RAVE RESTAURANT GROUP, INC. 10-K

ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective in assuring that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is (i) accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Management Report on Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the Company has conducted an evaluation of the effectiveness of its internal control over financial reporting. The Company’s management based its evaluation on criteria set forth in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, management has concluded that our internal control over financial reporting was effective as of June 28, 2020. 21 Index PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. 22 Index PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. 1. The financial statements filed as part of this report are listed in the Index to Consolidated Financial Statements and Supplementary Data appearing on page F-1 of this report on Form 10-K. 2. Any financial statement schedule filed as part of this report is listed in the Index to Consolidated Financial Statements and Supplementary Data appearing on page F-1 of this report on Form 10-K. 3. Exhibits: 3.1 Amended and Restated Articles of Incorporation of Rave Restaurant Group, Inc. (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 8, 2015). 3.2 Amended and Restated Bylaws of Rave Restaurant Group, Inc. (incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed January 8, 2015). 4.1 Indenture for 4% Convertible Senior Notes due 2022 (filed as Exhibit 4.1 to Form S-3/A filed January 6, 2017 and incorporated herein by reference). 4.2 Pledge Agreement (filed as Exhibit 4.2 to Form S-3/A filed January 6, 2017 and incorporated herein by reference). 4.3 Supplemental Indenture Number 1 dated as of October 31, 2017, between Rave Restaurant Group, Inc. and Securities Transfer Corporation (filed as Exhibit 4.1 to Form 8-K filed November 9, 2017 and incorporated herein by reference). 4.4 Description of Registrant’s Securities. 10.1 2015 Long Term Incentive Plan of the Company (filed as Exhibit 10.1 to Form 8-K filed November 20, 2014 and incorporated herein by reference).* 10.2 Form of Stock Option Grant Agreement under the Company’s 2015 Long Term Incentive Plan (filed as Exhibit 10.2 to Form 8-K filed November 20, 2014 and incorporated herein by reference).* 10.3 Form of Restricted Stock Unit Award Agreement under the Company’s 2015 Long-Term Incentive Plan (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 27, 2015 and incorporated herein by reference).* 10.4 Lease Agreement dated November 1, 2016, between A&H Properties Partnership and Rave Restaurant Group, Inc. (filed as Exhibit 10.4 to Form 10-K for the year ended June 30, 2019 and incorporated herein by reference).* 10.5 First Amendment to Lease and Expansion dated July 1, 2017, between A&H Properties Partnership and Rave Restaurant Group, Inc. (filed as Exhibit 10.4 to Form 10-K for the year ended June 30, 2019 and incorporated herein by reference).* 10.6 Second Amendment to Lease Agreement effective June 1, 2020, between A&H Properties Partnership and Rave Restaurant Group, Inc. 10.7 At Market Issuance Sales Agreement between the Company and B. Riley FBR, Inc. (filed as Exhibit 1.01 to Form 8-K filed December 5, 2017).* 10.8 Letter agreement dated October 18, 2019, between Rave Restaurant Group, Inc. and Brandon Solano (filed as Exhibit 10.1 to Form 8-K filed October 21, 2019 and incorporated herein by reference).* 10.9 Letter agreement dated November 4, 2019, between Rave Restaurant Group, Inc. and Mike Burns (filed as Exhibit 10.1 to Form 8-K filed November 15, 2019 and incorporated herein by reference).* 10.10 Letter agreement dated December 16, 2019, between Rave Restaurant Group, Inc. and Clinton Fendley (filed as Exhibit 10.1 to Form 8-K filed January 7, 2020 and incorporated herein by reference).* 10.11 Note, dated April 10, 2020, between Rave Restaurant Group, Inc. and JPMorgan Chase Bank, N. A. (filed as Exhibit 10.1 to Form 8-K filed April 16, 2020 and incorporated herein by reference).* 21.1 List of Subsidiaries. 23 Index 23.1 Consent of Independent Registered Public Accounting Firm. 23.2 Consent of Independent Registered Public Accounting Firm. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. 32.1 Section 1350 Certification of Principal Executive Officer. 32.2 Section 1350 Certification of Principal Financial Officer. 101 Interactive data files pursuant to Rule 405 of Regulation S-T. *Management contract or compensatory plan or agreement. ITEM 16. FORM 10-K SUMMARY. None. 24 Index SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Rave Restaurant Group, Inc. Date: September 28, 2020 By: /s/ Brandon L. Solano Brandon L. Solano Chief Executive Officer (principal executive officer) By: /s/ Clinton D. Fendley Clinton D. Fendley Vice President of Finance (principal financial officer) 25 Index Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name and Position Date /s/ Brandon L. Solano Brandon L. Solano Chief Executive Officer (principal executive officer) September 28, 2020 /s/ Clinton D. Fendley Clinton D. Fendley Vice President of Finance (principal financial and accounting officer) September 28, 2020 /s/ Mark E. Schwarz Mark E. Schwarz Director and Chairman of the Board September 