Management stated that cash on hand, operating cash flow and expected ATM proceeds should be sufficient to fund operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue and retail sales increased, led by Pie Five unit growth, higher comparable-store sales and increased franchise activity.
- Adjusted EBITDA improved from a loss of $0.2 million to positive $0.1 million for the quarter and from a loss of $0.3 million to positive $0.3 million year to date.
- Despite the operating improvement, quarterly net loss increased to $0.6 million from $0.5 million, primarily reflecting higher pre-opening costs and a $0.3 million impairment charge.
- Pre-opening expense increased to $0.2 million for the quarter and $0.4 million year to date, compared with $4 thousand and $0.2 million in the prior periods.
- Company-owned Pizza Inn restaurants reported a $0.3 million impairment charge because projected future cash flows were insufficient to recover the assets’ carrying value.
- Company-owned Pie Five restaurant operating cash flow increased 44.4% for the quarter and 129.0% year to date, although the segment remained loss-making before taxes.
- Share count increased materially because of ATM sales and option exercises; 10.2 million shares were outstanding as of May 13, 2015.
Outlook, Risks, Contingencies and Unusual Items
- Management emphasized continued Pie Five expansion and expects previously executed franchise development agreements and company development activity to support additional openings.
- The Company remains dependent on the performance of franchisees, comparable-store sales, successful new-store openings and continued access to equity financing.
- The Company recorded a $2.5 million net deferred tax asset and believes future taxable income will be sufficient for realization; this judgment depends on future operating performance and tax assumptions.
- Discontinued operations generated losses of $40 thousand for the quarter and $110 thousand year to date, primarily related to two closed Texas Pizza Inn locations.
- Related-party advisory fees are payable to an entity indirectly controlled by the Chairman. The agreement includes a $50 thousand quarterly fee and potential additional fees, subject to covenant-related limitations.
- Ordinary-course legal claims are pending. Management believes they are adequately insured or would not materially affect results, cash flows or financial condition if resolved unfavorably.
- Management identified estimates involving accounts receivable collectability, inventory valuation, long-lived-asset impairment, deferred tax assets, revenue recognition and legal contingencies as material sources of judgment.
- No separate fiscal-year revenue or earnings guidance was provided in the filing.
Most Important Facts to Verify
- Whether Pie Five openings can achieve targeted unit economics and offset continuing losses from company-owned restaurants.
- The sustainability of positive operating cash flow after the favorable working-capital effects of the distribution-model transition.
- Future equity issuance under the $10.0 million ATM authorization and its effect on dilution and liquidity.
- The recoverability of the $2.5 million deferred tax asset and any additional impairment risk at company-owned locations.
- Whether comparable-store sales growth persists while Pizza Inn domestic unit count remains broadly flat.
- The status and potential financial exposure of ordinary-course legal claims and related-party advisory fees.