Rave Restaurant Group, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2020, comprising 52 weeks, compared with the 53-week fiscal year ended June 30, 2019. The filing was signed September 28, 2020. Although the request references 2019 Q4, the supplied document is an annual report for fiscal 2020.
Business Context
Rave franchises Pizza Inn buffet, delivery/carry-out and express restaurants; licenses Pizza Inn Express kiosks; and franchises the Pie Five fast-casual pizza concept. The Company had no Company-owned restaurants at June 28, 2020.
- Domestic franchised/licensed units: 193, including 151 Pizza Inn units and 42 Pie Five units.
- International Pizza Inn units: 38.
- Licensed PIE kiosks: 13.
- Employees: 22.
Financial Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $10.0 million | $12.3 million | Down $2.3 million |
| Loss before taxes | $0.2 million | $0.8 million | Loss narrowed before tax |
| Income tax expense | $4.1 million | $(0.1) million benefit | Primarily valuation allowance change |
| Net loss | $4.2 million | $0.8 million | Loss increased $3.4 million |
| Basic and diluted loss per share | $0.28 | $0.05 | Loss per share increased |
| Adjusted EBITDA | $0.6 million | $0.4 million | Improved $0.2 million |
| Cash used in operating activities | $0.4 million | Cash provided of $0.7 million | Cash flow deteriorated |
Revenue consisted primarily of franchise royalties, supplier and distributor incentives, franchise fees, advertising funds and other franchise-related income. Pizza Inn franchise revenue decreased 7.4% to $6.7 million, while Pie Five franchise revenue decreased 31.0% to $2.9 million. Company-owned restaurant sales declined 72.9% to $0.2 million as the remaining Company-owned stores were closed.
Domestic comparable retail sales, presented on a comparable 53-week basis, declined 10.5% to $97.5 million. Pizza Inn comparable sales decreased 8.8% to $74.8 million, and Pie Five comparable sales decreased 15.7% to $22.7 million. Pie Five total retail sales declined 37.4%, primarily because average units open decreased from 67 to 54 and the Company closed 16 domestic Pie Five units net.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $3.0 million at June 28, 2020, compared with $2.3 million at June 30, 2019. Cash, cash equivalents and restricted cash totaled $3.2 million.
- Total liabilities were $9.2 million versus $6.0 million, substantially reflecting recognition of operating lease liabilities under ASC 842.
- Operating lease liabilities totaled $4.1 million, including $0.6 million current and $3.5 million long-term. Future operating lease payments were $7.9 million before sublease income.
- Convertible senior notes totaled approximately $1.6 million and mature February 15, 2022. The notes bear 4% interest and are convertible at $2.00 per share; $64 thousand of principal was converted during fiscal 2020.
- The Company received a $656,830 PPP loan at 0.98% interest, maturing April 10, 2022. All or part of the loan may be forgiven subject to SBA requirements.
- Shareholders’ equity declined to $0.5 million from $4.4 million, primarily because of the fiscal-year net loss.
- Management stated that cash on hand, operating cash flow, government-sponsored loan proceeds and potential common-stock sales were expected to fund operations for the next 12 months.
Material Changes Versus the Prior Period
- COVID-19 materially reduced in-store sales, particularly at Pizza Inn buffet and Pie Five restaurants, while increased carry-out and delivery sales provided only a modest offset.
- Pizza Inn domestic retail sales declined 13.7% to $77.8 million; domestic comparable sales declined 8.8%.
- Pie Five domestic retail sales declined 37.4% to $26.0 million, driven by lower comparable sales and substantial unit closures.
- Domestic Pizza Inn units decreased by four net to 151; international Pizza Inn units decreased by ten net to 38.
- General and administrative expense increased to $5.5 million from $5.3 million, while franchise expenses declined to $3.1 million from $3.8 million.
- Bad debt expense decreased to $53 thousand from $1.3 million.
- Impairment and other lease charges decreased to $0.9 million from $1.7 million, but included approximately $0.7 million of lease charges related to closed units.
- A full valuation allowance was established against deferred tax assets, producing approximately $4.1 million of income tax expense despite a pretax loss. Net operating loss carryforwards totaled $23.6 million.
- ASC 842 adoption added approximately $3.6 million of operating lease right-of-use assets and $4.0 million of operating lease liabilities at June 28, 2020.
Outlook, Risks and Unusual Items
Management expects COVID-19-related capacity restrictions, social-distancing requirements, possible temporary closures and changing consumer behavior to continue affecting Buffet and Pie Five units. The Company stated that the pandemic’s ultimate effect on future operations and liquidity could not be predicted and that future results were likely to be materially adversely affected.
Management plans to continue franchised Pizza Inn and Pie Five development, including evaluating international Pizza Inn development, particularly in the Middle East. It does not presently intend to operate Company-owned restaurants during fiscal 2021 and does not intend to expand the PIE kiosk licensing model in the foreseeable future.
- Employees were furloughed, remaining employee base salaries were reduced by 20%, and other expenses were cut during the fourth quarter.
- The Company amended its corporate-office lease to defer one-half of monthly base rent from June 2020 through May 2021.
- The Company had direct or contingent lease obligations for 16 additional locations; five non-operating leases were being evaluated for sublease or termination alternatives.
- Restaurant industry competition, franchisee financial condition, franchise disputes, lease guarantees, regulatory requirements, supplier pricing and the ability to collect receivables remain relevant risks.
- Legal claims arising in the ordinary course were described as insured or not expected to have a material adverse effect, although unfavorable outcomes could still affect results.
- The independent auditor issued an unmodified opinion and included an emphasis-of-matter paragraph regarding the uncertainty surrounding COVID-19’s financial impact and duration.
Investor Verification Checklist
- Verify the post-filing status, forgiveness and remaining balance of the $656,830 PPP loan.
- Assess whether COVID-19 restrictions, consumer traffic and carry-out or delivery trends caused further declines after June 28, 2020.
- Review the Company’s ability to fund operations and meet 2022 convertible-note obligations and lease commitments.
- Evaluate the recoverability of the $23.6 million of tax loss carryforwards given the full valuation allowance and continuing losses.
- Monitor Pie Five unit closures, franchisee health and whether management’s expectation of stabilizing and reversing net closures is achieved.
- Review contingent lease guarantees and the five non-operating leases being considered for sublease or termination.
- Reconcile reported Adjusted EBITDA of $0.6 million to GAAP net loss and consider the recurring nature of the excluded charges.