28, 2020 /s/ Brian T. Bares Brian T. Bares Director September 28, 2020 /s/ Robert B. Page Robert B. Page Director September 28, 2020 /s/ William C. Hammett, Jr. William C. Hammett, Jr. Director September 28, 2020 /s/ Clinton J. Coleman Clinton J. Coleman Director September 28, 2020 26 Index RAVE RESTAURANT GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Description Page No. Reports of Independent Registered Public Accounting Firms F-2 Consolidated Statements of Operations for the fiscal years ended June 28, 2020 and June 30, 2019. F-4 Consolidated Balance Sheets at June 28, 2020 and June 30, 2019. F-5 Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 28, 2020 and June 30, 2019. F-6 Consolidated Statements of Cash Flows for the fiscal years ended June 28, 2020 and June 30, 2019. F-7 Supplemental Disclosures of Cash Flow Information for the fiscal years ended June 28, 2020 and June 30, 2019. F-7 Notes to Consolidated Financial Statements. F-8 F-1 Index Report of Independent Regist ered Public Accounting Firm Board of Directors and Stockholders Rave Restaurant Group, Inc. The Colony, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Rave Restaurant Group, Inc. (the “Company”) and subsidiaries as of June 28, 2020, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 28, 2020, and the results of their operations and their cash flows for the year then ended , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Emphasis of Matter As discussed in Note K to the financial statements, on March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The ultimate financial impact and duration of these events cannot be reasonably estimated at this time. Our opinion was not modified with respect to this matter. Prior Period Financial Statements The financial statements of Rave Restaurant Group, Inc. as of June 30, 2019, were audited by other auditors whose report dated September 30, 2019, expressed an unmodified opinion on those statements. /s/ Armanino LLP Dallas, Texas We have served as the Company’s auditor since 2020. September 28, 2020 F-2 Index Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Rave Restaurant Group, Inc. The Colony, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Rave Restaurant Group, Inc. (the Company) as of June 30, 2019, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the fiscal year then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019, and the results of its operations and its cash flows for the fiscal year ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion. /s/ Baker Tilly US, LLP Plano, Texas March 13, 2020 F-3 Index RAVE RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Fiscal Year Ended June 28 , 2020 June 30 , 2019 REVENUES: $ 10,028 $ 12,319 COSTS AND EXPENSES: Cost of sales 439 1,120 General and administrative expenses 5,503 5,274 Franchise expenses 3,051 3,778 Gain on sale of assets (24 ) (551 ) Impairment of long-lived assets and other lease charges 880 1,664 Bad debt 53 1,265 Interest expense 95 104 Depreciation and amortization expense 186 466 Total costs and expenses 10,183 13,120 LOSS BEFORE TAXES (155 ) (801 ) Income tax expense (benefit) 4,078 (51 ) NET LOSS $ (4,233 ) $ (750 ) LOSS PER SHARE OF COMMON STOCK - BASIC: $ $ (0.28 ) $ $ (0.05 ) LOSS PER SHARE OF COMMON STOCK - DILUTED: $ $ (0.28 ) $ $ (0.05 ) Weighted average common shares outstanding - basic 15,144 15,070 Weighted average common and potential dilutive common shares outstanding 15,144 15,070 See accompanying Notes to Consolidated Financial Statements. F-4 Index RAVE RESTAURANT GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) June 28 , 2020 June 30 , 2019 ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,969 $ 2,264 Restricted Cash 234 233 Accounts receivable, less allowance for bad debts of $269 and $209, respectively 965 1,191 Notes receivable, less allowance for bad debt of $0 and $916, respectively 546 389 Inventories — 7 Income tax receivable — 4 Property held for sale — 231 Deferred contract charges 44 38 Prepaid expenses and other 174 346 Total current assets 4,932 4,703 LONG-TERM ASSETS Property, plant and equipment, net 366 500 Operating lease right of use asset, net 3,567 — Intangible assets definite-lived, net 155 196 Long-term notes receivable 449 735 Deferred tax asset, net — 4,060 Long-term deferred contract charges 231 232 Deposits and other 5 — Total assets $ 9,705 $ 10,426 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable - trade $ 446 $ 400 Accounts payable - lease termination impairments 407 832 Accrued expenses 775 834 Deferred rent — 37 Operating lease liability, current 632 — Deferred revenues 254 275 Total current liabilities 2,514 2,378 LONG-TERM LIABILITIES Convertible notes 1,549 1,584 PPP loan 657 — Deferred rent, net of current portion — 397 Operating lease liability, net of current portion 3,471 — Deferred revenues, net of current portion 960 1,561 Other long-term liabilities 51 72 Total liabilities 9,202 5,992 COMMITMENTS AND CONTINGENCIES (SEE NOTE J) SHAREHOLDERS’ EQUITY Common stock, $.01 par value; authorized 26,000,000 shares; issued 22,550,376 and 22,208,141 shares, respectively; outstanding 15,465,222 and 15,090,837 shares, respectively 225 222 Additional paid-in capital 33,531 33,327 Accumulated deficit (8,716 ) (4,483 ) Treasury stock