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.