Rave Restaurant Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rave Restaurant Group franchises and licenses Pizza Inn and Pie Five restaurants, including Pizza Inn buffet, delivery/carry-out, express and kiosk formats. The company had 162 domestic franchised or licensed units at December 26, 2021, comprising 128 Pizza Inn units and 34 Pie Five units, plus 33 international Pizza Inn units. The company had no company-owned restaurants.
This unaudited Form 10-Q covers the three and six months ended December 26, 2021, compared with the comparable periods ended December 27, 2020. The company is a smaller reporting company.
Financial Highlights
| Metric | Three Months Ended Dec. 26, 2021 | Three Months Ended Dec. 27, 2020 | Six Months Ended Dec. 26, 2021 | Six Months Ended Dec. 27, 2020 |
|---|---|---|---|---|
| Revenue | $2.696 million | $2.128 million | $5.249 million | $4.031 million |
| Income before taxes | $461 thousand | $104 thousand | $749 thousand | $182 thousand |
| Net income | $457 thousand | $102 thousand | $742 thousand | $178 thousand |
| Basic EPS | $0.03 | $0.01 | $0.04 | $0.01 |
| Adjusted EBITDA | $565 thousand | $205 thousand | $996 thousand | $383 thousand |
- Quarterly revenue increased approximately 26.7%; year-to-date revenue increased approximately 30.2%.
- Quarterly net margin was approximately 17.0%, compared with 4.8% in the prior-year quarter. Year-to-date net margin was approximately 14.1%, compared with 4.4% in the prior-year period.
- Adjusted EBITDA increased $360 thousand for the quarter and $613 thousand year to date.
- Revenue growth was primarily driven by higher franchise royalties, supplier and distributor incentive revenue, and advertising fund contributions.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $8.232 million at December 26, 2021, compared with $8.330 million at June 27, 2021.
- Operating activities generated $14 thousand of cash during the first six months of fiscal 2022, compared with $307 thousand of cash used in the prior-year period.
- Investing activities provided $48 thousand, primarily from $94 thousand of payments received on notes receivable, partially offset by $34 thousand of intangible asset purchases.
- Financing activities used $160 thousand, primarily for repayment of a short-term loan.
- Current liabilities were $3.723 million, including $1.590 million of convertible notes and $90 thousand of short-term loan obligations. Operating lease liabilities totaled $2.146 million, including current and long-term amounts.
- The company had $1.6 million in principal amount of 4% convertible senior notes outstanding at December 26, 2021. The notes matured February 15, 2022, and management stated that it intended to repay them in cash at maturity.
- Management stated that cash on hand, combined with cash from operations, should be sufficient to fund operations for the next 12 months, while also expecting modest operating cash flow in the third and fourth quarters of fiscal 2022.
Material Changes Versus the Prior Comparable Period
- Pizza Inn franchise revenue increased to $2.154 million for the quarter from $1.624 million and to $4.188 million year to date from $3.004 million.
- Pie Five franchise revenue increased to $496 thousand for the quarter from $456 thousand and to $968 thousand year to date from $932 thousand.
- Pizza Inn domestic retail sales increased 33.4% for the quarter and 29.0% year to date. Comparable-store sales increased 31.0% and 28.3%, respectively.
- Pie Five system-wide retail sales increased 14.9% for the quarter and 13.5% year to date, while comparable-store sales increased 15.1% and 16.3%, respectively. Average Pie Five units open declined from 37 to 34 for the quarter and from 40 to 34 year to date.
- General and administrative expense increased $192 thousand for the quarter and $309 thousand year to date, primarily due to higher corporate expenses.
- Franchise expense increased $178 thousand for the quarter and $617 thousand year to date, primarily due to higher advertising and convention expenses.
- Bad debt expense declined to $3 thousand for the quarter and $8 thousand year to date, compared with $88 thousand and $115 thousand, respectively, in the prior-year periods.
- No impairment or other lease charges were recorded in the current quarter or year-to-date period, compared with $4 thousand and $21 thousand in the comparable prior-year periods.
- Domestic Pizza Inn units declined by five during the quarter and seven year to date, ending at 128 units. Pie Five units increased by one to 34 units, while international Pizza Inn units increased by one to 33.
- Shareholders’ equity increased to $6.560 million from $5.733 million at June 27, 2021, primarily reflecting year-to-date net income and stock compensation expense.
Guidance, Outlook, Risks and Unusual Items
- Management expects modest operating cash flow in the second half of fiscal 2022 and believes available cash and operating cash flow will fund operations for the next 12 months.
- Management expects domestic Pizza Inn unit closures to continue modestly in the near term, with a potential reversal in future periods. International Pizza Inn units and Pie Five units are expected to increase moderately.
- COVID-19 continues to pose risks through capacity restrictions, temporary closures, reduced in-store dining, changes in customer behavior, labor and economic disruption, and possible negative publicity associated with restaurant outbreaks. The ultimate impact on future results and liquidity remains uncertain.
- On November 1, 2021, a court entered a $924 thousand judgment against the company in litigation brought by former CEO Scott Crane, plus pre- and post-judgment interest and court costs. The company intends to appeal the judgment.
- The company maintained a full $6.2 million valuation allowance against its deferred tax assets and used net operating losses to offset federal taxes.
- The company received forgiveness of its $0.7 million Paycheck Protection Program loan in the fourth quarter of fiscal 2021.
- Management stated that other pending claims are either covered by insurance or are not expected to have a material adverse effect, although unfavorable outcomes could differ from management’s assessment.
Investor Verification Priorities
- Verify repayment or other resolution of the $1.6 million convertible notes that matured in February 2022.
- Assess the cash impact, appeal status and ultimate liability related to the $924 thousand former-CEO judgment, including accrued interest and costs.
- Monitor whether positive comparable-store sales persist despite declining Pizza Inn domestic unit counts and lower average Pie Five unit counts.
- Reconcile reported net income and Adjusted EBITDA with operating cash generation, which was only $14 thousand for the first six months.
- Evaluate the effect of COVID-19, labor constraints, restaurant capacity restrictions, franchisee financial health and potential unit closures on royalties and supplier incentives.
- Review the recoverability of deferred tax assets, given the $6.2 million full valuation allowance.