RAVE RESTAURANT GROUP, INC. annual report, FY2022

Rave Restaurant Group, Inc. — Fiscal 2022 Form 10-K Summary

Reporting period: Fiscal year ended June 26, 2022, comprising 52 weeks. The filing is an annual Form 10-K rather than a quarterly “2021 Q4” report; the prior comparable fiscal year ended June 27, 2021.

Business Context

Rave franchises Pizza Inn buffet, delivery/carry-out and express restaurants, licenses Pizza Inn Express kiosks, and franchises Pie Five fast-casual pizza restaurants. The Company operates an asset-light model and had no Company-owned restaurants as of June 26, 2022.

150 franchised Pizza Inn restaurants, including 119 domestic and 31 international units.
31 franchised Pie Five units and 9 licensed PIE kiosks.
Total ending units declined to 159 from 167, reflecting 16 closures and 8 openings.
The Company had 24 employees and primarily serves markets in the southern United States, with international operations concentrated in the Middle East and Honduras.

Financial Results and Key Metrics

Metric	Fiscal 2022	Fiscal 2021	Change
Revenue	$10.692 million	$8.593 million	+$2.099 million, +24.4%
Income before taxes	$2.365 million	$1.491 million	+$0.874 million, +58.6%
Income tax benefit	$5.657 million	$0.029 million	Primarily valuation allowance reversal
Net income	$8.022 million	$1.520 million	+$6.502 million, +427.8%
Basic and diluted EPS	$0.45	$0.09	+$0.36
Adjusted EBITDA	$2.806 million	$1.965 million	+$0.841 million, +42.8%
Cash flow from operations	$1.384 million	$1.485 million	-$0.101 million

Reported net margin was approximately 75.0%, but it was substantially inflated by the $5.7 million income tax benefit. Pre-tax margin was approximately 22.1%; EBITDA margin was approximately 24.4% and Adjusted EBITDA margin approximately 26.2%.
Pizza Inn franchise and license revenue increased to $8.535 million from $6.582 million. Pie Five franchise and license revenue increased to $1.967 million from $1.816 million.
Domestic comparable retail sales increased 23.2% to $102.698 million. Pizza Inn comparable sales rose 24.7% and Pie Five comparable sales rose 17.1%.
General and administrative expense increased 15.6% to $5.446 million, while franchise expense increased to $3.284 million from $2.394 million.

Cash Flow, Liquidity, Debt and Capital Structure

Cash and cash equivalents were $7.723 million at June 26, 2022, compared with $8.330 million at the prior year-end.
Operating cash flow was $1.384 million. Investing activities provided $0.338 million, primarily from payments on notes receivable. Financing activities used $2.329 million.
The Company paid $1.597 million to retire its 4% convertible notes at maturity in February 2022 and had no convertible notes outstanding at year-end.
A short-term loan balance of $30 thousand remained at year-end after $220 thousand of repayments during the year.
Operating lease liabilities totaled $1.911 million, including $0.490 million current and $1.421 million long term. Future operating lease payments totaled $2.075 million before imputed interest.
Current assets were $10.058 million versus current liabilities of $2.890 million. The Company stated that cash on hand and operating cash flow should be sufficient for fiscal 2023 and beyond.
The Company repurchased 493,474 shares for approximately $0.512 million during fiscal 2022. On June 28, 2022, the repurchase authorization was increased to 8.016 million shares; an additional 1,110,891 shares were repurchased for $1.4 million after year-end.
No dividends were paid, and management stated that it currently does not intend to pay dividends.

Material Changes Versus Fiscal 2021

Revenue and restaurant system sales improved as the impact of COVID-19 moderated.
Domestic comparable sales recovered, but unit counts continued to contract: domestic Pizza Inn units declined to 128 from 135, and Pie Five units declined to 31 from 33.
Pie Five’s average domestic units open fell to 32 from 37, although total and comparable retail sales increased.
Net income benefited from a $5.7 million deferred tax benefit resulting from the reversal of the full valuation allowance on deferred tax assets. The Company also recorded a $0.7 million employee retention credit.
Fiscal 2021 included a $0.7 million gain from PPP loan forgiveness; fiscal 2022 did not.
Cash flow from operations declined modestly despite higher net income, largely because the tax benefit was non-cash and working-capital changes were unfavorable.
Shareholders’ equity increased to $13.412 million from $5.733 million, primarily due to net income, partially offset by share repurchases.

Outlook, Risks and Unusual Items

Management plans to expand franchised Pizza Inn units domestically and internationally, particularly in the Middle East, and continue developing franchised Pie Five units with experienced, well-capitalized operators.
No formal revenue, earnings or unit-development guidance was provided.
COVID-19 remains a material risk because renewed restrictions, outbreaks, capacity limitations, supply-chain disruption or reduced customer willingness to dine in could adversely affect franchise royalties, supplier rebates and liquidity.
The business faces intense competition from national, regional and local pizza operators, fast-casual concepts, grocery products and other franchisors.
Franchisee financial health, store closures, lease guarantees and the Company’s concentration in certain geographic markets could affect results. The Company may become responsible for guaranteed leases if franchisees default.
The Company had $23.1 million of net operating loss carryforwards, with certain limitations and expirations beginning in 2032. The $5.7 million tax benefit depended on management’s assessment that the deferred tax assets were realizable.
Legal claims arise in the ordinary course of business; management believes current matters are insured or would not materially affect financial condition if resolved unfavorably.
The audit identified revenue recognition as a critical audit matter because the Company has multiple franchise revenue streams with varying contract terms and recognition patterns.

Most Important Facts to Verify

Whether the reversal of the deferred tax valuation allowance is sustainable and whether future earnings can support realization of the $5.772 million deferred tax asset.
Underlying recurring profitability excluding the $5.7 million tax benefit and $0.7 million employee retention credit.
Whether declining unit counts, particularly in Delco, PIE and Pie Five locations, stabilize or reverse as management expects.
Whether comparable-store sales recovery continues after COVID-19 effects, inflationary pressures and changes in consumer dining behavior.
The status and financial impact of the additional $1.4 million share repurchases completed after year-end and the expanded repurchase authorization.
Potential obligations from guaranteed franchisee leases, remaining lease commitments and franchisee credit exposure.
Whether operating cash flow remains sufficient to fund corporate expenses, lease obligations, repurchases and planned expansion without new financing.