at cost Shares in treasury: 7,085,154 and 7,117,304, respectively (24,537 ) (24,632 ) Total shareholders’ equity 503 4,434 Total liabilities and shareholders’ equity $ 9,705 $ 10,426 See accompanying Notes to Consolidated Financial Statements. F-5 Index RAVE RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-in Accumulated Treasury Stock Shares Amount Capital Deficit Shares Amount Total BALANCE, June 24, 2018 22,167 $ 222 $ 33,206 $ (2,493 ) (7,119 ) $ (24,636 ) $ 6,299 ASC 606 cumulative adjustment (1,622 ) (1,622 ) Stock compensation expense — — 36 382 — — 418 Conversion of senior notes, net — — — — 2 4 4 Issuance of common stock 41 — 88 — — — 88 Equity issue costs - ATM offering — — (3 ) — — — (3 ) Net income — — — (750 ) — — (750 ) BALANCE, June 30, 2019 22,208 $ 222 $ 33,327 $ (4,483 ) (7,117 ) $ (24,632 ) $ 4,434 Common Stock Additional Paid-in Accumulated Treasury Stock Shares Amount Capital Deficit Shares Amount Total BALANCE, June 30, 2019 22,208 $ 222 $ 33,327 $ (4,483 ) (7,117 ) $ (24,632 ) $ 4,434 Conversion of senior notes, net — — (31 ) — 32 95 64 Stock compensation expense — — (104 ) — — — (104 ) Issuance of common stock 342 3 354 — — — 357 Equity issue costs - ATM offering — — (15 ) — — — (15 ) Net income — — — (4,233 ) — — (4,233 ) BALANCE, June 28, 2020 22,550 $ 225 $ 33,531 $ (8,716 ) (7,085 ) $ (24,537 ) $ 503 F-6 Index RAVE RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Year Ended June 28 , 2020 June 30 , 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,233 ) $ (750 ) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Impairment of long-lived assets and other lease charges 880 1,664 Stock compensation expense (104 ) 36 Depreciation and amortization 145 423 Amortization of operating lease asset 471 — Amortization of intangible assets definite-lived 41 43 Amortization of debt issue costs 29 22 Gain on sale of assets (24 ) (551 ) Provision for bad debt (accounts receivable) 53 349 Provision for bad debt (notes receivable) — 916 Deferred income tax asset (net) 4,060 (198 ) Changes in operating assets and liabilities: Accounts receivable 132 226 Operating notes receivable 104 50 Inventories 7 (1 ) Prepaid expenses, deposits and other, net 167 (446 ) Restricted Cash (1 ) — Deferred revenue (587 ) (409 ) Accounts payable - trade 46 (21 ) Accounts payable - lease termination impairments (985 ) (418 ) Operating lease liability (494 ) — Accrued expenses, deferred rent and other (67 ) (276 ) Cash (used in) provided by operating activities (360 ) 659 CASH FLOWS FROM INVESTING ACTIVITIES: Notes receivable from fixed asset sales 123 201 Proceeds from sale of assets — 11 Capital expenditures (56 ) (81 ) Cash (used in) provided by investing activities 67 131 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of stock 357 88 Equity issuance costs (15 ) — Proceeds from PPP loan 657 — Cash provided by financing activities 999 88 Net increase in cash and cash equivalents 706 878 Cash, cash equivalents, and restricted cash, beginning of period 2,497 1,619 Cash, cash equivalents, and restricted cash, end of period $ 3,203 $ 2,497 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR: Interest $ 66 $ 72 Income taxes $ 18 $ 168 Non-cash activities: Conversion of notes to common shares $ 64 $ 4 Notes receivable from sales of fixed assets $ — $ 654 Operating lease right of use assets at adoption $ 4,150 $ — Operating lease liability at adoption $ 4,894 $ — See accompanying Notes to Consolidated Financial Statements. F-7 Index RAVE RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of Business: Rave Restaurant Group, Inc. and its subsidiaries (collectively referred to as the “Company”, or in the first person notations of “we”, “us” and “our”) franchise pizza buffet, delivery/carry-out and express restaurants domestically and internationally under the trademark “Pizza Inn” and operate and franchise domestic fast casual restaurants under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses pizza kiosks under the “Pizza Inn” trademark. We facilitate the procurement and distribution of food, equipment and supplies to our domestic and international system of restaurants through agreements with third party distributors. As of June 28, 2020, we had 42 franchised Pie Five Units, 176 franchised Pizza Inn restaurants, and 13 licensed Pizza Inn Express, or PIE, kiosks (“PIE Units”). The 138 domestic franchised Pizza Inn restaurants were comprised of 83 pizza buffet restaurants (“Buffet Units”), 10 delivery/carry-out restaurants (“Delco Units”), and 45 express restaurants (“Express Units”). As of June 28, 2020, there were 38 international franchised Pizza Inn restaurants. Domestic Pizza Inn restaurants and kiosks were located predominantly in the southern half of the United States, with Texas, Arkansas, North Carolina and Mississippi accounting for approximately 23%, 19%, 17% and 9%, respectively, of the total number of domestic units. Principles of Consolidation: The consolidated financial statements include the accounts of Rave Restaurant Group, Inc. and its subsidiaries, all of which are wholly owned. All appropriate inter-company balances and transactions have been eliminated. