Rave Restaurant Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended December 28, 2014, compared with the periods ended December 29, 2013. The quarters each contained 13 weeks and the six-month periods each contained 26 weeks. The company operated Pizza Inn and Pie Five restaurants, franchised restaurants, and Norco food and supply distribution.
Financial Results and Key Metrics
| Metric | Three months ended Dec. 28, 2014 | Prior comparable period | Six months ended Dec. 28, 2014 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $11.1 million | $10.0 million | $22.4 million | $20.1 million |
| Loss from continuing operations before taxes | $(0.5) million | $(0.5) million | $(0.9) million | $(1.0) million |
| Net loss | $(0.4) million | $(0.4) million | $(0.7) million | $(0.7) million |
| Basic net loss per share | $(0.04) | $(0.05) | $(0.07) | $(0.09) |
| Adjusted EBITDA | $(0.02) million | $(0.2) million | $0.1 million | $(0.3) million |
| Cash used in operating activities | Not separately presented for the quarter | $(0.03) million | $0.2 million provided |
- Revenue increased approximately 11.0% in the quarter and 11.6% for the six-month period.
- Approximate loss from continuing operations before tax margins were negative 4.7% for the quarter and negative 3.9% for the six-month period. Net loss margins were approximately negative 3.6% and negative 3.0%, respectively.
- Revenue comprised food and supply sales of $7.3 million for the quarter and $14.7 million for six months; franchise revenue of $1.1 million and $2.1 million; and company-owned restaurant sales of $2.8 million and $5.6 million.
- At December 28, 2014, cash and cash equivalents were $2.2 million, compared with $2.8 million at June 29, 2014. Total assets were $16.2 million and total liabilities were $4.8 million.
- Bank debt was fully repaid by December 28, 2014. The F&M credit agreement expired by its terms after the revolving facility expired in August 2014 and the initial term loan was paid in full.
- Six-month capital expenditures were $1.6 million, primarily for new company-owned Pie Five restaurants. Six-month financing cash inflow of $1.0 million included stock-sale proceeds of $1.8 million, partly offset by $0.8 million of debt repayments.
Material Changes Versus the Prior Comparable Period
- Company-owned restaurant sales increased 23.5% in the quarter and 23.9% for six months, driven by comparable-store sales and additional company-owned Pie Five restaurants.
- Pie Five system-wide retail sales increased 118.1% in the quarter and 117.8% for six months. Comparable-store retail sales increased 16.9% and 17.1%, respectively.
- Pizza Inn domestic comparable-store retail sales increased 6.4% in the quarter and 5.6% for six months, while total domestic Pizza Inn retail sales increased only modestly because of unit changes.
- Pie Five domestic units increased from 20 to 31 during the first six months, including 13 openings and two franchised closures. Total domestic Pizza Inn units declined from 182 to 181.
- Adjusted EBITDA improved to a small loss in the quarter and a profit for the six-month period, although GAAP net losses continued.
- Cost of sales increased to $9.5 million from $8.4 million in the quarter and to $19.1 million from $17.1 million for six months, primarily due to increased Norco sales and additional company-owned restaurants.
- Interest expense declined in the quarter because of the zero debt balance. Six-month interest expense increased because capitalized loan origination costs were written off following repayment of the credit facilities.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash on hand, operating cash flow, and proceeds from the 2014 ATM offering are expected to fund operations for the next 12 months. The filing provides no formal revenue or earnings guidance.
- Through December 28, 2014, the company had sold 59,263 shares under the 2014 ATM offering for approximately $0.4 million of net proceeds. The offering permits sales of up to $5.0 million in aggregate.
- Management expects to realize the $2.2 million net deferred tax asset through future taxable income and reversal of temporary differences. This expectation depends on future operating performance and tax circumstances.
- Discontinued operations produced losses of $43,000 in the quarter and $70,000 for six months, primarily related to two closed Texas Pizza Inn locations.
- The company has ordinary-course legal claims and believes they are insured or would not materially affect results if resolved unfavorably.
- A related party advisory agreement with an entity indirectly controlled by the chairman includes a $150,000 initial fee, quarterly fees of $50,000, and potential additional quarterly fees of up to $50,000, subject to financial covenant limitations.
- Effective January 7, 2015, the company changed its name from Pizza Inn Holdings, Inc. to Rave Restaurant Group, Inc.; its NASDAQ ticker changed from PZZI to RAVE on January 9, 2015.
- Management identifies collection of franchisee receivables, inventory valuation, long-lived-asset impairment, deferred tax asset realization, revenue recognition, and legal contingencies as key areas involving estimates and potential variability.
- Management reported that disclosure controls were effective at period-end and that no material changes had affected internal controls over financial reporting.
Investor Verification Checklist
- Verify whether Pie Five unit growth and comparable-store sales can continue without materially increasing pre-opening, labor, capital, or corporate costs.
- Assess liquidity after the reported decline in cash, negative operating cash flow, planned capital expenditures, and reliance on future ATM proceeds.
- Evaluate the support for realizing the $2.2 million deferred tax asset given the company’s continuing GAAP losses.
- Review the effect of debt repayment and credit-facility expiration on future liquidity, borrowing capacity, and interest expense.
- Reconcile adjusted EBITDA to GAAP results and assess the recurring nature of excluded pre-opening, closure, impairment, and stock-compensation costs.
- Review the related-party advisory agreement, fee waivers, and amounts paid or payable to the chairman-affiliated entity.
- Confirm the status and potential exposure of ordinary-course litigation, closed-restaurant obligations, and remaining share-repurchase authorization of 848,425 shares.