Rave Restaurant Group, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended March 26, 2023, compared with March 27, 2022. The filing is the fiscal third quarter of 2023, although the request metadata identifies “2022 Q3.” Financial statements are unaudited.
Business context
Rave franchises and licenses Pizza Inn buffet, delivery/carry-out, express and kiosk concepts, and Pie Five fast-casual pizza restaurants. The company had 155 Pizza Inn units, including 122 domestic and 33 international units, and 30 domestic Pie Five franchised units at March 26, 2023. It operated no company-owned restaurants.
Financial performance and liquidity
| Metric | Q3 FY2023 | Q3 FY2022 | 9M FY2023 | 9M FY2022 |
|---|---|---|---|---|
| Revenue | $3.0 million | $2.6 million | $8.8 million | $7.9 million |
| Income before taxes | $438 thousand | $496 thousand | $1.325 million | $1.245 million |
| Net income | $323 thousand | $493 thousand | $978 thousand | $1.235 million |
| Basic EPS | $0.02 | $0.03 | $0.06 | $0.07 |
| Adjusted EBITDA | $568 thousand | $590 thousand | $1.725 million | $1.586 million |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $1.233 million | $525 thousand |
- Revenue increased 13.4% in the quarter and 12.3% year to date. Pizza Inn revenue increased to $2.45 million in the quarter and $7.27 million year to date, primarily from higher royalties, supplier incentives and advertising fund revenue. Pie Five revenue was broadly stable.
- Net margin was approximately 10.9% in the quarter and 11.1% year to date, versus approximately 18.8% and 15.7% in the comparable periods. The decline primarily reflected higher income taxes and increased operating expenses.
- General and administrative expense increased to $1.486 million in the quarter and $4.282 million year to date. Franchise expense increased to $964 thousand and $3.033 million, respectively, mainly from payroll, advertising and travel costs.
- Income tax expense increased to $115 thousand in the quarter and $347 thousand year to date, compared with $3 thousand and $10 thousand. Management attributed the increase to full recognition of the deferred tax asset during the fourth quarter of fiscal 2022.
- Cash and cash equivalents declined to $3.867 million at March 26, 2023 from $7.723 million at June 26, 2022. Operating cash flow was $1.233 million, investing activities used $80 thousand and financing activities used $5.009 million.
- Financing cash usage primarily reflected $4.979 million of treasury-stock purchases. The company repurchased 3.357 million shares during the first nine months at an average price of $1.48 per share.
- The company had no convertible notes outstanding and no short-term loan balance at March 26, 2023. Recorded operating lease liabilities totaled $1.547 million, including $481 thousand current.
- Management stated that cash on hand and expected operating cash flow should be sufficient to fund operations for the next 12 months and beyond.
Material changes versus the prior comparable period
- Pizza Inn domestic retail sales increased 15.6% in both the quarter and year to date, benefiting from reduced COVID-19 disruption and increased customer engagement. Domestic comparable-store sales also increased 15.6% for the quarter.
- Pie Five system-wide retail sales increased 2.6% in the quarter, while comparable-store sales increased 8.1%; average units open declined from 34 to 31.
- Domestic Pizza Inn units declined by three during the quarter and six year to date, ending at 122. Pie Five domestic franchised units declined by one to 30.
- Adjusted EBITDA was broadly stable in the quarter but increased 8.8% year to date, despite lower GAAP net income.
- Accounts receivable decreased to $1.492 million from $1.981 million at fiscal year-end, while the allowance for bad debts increased to $59 thousand from $27 thousand.
- Total shareholders’ equity declined to $9.670 million from $13.412 million, primarily because of treasury-stock repurchases, partly offset by net income and stock-based compensation.
Outlook, risks, contingencies and unusual items
- Management expects Pizza Inn domestic and international unit counts to increase modestly in future periods and believes Pie Five units will eventually increase. No quantitative earnings or revenue guidance was provided.
- The company continues to identify COVID-19 recurrence, restaurant-dining restrictions, customer behavior and reduced off-premises demand as potential risks, although recent adverse effects have diminished.
- A former chief executive’s litigation resulted in a $1.9 million judgment, including attorney fees, costs and prejudgment interest. The company appealed to the Fifth Circuit; the outcome remains uncertain and could require payment, a new trial or reversal of the judgment.
- The company remains exposed to franchise disputes, employment matters, taxes, food-product contracts and other ordinary-course claims. Management believes these matters are insured or would not materially affect results if adversely resolved.
- Operating lease payments total $1.658 million before $111 thousand of imputed interest, with maturities extending beyond 2026.
- The company recorded $37 thousand of bad debt expense and $5 thousand of impairment and other lease charges during the first nine months. Stock-based compensation expense was $259 thousand.
- Disclosure controls and procedures were evaluated as effective, and management reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the status and potential cash impact of the $1.9 million former-CEO judgment and appeal.
- Assess whether the reduced cash balance remains adequate after substantial share repurchases and required lease payments.
- Monitor unit closures, franchisee financial condition, bad-debt trends and the ability to grow Pizza Inn and Pie Five locations.
- Reconcile the increase in revenue and adjusted EBITDA with the decline in net income, particularly the higher tax expense and corporate and franchise costs.
- Review the sustainability and timing of employee retention credit collections and other nonrecurring cash-flow benefits.
- Evaluate the company’s non-GAAP Adjusted EBITDA alongside GAAP results and the effect of future stock-based compensation and lease obligations.