Rave Restaurant Group, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 27, 2021, with 52 weeks, compared with the fiscal year ended June 28, 2020. Although the request references “2020 Q4,” this filing is an annual report for fiscal 2021. Rave franchises Pizza Inn and Pie Five restaurants and licenses Pizza Inn Express kiosks. At year-end, it had 156 franchised Pizza Inn restaurants, 33 franchised Pie Five units and 11 licensed PIE kiosks; it operated no company-owned restaurants.
Financial Performance and Position
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Revenue | $8.593 million | $10.028 million | Down 14.3% |
| Net income/(loss) | $1.520 million | $(4.233) million | Improved $5.753 million |
| Basic and diluted EPS | $0.09 | $(0.28) | Improved $0.37 |
| Adjusted EBITDA | $1.965 million | $0.566 million | Up $1.399 million |
| Cash flow from operations | $1.485 million | $(0.360) million | Improved $1.845 million |
- Margins: Net margin was approximately 17.7% in fiscal 2021 versus negative 42.2% in fiscal 2020. Adjusted EBITDA margin was approximately 22.9% versus 5.6%.
- Revenue mix: Pizza Inn franchise and license revenue was $6.582 million, down from $6.662 million. Pie Five franchise and license revenue was $1.816 million, down from $2.894 million. Supplier and distributor incentives were $3.482 million, while franchise royalties were $3.689 million.
- Retail sales: Domestic comparable-store retail sales were $83.719 million, down from $85.452 million. Pizza Inn comparable sales declined 1.0%; Pie Five comparable sales declined 6.2%. Total domestic Pizza Inn retail sales declined 9.9%, and Pie Five retail sales declined 31.8%, primarily because of COVID-19 and unit closures.
- Cost structure: General and administrative expense declined to $4.710 million from $5.503 million; franchise expense declined to $2.394 million from $3.051 million. Impairment and other lease charges fell to $21 thousand from $880 thousand. Bad debt expense increased to $121 thousand from $53 thousand.
- Balance sheet: Cash and cash equivalents were $8.330 million, up from $2.969 million. Total assets were $13.345 million and total liabilities were $7.612 million, compared with $9.705 million and $9.202 million, respectively, at the prior year-end. Shareholders’ equity increased to $5.733 million from $0.503 million.
- Debt and leases: Approximately $1.576 million of 4% convertible senior notes was classified as current and matures February 15, 2022. A $0.7 million PPP loan was fully forgiven in fiscal 2021. Operating lease liabilities totaled $2.376 million, including $465 thousand current, with total scheduled operating lease payments of $2.626 million before imputed interest.
- Capital and liquidity: Financing activities provided $3.880 million, principally from $3.761 million of stock issuance proceeds under the ATM offering. Management stated that cash on hand and operating cash flow should be sufficient to fund operations and planned capital expenditures for fiscal 2022.
Material Changes Versus Prior Period
- The Company returned to profitability, supported by lower operating costs, substantially lower impairment and lease charges, and a $657 thousand gain from PPP loan forgiveness.
- COVID-19 materially reduced dine-in activity, particularly at Pizza Inn buffet and Pie Five units, while carryout and delivery provided only a partial offset.
- Domestic Pizza Inn units declined from 151 to 135, including 13 buffet closures, and international Pizza Inn units declined from 38 to 32. Pie Five domestic franchised units declined from 42 to 33 after 10 closures and one opening.
- The single remaining company-owned Pie Five restaurant had been closed during fiscal 2020; consequently, fiscal 2021 included no company-owned restaurant sales and no company-owned units.
- The Company issued approximately 2.540 million common shares during fiscal 2021, increasing outstanding shares to 18.005 million at August 30, 2021, from 15.465 million at the prior year-end.
- The fiscal 2021 income tax benefit was $29 thousand, but the Company continued to maintain a full valuation allowance against deferred tax assets. Net operating loss carryforwards totaled $23.6 million.
Outlook, Commentary, Risks and Unusual Items
- Management expects fiscal 2022 operating cash flow to remain negatively affected by the COVID-19 pandemic but believes available liquidity will fund operations for the next 12 months.
- Management plans to continue domestic and international franchise development, including potential Pizza Inn development in the Middle East and further Pie Five franchise opportunities. It does not intend to open additional PIE kiosks in the foreseeable future.
- COVID-19 remains the principal disclosed operating risk, including potential capacity restrictions, temporary closures, supply-chain disruption, reduced customer traffic, labor and economic effects, and possible renewed outbreaks or government restrictions.
- Other risks include franchisee financial weakness and defaults, declining unit counts, competition from larger restaurant chains and fast-casual pizza concepts, commodity and supplier pricing fluctuations, regulatory and franchise-law requirements, lease guarantees, and the February 2022 convertible-note maturity.
- Legal matters arise in the ordinary course; management believes pending claims are insured or would not materially affect results if resolved adversely.
- The independent auditor identified revenue recognition as a critical audit matter because of the number and differing terms of franchise revenue streams. The auditor issued an unqualified opinion on the financial statements.
- No dividends were paid or planned, and no shares were repurchased during fiscal 2021.
Investor Verification Points
- Verify the Company’s ability to address the approximately $1.6 million convertible-note maturity due February 15, 2022, including whether repayment or equity settlement is expected.
- Assess cash generation excluding the nonrecurring $657 thousand PPP forgiveness gain and the benefit from fiscal 2021 equity issuance.
- Monitor domestic and international unit closures, franchisee health, comparable-store sales and the pace of Pie Five stabilization.
- Evaluate the sustainability of the reported profitability and Adjusted EBITDA after COVID-related effects, lease charges and other adjustments.
- Review the full valuation allowance against deferred tax assets and the potential future use of the $23.6 million of net operating loss carryforwards.
- Review lease guarantees and scheduled lease payments, particularly for locations assigned or subleased to franchisees.