Rave Restaurant Group, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended March 27, 2022, compared with March 28, 2021. The filing metadata identifies “2021 Q3,” but the reported fiscal quarter is the third quarter of fiscal 2022. The company franchises Pizza Inn and Pie Five restaurants and licenses Pizza Inn Express kiosks. The filing is unaudited.
Business context and operating footprint
- At March 27, 2022, the system included 128 domestic Pizza Inn units, 31 international Pizza Inn units and 33 domestic Pie Five units, for 192 total franchised or licensed units; reported ending-unit activity tables separately show 159 total units for the Pizza Inn and Pie Five operating concepts.
- The company owned no restaurants during the period. Its remaining company-owned Pie Five restaurant had been closed in fiscal 2020.
- Domestic franchised and licensed systemwide retail sales were $27.1 million in the quarter and $78.5 million year to date.
Financial performance
| Metric | Three months ended Mar. 27, 2022 | Three months ended Mar. 28, 2021 | Nine months ended Mar. 27, 2022 | Nine months ended Mar. 28, 2021 |
|---|---|---|---|---|
| Revenue | $2.620 million | $2.183 million | $7.869 million | $6.214 million |
| Income before taxes | $496 thousand | $417 thousand | $1.245 million | $599 thousand |
| Net income | $493 thousand | $416 thousand | $1.235 million | $594 thousand |
| Basic EPS | $0.03 | $0.02 | $0.07 | $0.03 |
| EBITDA | $556 thousand | $481 thousand | $1.444 million | $796 thousand |
| Adjusted EBITDA | $590 thousand | $398 thousand | $1.586 million | $781 thousand |
- Quarterly revenue increased 20.0% and year-to-date revenue increased 26.6%. Quarterly net income increased 18.5%, while year-to-date net income more than doubled.
- Net margin was approximately 18.8% for the quarter versus 19.1% in the prior-year quarter, and approximately 15.7% year to date versus 9.6% previously.
- Pizza Inn franchise revenue increased to $2.1 million in the quarter and $6.3 million year to date, primarily from higher supplier incentives and domestic royalties.
- Pie Five franchise revenue increased to $482 thousand in the quarter and $1.45 million year to date.
- General and administrative expense increased to $1.4 million in the quarter and $3.9 million year to date. Franchise expense increased to $705 thousand and $2.5 million, primarily due to higher advertising expense.
- Interest expense declined following repayment of all outstanding convertible notes. The prior-year quarter included a $156 thousand gain on sale of assets, which did not recur.
Cash flow, liquidity and capital structure
- Cash provided by operating activities was $525 thousand for the nine months ended March 27, 2022, compared with cash used of $357 thousand in the prior-year period.
- Investing activities provided $169 thousand, primarily from $240 thousand of note receivable collections, partly offset by $46 thousand of intangible-asset purchases and $25 thousand of capital expenditures.
- Financing activities used $1.787 million, principally due to the $1.597 million cash repayment of convertible notes and $190 thousand repayment of a short-term loan.
- Cash and cash equivalents were $7.237 million at March 27, 2022, compared with $8.330 million at June 27, 2021.
- Total liabilities declined to $4.724 million from $7.612 million, primarily because the convertible notes were fully repaid. No convertible notes remained outstanding at quarter-end.
- Operating lease liabilities totaled $2.029 million, including $483 thousand current and $1.546 million non-current on the balance sheet.
- Management expects modest operating cash flow in the fourth quarter of fiscal 2022 but believes cash on hand and operating cash flow will fund operations for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth reflected recovery in franchisee retail activity as the effects of COVID-19 moderated. Pizza Inn domestic retail sales increased 27.0% in the quarter and 28.3% year to date; comparable-store sales increased 22.8% and 29.4%, respectively.
- Pie Five systemwide retail sales increased 19.5% in the quarter and 15.4% year to date, while comparable-store sales increased 21.4% and 17.2%, respectively.
- Average domestic Pizza Inn units open declined from 140 to 128 in the quarter and from 145 to 132 year to date. Average Pie Five units open declined from 36 to 34 in the quarter and from 39 to 33 year to date.
- Adjusted EBITDA increased $192 thousand, or approximately 48%, in the quarter and $805 thousand, or approximately 103%, year to date.
- The company ended the period with no convertible notes outstanding, compared with $1.576 million of current convertible notes at June 27, 2021.
Outlook, risks, contingencies and unusual items
- Management expects Pizza Inn domestic units to stabilize in the near term and increase modestly in future periods. International Pizza Inn and Pie Five units are also expected to increase moderately or modestly.
- COVID-19 impacts moderated during fiscal 2022, but capacity restrictions, temporary closures, labor and operating disruptions, reduced in-store dining, and potential future outbreaks could materially affect sales, royalties, supplier incentives, cash flow and liquidity.
- On February 9, 2022, a court entered judgment of $1.888 million against the company, including attorney fees, court costs and prejudgment interest, in a former CEO employment dispute. The company appealed to the Fifth Circuit Court of Appeals. The filing does not clearly state whether a liability for the judgment was recorded.
- The company maintains a full $6.1 million valuation allowance against deferred tax assets and used net operating losses to offset federal income taxes.
- Management states that other pending claims and contingencies are either insured or not expected to have a material adverse effect, although adverse outcomes could differ from current estimates.
- The PPP loan received in 2020 was fully forgiven in the fourth quarter of fiscal 2021.
Important facts for investors to verify
- Confirm the accounting treatment, payment status and potential cash impact of the $1.888 million employment-litigation judgment and appeal.
- Assess whether operating cash flow and the $7.237 million cash balance are sufficient after considering the judgment, lease commitments and expected fourth-quarter cash flow.
- Monitor Pizza Inn and Pie Five unit closures, openings, comparable-store sales and the continued decline in average units open.
- Evaluate the sustainability of revenue and Adjusted EBITDA growth as COVID-19 comparisons normalize and advertising and corporate expenses remain elevated.
- Review the $6.1 million deferred-tax-asset valuation allowance and the likelihood of future tax benefits.
- Reconcile the filing’s unit-count presentations and confirm the current total franchised and licensed system footprint.