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash of $0.2 million at June 28, 2020 and June 30, 2019 is omitted from cash and cash equivalents and is included in other long term assets. The restricted cash is held in an interest-bearing money market account and is restricted pursuant to a letter of credit for an insurance claim dating back to the mid-1980’s. Concentration of Credit Risk: Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. At June 28, 2020 and June 30, 2019, and at various times during the fiscal years then ended, cash and cash equivalents were in excess of Federal Depository Insurance Corporation insured limits. We do not believe we are exposed to any significant credit risk on cash and cash equivalents. Notes receivable, which potentially subject the Company to concentrations of credit risk, consist primarily of promissory notes from franchise agreements and structured Company-financed sales of assets. At June 28, 2020 and June 30, 2019, and at various times during the fiscal years then ended, the Company had concentrations of credit risk with four franchisees on notes receivables with both short and long term maturities. As of June 28, 2020, the Company had one short term note receivable with one franchisee and the Company had five notes receivable with three franchisees totaling $1.1 million. The financed asset sales were executed with a weighted average interest rate of 4.6%. Principal and interest payments are due monthly and a balloon payment is due after 24 months. Inventories: Inventory consists primarily of food, paper products and supplies stored in and used by Company restaurants and is stated at lower of first-in, first-out (“FIFO”) or market. Closed Restaurants and Discontinued Operations: In April, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which modifies the definition of discontinued operations to include only disposals of an entity that represent strategic shifts that have or will have a major effect on an entity’s operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. The standard was effective prospectively for annual and interim periods beginning after December 15, 2014, with early adoption permitted. The authoritative guidance on “ Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that discontinued operations that meet certain criteria be reflected in the statement of operations after results of continuing operations as a net amount. This guidance also requires that the operations of closed restaurants, including any impairment charges, be reclassified to discontinued operations for all periods presented. The authoritative guidance on “ Accounting for Costs Associated with Exit or Disposal Activities,” requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This authoritative guidance also establishes that fair value is the objective for initial measurement of the liability. Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Repairs and maintenance are charged to operations as incurred while major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and the related accumulated depreciation or amortization are removed from the accounts and the gain or loss is included in operations. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying asset and amortized over the estimated useful life of the asset. F-8 Index Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets or, in the case of leasehold improvements, over the term of the lease including any reasonably assured renewal periods, if shorter. The useful lives of the assets range from three to ten years. Impairment of Long-Lived Asset and other Lease Charges: The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use and eventual disposition of the assets compared to their carrying value. If impairment is recognized, the carrying value of an impaired asset is reduced to its fair value, based on discounted estimated future cash flows. During fiscal year 2020, the Company tested its long-lived assets for impairment and recognized pre-tax, non-cash impairment charges of $0.2 million primarily related to assets held for sale. The Company also had lease charges related to closed units of $0.7 million. Accounts Receivable: Accounts receivable consist primarily of receivables generated from franchise royalties. The Company records a provision for doubtful receivables to allow for any amounts that may be unrecoverable based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Finance charges may be accrued at a rate of 18% per year, or up to the maximum amount allowed by law, on past due receivables. The interest income recorded from finance charges is immaterial. Notes Receivable: Notes receivable primarily consist of promissory notes arising from franchisee agreements and structured Company-financed sales of assets. The majority of amounts and terms are evidenced by formal promissory notes and personal guarantees. All notes allow for early payment without penalty. Fixed principle and interest payments are due monthly. Interest income is recognized monthly. Notes receivable mature at various dates through 2022 and bear interest at a weighted average rate of 4.6% at June 28, 2020. Management evaluates the creditworthiness of franchisees by considering credit history and sales to evaluate credit risk. Management determines interest rates based on credit risk of the underlining franchisee. The Company monitors payment history to determine