Rave Restaurant Group, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 25, 2023, comprising 52 weeks, compared with the fiscal year ended June 26, 2022. The supplied metadata identifies “2022 Q4,” but the filing is an annual report for fiscal 2023.
Business context
Rave franchises Pizza Inn buffet, delivery/carry-out and express restaurants, franchises Pie Five fast-casual pizza restaurants, and licenses Pizza Inn Express kiosks. The Company operates an asset-light model and had no Company-owned restaurants at either fiscal year-end.
- At June 25, 2023: 152 franchised Pizza Inn restaurants, 27 franchised Pie Five units and 5 licensed PIE kiosks.
- Pizza Inn included 118 domestic units and 34 international units; Pie Five units were domestic and franchised.
- The Company had 25 full-time employees and is classified as a smaller reporting company.
Financial performance and key metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $11.889 million | $10.692 million | +11.2% |
| Income before taxes | $2.150 million | $2.365 million | -9.1% |
| Net income | $1.613 million | $8.022 million | -79.9% |
| Basic EPS | $0.11 | $0.45 | Down $0.34 |
| Diluted EPS | $0.10 | $0.45 | Down $0.35 |
| Adjusted EBITDA | $2.702 million | $2.806 million | -3.7% |
| Cash flow from operations | $2.629 million | $1.384 million | +$1.245 million |
- Net profit margin was approximately 13.6% in FY2023 versus 75.0% in FY2022; the prior-year margin benefited substantially from a $5.7 million income-tax benefit.
- Adjusted EBITDA margin was approximately 22.7% in FY2023 versus 26.2% in FY2022.
- Pizza Inn franchise and license revenue increased to $9.810 million from $8.535 million, while Pie Five revenue declined to $1.893 million from $1.967 million.
- Domestic comparable retail sales increased 10.3% overall to $115.194 million. Pizza Inn comparable sales increased 11.3%; Pie Five comparable sales increased 5.4%.
Cash, debt and liquidity
- Cash and cash equivalents were $5.328 million at June 25, 2023, down from $7.723 million.
- Operating cash flow was $2.629 million; investing activities used $15 thousand; financing activities used $5.009 million.
- Financing cash use primarily reflected $4.979 million spent on treasury-stock purchases. The Company repurchased 3,356,977 shares at an average price of $1.48 per share.
- There were no outstanding convertible notes at year-end. The 4% convertible notes matured and were paid in February 2022. The balance sheet also showed no short-term loan balance at June 25, 2023.
- Total liabilities were $3.846 million and shareholders’ equity was $10.391 million. Operating lease liabilities totaled $1.421 million, including $463 thousand current.
- Management stated that cash on hand and operating cash flow should be sufficient for FY2024 and beyond.
Material changes versus the prior period
- Revenue increased $1.197 million, principally from higher Pizza Inn royalties, supplier incentives, advertising-fund contributions and reduced COVID-19 disruption.
- Franchise expenses increased $672 thousand to $3.956 million, primarily due to higher Pizza Inn payroll, advertising and travel costs.
- General and administrative expense increased slightly to $5.490 million, while bad-debt expense rose to $73 thousand from $46 thousand, primarily because of collectability concerns involving international receivables.
- FY2022 included a $704 thousand employee-retention tax credit; no comparable credit was recorded in FY2023. The Company stated that $0.6 million had been received by June 25, 2023, with $0.1 million outstanding.
- The federal net operating loss carryforward declined to approximately $21 million from $23.1 million. The Company reported a net deferred tax asset of $5.342 million and no valuation allowance.
- Domestic Pizza Inn units declined by five net units to 123, while international Pizza Inn units increased by three to 34. Pie Five units declined by four to 27, primarily from closing poor-performing restaurants.
- The Company’s outstanding shares declined to 14.154 million from 17.511 million, largely because of the fiscal 2023 repurchases.
Guidance, outlook, risks and unusual items
- Management plans to continue domestic Pie Five franchise development and evaluate additional Pizza Inn Buffet and Delco development internationally, particularly in the Middle East.
- Management believes domestic Pizza Inn store closures are moderating and expects the trend to reverse in future periods; no quantitative earnings or unit-growth guidance was provided.
- In September 2023, the Company terminated its Saudi Arabia master licensee, resulting in the closure of 12 international units. Those units generated approximately $0.1 million of FY2023 revenue.
- Key risks include intense restaurant competition, franchisee financial condition and default risk, supply-chain and commodity-cost volatility, labor and regulatory requirements, lease guarantees, international market exposure and the ability to realize deferred tax assets.
- The Company has contingent and direct lease obligations for eight additional restaurant locations; guaranteed lease payments totaled approximately $867 thousand through 2028.
- A former CEO litigation matter was resolved favorably on appeal in May 2023; the Company returned to the trial court for consideration of costs and attorney fees. Management stated that other pending claims are insured or not expected to be material.
- The filing states that internal control over financial reporting and disclosure controls were effective as of June 25, 2023. The Company was not required to obtain an external auditor attestation on internal controls.
Important facts for investors to verify
- Confirm the impact of the Saudi master-license termination and the resulting 12-unit international closure on FY2024 royalties and supplier incentives.
- Assess whether comparable-sales growth can offset the continued reduction in domestic and Pie Five unit counts.
- Evaluate the realizability of the $5.342 million deferred tax asset and the timing and utilization limits of approximately $21 million of federal net operating losses.
- Review cash usage after the substantial share repurchases and the Company’s ability to fund operations, lease obligations and planned development from operating cash flow.
- Monitor international receivable collectability, franchisee defaults and the $867 thousand of guaranteed lease commitments.
- Consider the effect of the FY2022 employee-retention credit and tax benefit when comparing normalized profitability with FY2023.