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 13-week quarter ended September 25, 2016, the first quarter of fiscal 2017, compared with the quarter ended September 27, 2015. The financial statements are unaudited.
- At quarter-end, the system comprised 254 domestic units and 60 international Pizza Inn units; domestic units included 162 Pizza Inn and 92 Pie Five locations.
- Company-owned units totaled 31, including 1 Pizza Inn and 30 Pie Five restaurants.
Financial Performance and Key Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|
| Revenue | $15.456 million | $14.536 million | +6.3% |
| Loss from continuing operations | $1.479 million | $0.520 million | Loss increased $0.959 million |
| Net loss | $1.496 million | $0.557 million | Loss increased $0.939 million |
| Net loss margin | (9.7%) | (3.8%) | Down approximately 5.9 percentage points |
| Adjusted EBITDA | $(0.184) million | $0.228 million | Down $0.412 million |
| Basic and diluted loss per share | $(0.14) | $(0.05) | Down $0.09 |
| Cash used in operating activities | $1.468 million | Cash provided of $0.743 million | Decrease of $2.211 million |
- Revenue consisted of food and supply sales of $9.144 million, franchise revenue of $1.413 million, and company-owned restaurant sales of $4.899 million.
- Total costs and expenses were $16.921 million versus $15.314 million. Cost of sales rose to $13.882 million from $12.350 million, and general and administrative expense rose to $1.903 million from $1.569 million.
- Pre-opening expense declined to $19 thousand from $432 thousand, but the benefit was more than offset by weaker company-owned Pie Five performance, a $43 thousand loss on sale of assets, $169 thousand of other lease charges, and increased depreciation and amortization.
- Cash used in investing activities was $157 thousand, including $162 thousand of capital expenditures, compared with $3.564 million used in the prior-year quarter.
- Financing activities provided $806 thousand, primarily from stock-option exercises.
Liquidity, Capital Structure, and Balance Sheet
| Balance-sheet item | September 25, 2016 | June 26, 2016 |
|---|
| Cash and cash equivalents | $0.285 million | $1.104 million |
| Total current assets | $3.999 million | $4.872 million |
| Total current liabilities | $4.661 million | $5.499 million |
| Total liabilities | $8.179 million | $9.102 million |
| Shareholders’ equity | $8.758 million | $9.403 million |
- The company reported no interest expense in the quarter and stated that its bank credit facilities had been paid off in the first quarter of fiscal 2016; the filing does not report outstanding debt at quarter-end.
- Management stated that cash on hand, operating cash flow, and proceeds from the 2014 at-the-market offering are expected to fund operations for the next 12 months.
- Through September 25, 2016, the company had sold 825,763 shares under the 2014 ATM offering for aggregate gross proceeds of $8.1 million.
- There were no share repurchases during the quarter; up to 848,425 additional shares remained available for repurchase under the 2007 plan.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.3%, primarily from higher food and supply sales, increased franchise revenue, and growth in company-owned restaurant sales.
- Pie Five system-wide domestic retail sales increased 35.5% to $15.047 million as average units open increased from 57 to 90. However, comparable Pie Five retail sales fell 14.7%, and company-owned Pie Five average weekly sales declined 11.5% to $11,764.
- Company-owned Pie Five restaurant operating cash flow fell 94.3% to $36 thousand, and the segment’s loss before taxes increased to $1.505 million from $0.611 million.
- Pizza Inn domestic retail sales declined 1.6% to $22.103 million, while comparable-store retail sales increased 0.2%. Domestic Pizza Inn unit count was unchanged at 162.
- Company-owned Pie Five units declined from 31 to 30 after one closure; six franchised Pie Five units opened and one closed, resulting in 92 domestic Pie Five units.
- Cash declined $819 thousand during the quarter, primarily because of the operating cash outflow, partly offset by stock-option proceeds.
Guidance, Outlook, Risks, and Unusual Items
- No specific earnings, revenue, unit-growth, or margin guidance was provided.
- Management described continued Pie Five expansion, supported by previously executed franchise development agreements and company development in major metropolitan areas, but comparable sales and company-owned store economics weakened materially.
- The company recorded a full valuation allowance against deferred tax assets. Deferred tax assets were approximately $5.4 million at September 25, 2016, reflecting uncertainty regarding future realization amid cumulative losses.
- Unusual or non-recurring items included closed-store expenses, lease termination and other lease charges, impairment and non-operating store costs, and a loss on sale of assets. These items contributed to the decline in Adjusted EBITDA.
- The company is subject to ordinary-course claims involving employment matters, franchise disputes, lawsuits, taxes, food-product contracts, and other matters. Management believes pending matters are insured or will not materially affect annual results, cash flows, or financial condition.
- Management cautioned that forward-looking statements involve risks and uncertainties and that actual results may differ materially from expectations. The filing does not provide a separately updated risk-factor discussion because the company is a smaller reporting company.
Investor Verification Checklist
- Verify whether cash of $285 thousand and the expected 12-month liquidity plan remain adequate given the $1.468 million quarterly operating cash outflow.
- Assess whether Pie Five comparable-store sales and company-owned restaurant cash flow recover, and whether further closures, impairments, or lease charges may occur.
- Review the company’s reliance on the ATM offering and potential equity dilution to support liquidity.
- Monitor the realizability of approximately $5.4 million of deferred tax assets and changes in the related valuation allowance.
- Reconcile Adjusted EBITDA to GAAP results and evaluate the recurrence of excluded store, lease, impairment, and discontinued-operation costs.
- Review pending legal, franchise, employment, tax, and contractual contingencies for developments that could exceed management’s current assessment.