whether or not a loan should be placed on a nonaccrual status or impaired. The Company charges off notes receivable based on an account-by-account analysis of the borrower’s current economic conditions, monthly payments history and historical loss experience. The allowance for doubtful notes receivable is netted within notes receivable. The expected principal collections on notes receivable for the next three years were as follows as of June 28, 2020 (in thousands): Notes Receivable 2021 $ 546 2022 449 2023 – $ 995 Income Taxes: Income taxes are accounted for using the asset and liability method pursuant to the authoritative guidance on Accounting for Income Taxes . Deferred taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement and carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes future tax benefits to the extent that realization of such benefits is more likely than not. The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. During the quarter ending March 29, 2020, it was determined that the valuation allowance on deferred tax assets should be increased by $4.3 million resulting in a full valuation allowance. The Company has maintained the full valuation allowance for the year ended June 28, 2020. F-9 Index For the year ended, June 28, 2020, the Company recorded an income tax expense of $4.1 million including federal deferred tax expense of $4.1 million and current state tax expense of $20 thousand. As of June 28, 2020, the Company had net operating loss carryforwards totaling $23.6 million that are available to reduce future taxable income and will begin to expire in 2032. Under the Tax Cuts and Jobs Act, approximately $0.8 million of the loss carryforwards are limited to 80% and do not expire. Under ASC 740, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. From time to time, the Company may be assessed interest and penalties by taxing authorities. In those cases, the charges are recorded as income tax expense, as incurred, in the Consolidated Statements of Operations. There were no such charges or accruals for the years ended June 28, 2020 and June 30, 2019. Adoption of ASC 842, “Leases” In February 2016, FASB issued Accounting Standards Codification 842, Leases (“ASC 842”) which requires an entity to recognize a right of use asset and lease liability for all leases. Classification of leases as either a finance or operating lease determines the recognition, measurement and presentation of expenses. The new standard became effective for the Company in the first quarter of fiscal 2020 and was adopted using a modified retrospective approach with the date of initial application on July 1, 2019. Consequently, upon transition, the Company recognized an operating lease right of use asset and an operating lease liability. The Company applied the following practical expedients as provided in the standards update which provide elections to: • not apply the recognition requirements to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option); • not reassess whether a contract contains a lease, lease classification and initial direct costs; and • not reassess certain land easements in existence prior to July 1, 2019. Through the implementation process, the Company evaluated each of its lease arrangements and enhanced its systems to track and calculate additional information required upon adoption of this standards update. The adoption had an impact to the Condensed Consolidated Balance Sheet as of July 1, 2019 relating to the recognition of operating lease right of use assets and operating lease liabilities which represented approximately a 30% change to total assets and a 64% change to total liabilities. The impact of adoption of this new standards update was as follows (in thousands): Adoption July 1, 2019 Reclassification (1) Total Adjustment Balance Sheet: Operating lease right of use assets $ 3,428 $ 434 $ 3,862 Operating lease liabilities, current 528 528 Operating lease liabilities, net of current portion 3,347 3,347 (1) As of June 30, 2019, the Company had $132 thousand recorded within deferred rent for lease incentives incurred at the inception of the affected leases and $302 thousand in deferred rent tenant improvements. Upon adoption of the new standards update, these lease incentives were included within the operating lease liability. Certain balances have been reclassified. These reclassifications had no effect on net income or stockholders’ equity. Revenue Recognition: Revenue is measured based on consideration specified in contracts with customers and excludes incentives and amounts collected on behalf of third parties, primarily sales tax. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The following describes principal activities, separated by major product or service, from which the Company generates its revenues: Restaurant Sales Revenue from restaurant sales is recognized when food and beverage products are sold in Company-owned restaurants. