Rave Restaurant Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rave Restaurant Group franchises and licenses Pizza Inn, Pie Five and Pizza Inn Express concepts and facilitates food, equipment and supply distribution through third-party distributors. The filing covers the 13-week and 26-week periods ended December 25, 2022, compared with December 26, 2021. The company had 125 domestic Pizza Inn units, 33 international Pizza Inn units and 31 domestic Pie Five units at period end; it operated no company-owned restaurants.
Financial Metrics
| Metric | Three Months Ended Dec. 25, 2022 | Six Months Ended Dec. 25, 2022 |
|---|---|---|
| Revenue | $2.866 million | $5.871 million |
| Income before taxes | $488 thousand | $887 thousand |
| Net income | $348 thousand | $655 thousand |
| Net margin | 12.1% | 11.2% |
| Basic diluted EPS | $0.02 | $0.04 |
| Adjusted EBITDA | $615 thousand | $1.157 million |
| Cash flow from operations | Not separately provided | $792 thousand |
- Revenue increased 6.3% for the quarter and 11.8% year to date, primarily from higher Pizza Inn royalties, supplier and distributor incentives, and advertising fund contributions.
- Operating expenses increased to $2.378 million for the quarter and $4.984 million year to date. General and administrative expense and franchise expense increased, partly offset by the absence of prior-year interest expense.
- Income tax expense rose to $140 thousand for the quarter and $232 thousand year to date, compared with $4 thousand and $7 thousand, respectively, in the prior-year periods.
- Cash and cash equivalents were $3.429 million at December 25, 2022, down from $7.723 million at June 26, 2022. Total liabilities were $3.768 million, including $1.670 million of operating lease liabilities. No convertible notes were outstanding.
- Cash used in financing activities was $5.009 million, primarily due to $4.979 million of share repurchases. Capital expenditures and intangible-asset purchases totaled $137 thousand.
Material Changes Versus Prior Comparable Period
- Quarterly net income declined 23.9% from $457 thousand to $348 thousand, despite higher revenue, primarily because income tax expense increased by $136 thousand.
- Year-to-date net income declined 11.7% from $742 thousand to $655 thousand. The revenue increase was more than offset by higher operating expenses and taxes.
- Adjusted EBITDA increased from $565 thousand to $615 thousand for the quarter and from $996 thousand to $1.157 million year to date.
- Pizza Inn domestic retail sales increased 12.5% for the quarter to $23.633 million, while comparable-store retail sales increased 8.4%. The domestic Pizza Inn unit count declined by three units during the period.
- Pie Five total retail sales decreased 2.5% for the quarter because average units open declined from 34 to 31; comparable-store retail sales increased 6.3%.
- The company repurchased 3,356,977 shares during the first six months, reducing outstanding shares from 17.511 million at June 26, 2022 to 14.154 million at December 25, 2022. The company had 1,997,974 repurchase shares remaining under its plan.
Outlook, Risks, Contingencies and Unusual Items
- Management expects cash on hand and operating cash flow to fund operations for the next 12 months and beyond. No quantitative revenue or earnings guidance was provided.
- Management expects Pizza Inn units to increase modestly in future periods and believes Pie Five units will eventually increase.
- The company stated that COVID-19 impacts have diminished, but renewed outbreaks, restaurant restrictions, reduced customer traffic, or changes in off-premises dining could materially affect future results and liquidity.
- The company collected approximately $0.6 million of an employee retention credit during the first quarter of fiscal 2023; $0.7 million had been recorded as other income in fiscal 2022.
- A former CEO obtained a $1.9 million judgment, including fees, costs and prejudgment interest, against the company in February 2022. The company has appealed the judgment to the Fifth Circuit Court of Appeals.
- The company remains exposed to ordinary-course franchise, employment, tax, lease and other legal claims. Management believes other pending matters are insured or would not be material if adversely resolved.
- Management concluded that disclosure controls and procedures were effective as of December 25, 2022, with no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify the status, potential cash impact and accounting treatment of the $1.9 million former-CEO judgment and appeal.
- Assess whether the $3.429 million cash balance remains adequate after substantial share repurchases and ongoing operating lease obligations.
- Reconcile the higher tax expense and confirm the realizability of the $5.590 million net deferred tax asset.
- Monitor Pizza Inn unit closures, Pie Five store count, comparable-store sales and franchisee financial health.
- Review the sustainability of operating cash flow, including the benefit from employee retention credit-related collections.
- Evaluate the effect of future share repurchases on liquidity, share count and per-share results.