Business Context and Reporting Period
Rave Restaurant Group, Inc. franchises and licenses Pizza Inn and Pie Five restaurants and Pizza Inn Express kiosks. The company had 165 total Pizza Inn units at September 26, 2021, including 133 domestic and 32 international units, and 33 domestic Pie Five franchised units. The company-owned restaurant segment had no operating restaurants after closure of its remaining Pie Five restaurant in fiscal 2020.
This unaudited Form 10-Q covers the 13-week quarter ended September 26, 2021, compared with the 13-week quarter ended September 27, 2020.
Key Financial Metrics
| Metric | Quarter Ended September 26, 2021 | Quarter Ended September 27, 2020 | Change |
|---|---|---|---|
| Revenue | $2.553 million | $1.903 million | Up $650 thousand, or 34.2% |
| Income before taxes | $288 thousand | $78 thousand | Up $210 thousand |
| Net income | $285 thousand | $76 thousand | Up $209 thousand |
| Net margin | 11.2% | 4.0% | Up approximately 7.2 percentage points |
| Basic EPS | $0.02 | $0.00 | Improved |
| Adjusted EBITDA | $431 thousand | $177 thousand | Up $254 thousand |
| Cash used in operating activities | $343 thousand | $7 thousand | Higher cash usage |
Revenue growth primarily reflected higher franchise royalties, advertising fund contributions, supplier and distributor incentives, and supplier convention funds. Pizza Inn franchise revenue increased to $2.034 million from $1.380 million, while Pie Five franchise revenue was broadly stable at $472 thousand versus $476 thousand.
Reported costs and expenses were $2.265 million, compared with $1.825 million. Franchise expenses increased to $986 thousand from $547 thousand, and general and administrative expenses increased to $1.206 million from $1.089 million, primarily due to increased advertising spending. Cost of sales fell to zero from $78 thousand because the company-owned restaurant had been closed. No impairment or other lease charges were recorded in the current quarter versus $17 thousand in the prior-year quarter.
Liquidity, Balance Sheet, and Debt
- Cash and cash equivalents were $7.876 million at September 26, 2021, down from $8.330 million at June 27, 2021.
- Total current assets were $9.459 million versus $10.373 million at fiscal year-end; total assets were $12.576 million versus $13.345 million.
- Total liabilities were $6.516 million versus $7.612 million, and shareholders’ equity increased to $6.060 million from $5.733 million.
- Current liabilities included $1.583 million of convertible notes and $120 thousand of short-term loans. The convertible notes had $1.6 million of principal outstanding, bear 4% interest, and mature February 15, 2022.
- Operating lease liabilities totaled $2.262 million, including $470 thousand classified as current.
- Investing activities provided $19 thousand, primarily from $57 thousand of note repayments, partially offset by $27 thousand of intangible-asset purchases and $11 thousand of capital expenditures.
- Financing activities used $130 thousand, primarily from repayment of a short-term loan.
Material Changes Versus the Prior Comparable Period
- Domestic Pizza Inn retail sales increased 24.7% to $20.347 million, and comparable-store retail sales increased 25.0%.
- Pie Five system-wide retail sales increased 12.3% to $5.060 million, while comparable-store retail sales increased 17.5%; average units open declined from 39 to 33.
- Domestic Pizza Inn units declined from 135 at the beginning of the quarter to 133 at quarter-end, reflecting one opening and three closures. Management expects near-term net closures but believes unit growth may resume in future periods.
- Adjusted EBITDA increased to $431 thousand from $177 thousand, including current-period adjustments for $42 thousand of stock compensation and $33 thousand of severance.
- Operating cash flow deteriorated despite higher earnings, primarily because of reductions in accrued expenses, accounts payable, operating lease liabilities, and deferred revenue.
- The company maintained a full $6.3 million valuation allowance against deferred tax assets and used net operating losses to offset federal taxes.
Guidance, Outlook, Risks, and Unusual Items
Management stated that cash on hand combined with cash from operations should be sufficient to fund operations for the next 12 months. It also expects modest operating cash flow in the second quarter of fiscal 2022 while continuing aggressive expense controls. The filing does not provide formal revenue or earnings guidance.
COVID-19 remains a material risk through possible restaurant capacity restrictions, labor shortages, temporary closures, reduced in-store dining, supply-chain disruption, and changes in consumer behavior. Management cannot predict the duration or ultimate financial impact of the pandemic.
On November 1, 2021, after the quarter-end, a federal court entered a $924 thousand judgment against the company in favor of former CEO Scott Crane, plus pre- and post-judgment interest and court costs. The company intends to appeal. The filing does not clearly quantify the total expected cash obligation or its accounting impact beyond the judgment amount.
The $0.7 million PPP loan received in fiscal 2020 was fully forgiven in the fourth quarter of fiscal 2021. Management believes other pending claims are insured or would not materially affect annual results, cash flows, or financial condition if decided adversely.
Important Facts for Investors to Verify
- Verify the company’s ability to satisfy or otherwise resolve the $924 thousand judgment, related interest and court costs, including the outcome of the planned appeal.
- Monitor the February 15, 2022 maturity of the approximately $1.6 million convertible notes and the company’s refinancing, repayment, or potential share-settlement plans.
- Assess whether positive comparable-store sales can offset continuing domestic unit closures and the decline in average Pie Five units open.
- Reconcile reported net income with negative operating cash flow and track working-capital movements in subsequent quarters.
- Evaluate the effects of COVID-19, labor availability, restaurant capacity restrictions, and supply-chain conditions on franchisee sales and royalty revenue.
- Review the sustainability of revenue growth given the contribution from advertising funds and supplier convention funds, which may not recur at the same level.