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. F-10 Index Franchise Revenues Franchise revenues consist of 1) franchise royalties, 2) supplier and distributor incentive revenues, 3) franchise license fees, 4) area development exclusivity fees and foreign master license fees, 5) advertising funds, and 6) supplier convention funds. Franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as sales occur. Supplier and distributor incentive revenues are recognized when title to the underlying commodities transfer. Franchise license fees are typically billed upon execution of the franchise agreement and amortized over the term of the franchise agreement which can range from five to 20 years. Fees received for renewal periods are amortized over the life of the renewal period. Area development exclusivity fees and foreign master license fees are typically billed upon execution of the area development and foreign master license agreements. Area development exclusivity fees are included in deferred revenue in the Consolidated Balance Sheets and allocated on a pro rata basis to all stores opened under that specific development agreement. Area development exclusivity fees that include rights to sub-franchise are amortized as revenue over the term of the contract. Advertising fund contributions for Pie Five units represent contributions collected where we have control over the activities of the fund. Contributions are based on a percentage of net retail sales. We have determined that we are the principal in these arrangements, and advertising fund contributions and expenditures are, therefore, reported on a gross basis in the Consolidated Statements of Income. In general, we expect such advertising fund contributions and expenditures to be largely offsetting and, therefore, do not expect a significant impact on our reported income before income taxes. Our obligation related to these funds is to develop and conduct advertising activities. Pie Five marketing fund contributions are billed and collected weekly. Supplier convention funds are deferred until the obligations of the agreement are met and the event takes place. Total revenues consist of the following (in thousands): Fiscal Year Ended June 28 , 2020 June 30 , 2019 Restaurant sales $ 240 $ 889 Franchise royalties 3,697 4,814 Supplier and distributor incentive revenues 3,906 4,519 Franchise license fees 853 1,031 Area development fees and foreign master license fees 20 41 Advertising funds 799 684 Supplier convention funds 278 294 Rental income 195 — Interest income and other 40 47 $ 10,028 $ 12,319 Stock-Based Compensation: The Company accounts for stock options using the fair value recognition provisions of the authoritative guidance on share-based payments. The Company uses the Black-Scholes formula to estimate the value of stock-based compensation for options granted to employees and directors and expects to continue to use this acceptable option valuation model in the future. The authoritative guidance also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow. Restricted stock units (“RSU’s”) represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions. Compensation cost for RSU’s is measured as an amount equal to the fair value of the RSU’s on the date of grant and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the best estimate of the ultimate achievement level. Fair Value of Financial Instruments: The carrying amounts of accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. F-11 Index Contingencies: Provisions for legal settlements are accrued when payment is considered probable and the amount of loss is reasonably estimable in accordance with the authoritative guidance on Accounting for Contingencies . If the best estimate of cost can only be identified within a range and no specific amount within that range can be determined more likely than any other amount within the range, and the loss is considered probable, the minimum of the range is accrued. Legal and related professional services costs to defend litigation are expensed as incurred. Use of Management Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect its reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and other various assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically. Actual results could differ materially from estimates. Fiscal Year: The Company’s fiscal year ends on the last Sunday in June. The fiscal year ended June 28, 2020 contained 52 weeks and the fiscal year ended June 30, 2019 contained 53 weeks. NOTE B – PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS: Property, and plant and equipment consist of the following (in thousands): Estimated Useful Lives June 28 2020 June 30 , 2019 Equipment, furniture and fixtures 3 - 7 yrs $ 808 $ 867 Software 5 yrs 809 810 Leasehold improvements 10 yrs or lease term, if shorter 472 434 2,089 2,111 Less: accumulated depreciation/amortization (1,723 ) (1,611 ) $ 366 $ 500 Depreciation and amortization expense was approximately $0.2 million and $0.5 million for the fiscal years ended June 28, 2020 and June 30, 2019, respectively. Intangible assets consist of the following (in thousands): June 28 , 2020 June 30 , 2019 Estimated Useful Lives Acquisition Cost Accumulated Amortization Net Value Acquisition Cost Accumulated Amortization Net Value Trademarks and tradenames 10 years $ 278 $ (181 ) $ 97 $ 278 $ (153 ) $ 125 Name change 15 years 70 (25 ) 45 70 (21 ) 49 Prototypes 5 years 230 (217 ) 13 230 (208 ) 22 $ 578 $ (423 ) $ 155 $ 578 $ (382 ) $ 196 Amortization expense for intangible assets was approximately $41 thousand and $43 thousand for the fiscal years ended June 28, 2020 and June 30, 2019, respectively. F-12 Index NOTE C - ACCRUED EXPENSES: Accrued expenses consist of the following (in thousands): June 28 , 2020 June 30 , 2019 Compensation $ 451 $ 265 Other 236 478 Professional fees 80 83 Insurance loss reserves 8 8 $ 775 $ 834 NOTE D - CONVERTIBLE NOTES: On March 3, 2017, the Company completed a registered shareholder rights offering of its 4% Convertible Senior Notes due 2022 (“Notes”). Shareholders exercised subscription rights to purchase all 30,000 of the Notes at the par value of $100 per Note, resulting in gross offering proceeds to the Company of $3.0 million. The Notes bear interest at the rate of 4% per annum on the principal or par value of $100 per note, payable annually in arrears on February 15 of each year, commencing February 15, 2018. Interest is payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes mature on February 15, 2022, at which time all principal and unpaid interest will be payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes are secured by a pledge of all outstanding equity securities of our two primary direct operating subsidiaries. Noteholders may convert their Notes to common stock as of the 15 th day of any calendar month, unless the Company sooner elects to redeem the Notes. The conversion price is $2.00 per share of common stock. Accrued interest will be paid through the effective date of the conversion in cash or, at the Company’s sole discretion, in shares of Company common stock. The Company determined that the Notes contained a beneficial conversion feature of $0.1 million since the market price of the Company’s common stock was higher than the effective conversion price of the Notes when issued. The beneficial conversion feature and the issuance costs of the notes aggregated $0.2 million and were considered a debt discount and are accreted into interest expense using the effective interest method over the debt maturity period. During fiscal 2020, $64 thousand of the Notes were converted to common shares. As of June 28, 2020, $1.6 million of the Notes was outstanding, offset by $48 thousand of unamortized debt issue costs and unamortized debt discounts. NOTE E - PPP LOAN: On April 13, 2020, the Company received the proceeds from a loan in the amount of $656,830 (the “PPP Loan”) from JPMorgan Chase Bank, N.A. (the “Lender”) pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). The PPP Loan matures on April 10, 2022 and bears interest at a rate of 0.98% per annum. Commencing November 10, 2020, we are required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize by April 10, 2022 the principal amount outstanding on the PPP Loan as of October 10, 2020. We may prepay the PPP Loan at any time prior to maturity with no prepayment penalties. The PPP Loan is evidenced by a promissory note dated April 10, 2020, which contains various certifications and agreements related to the PPP, as well customary default and other provisions. The PPP Loan is unsecured by the Company and is guaranteed by the SBA. All or a portion of the PPP Loan may be forgiven by the SBA upon application by the Company accompanied by documentation of expenditures in accordance with SBA requirements under the PPP. In the event all or any portion of the PPP Loan is forgiven, the amount forgiven will be applied to outstanding principal. NOTE F - INCOME TAXES: Provision for income taxes from continuing operations consists of the following (in thousands): Fiscal Year Ended June 28 , 2020 June 30 , 2019 Current - Federal $ – $ – Current - Foreign 18 131 Current - State – 15 Deferred - Federal 4,053 (189 ) Deferred - State 7 (8 ) Provision for income taxes $ 4,078 $ (51 ) F-13 Index The effective income tax rate varied from the statutory rate for the fiscal years ended June 28, 2020 and June 30, 2019 as reflected below (in thousands): June 28 , 2020 June 30 , 2019 Federal income taxes (benefit) based on a statutory rate of 21.0% $ (33 ) $ (168 ) State income tax, net of federal effect 20 93 Foreign taxes – 15 Permanent adjustments 4 8 Change in valuation allowance 4,081 – Other 6 1 $ 4,078 $ (51 ) The tax effects of temporary differences that give rise to the net deferred tax assets consisted of the following (in thousands): June 28 , 2020 June 30 , 2019 Reserve for bad debt $ 61 $ 48 Deferred fees — 17 Other reserves and accruals 568 795 Operating lease liabilities 937 — Credit carryforwards 171 156 Net operating loss carryforwards 5,371 5,206 Depreciable assets 306 263 Total gross deferred tax asset 7,414 6,485 Valuation allowance (6,515 ) (2,425 ) Total deferred tax asset $ 899 $ 4,060 Right-of-use asset (815 ) — Other deferred tax liabilities (84 ) — Total deferred tax liabilities $ (899 ) $ — Net deferred tax asset $ — $ 4,060 For the year ended June 28, 2020, the Company recorded an income tax expense of $4.1 million including federal deferred tax expense of $4.1 million and current state tax expense of $20 thousand. As of June 28, 2020, the Company had net operating loss carryforwards totaling $23.6 million that are available to reduce future taxable income and will begin to expire in 2032. Under the Tax Cuts and Jobs Act, approximately $0.8 million of the loss carryforwards are limited to 80% and do not expire. The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. During the quarter ending March 29, 2020, it was determined that the valuation allowance on deferred tax assets should be increased by $4.3 million resulting in a full valuation allowance. The Company has maintained the full valuation allowance for the year ended June 28, 2020. On March 27, 2020, President Trump signed into law the CARES Act. The legislation enacts various measures to assist companies affected by the COVID-19 pandemic. Key income tax-related provisions of the bill include temporary modifications to net operating loss utilization and carryback limitations, allowance of refundable alternative minimum tax credits, reduced limitation of charitable contributions, reduced limitations of business interest expense, and technical corrections to depreciation of qualified improvement property. NOTE G - LEASES: The Company leases its 19,576 square foot corporate office facility with average annual lease payments of approximately $18.00 per square foot. This lease began on January 2, 2017 and has a ten-year term. The Company amended its lease agreement in June 2020 and has elected to defer one-half of the monthly base rent for the period from June 2020 through May 2021. F-14 Index The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that it can be determined that an arrangement represents a lease, it is classified as either an operating lease or a finance lease. The Company does not currently have any finance leases. The Company capitalizes operating leases on the Condensed Consolidated Balance Sheets through a right of use asset and a corresponding lease liability. Right of use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Short-term leases that have an initial term of one year or less are not capitalized but are disclosed below. Short-term lease costs exclude expenses related to leases with a lease term of one month or less. Operating lease right of use assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. In addition to the present value of lease payments, the operating lease right of use asset also includes any lease payments made to the lessor prior to lease commencement less any lease incentives and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Nature of Leases The Company leases certain office space, restaurant space, and information technology equipment under non-cancelable leases to support its operations. A more detailed description of significant lease types is included below. Office Agreements The Company rents office space from third parties for its corporate location. Office agreements are typically structured with non-cancelable terms of one to 10 years. The Company has concluded that its office agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term. Restaurant Space Agreements The Company rents restaurant space from third parties for its Company-owned restaurants. Restaurant space agreements are typically structured with non-cancelable terms of one to 10 years. The Company has concluded that its restaurant agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term. The Company also subleases some of its restaurant space to third parties. The Company’s two subleases have terms that end in 2023 and 2025. The sublease agreements are noncancelable through the end of the term and both parties have substantive rights to terminate the lease when the term is complete. Sublease agreements are not capitalized and are recorded as rental income in the period that rent is received. As of June 28, 2020, the Company had no Company-owned restaurants. Information Technology Equipment The Company rents information technology equipment, primarily printers and copiers, from a third party for its corporate office location. Information technology equipment agreements are typically structured with non-cancelable terms of one to five years. The Company has concluded that its information technology equipment commitments are operating leases. Discount Rate Leases typically do not provide an implicit interest rate. Accordingly, the Company is required to use its incremental borrowing rate in determining the present value of lease payments based on the information available at the lease commencement date. The Company’s incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. The Company uses the implicit rate in the limited circumstances in which that rate is readily determinable. F-15 Index Lease Guarantees The Company has guaranteed the financial responsibilities of certain franchised store leases. These guaranteed leases are not considered operating leases because the Company does not have the right to control the underlying asset. If the franchisee abandons the lease and fails to meet the lease’s financial obligations, the lessor may assign the lease to the Company for the remainder of the term. If the Company does not expect to assign the abandoned lease to a new franchisee within 12 months, the lease will be considered an operating lease and a right-of-use asset and liability will be recognized. Practical Expedients and Accounting Policy Elections Certain lease agreements include lease and non-lease components. For all existing asset classes with multiple component types, the Company has utilized the practical expedient that exempts it from separating lease components from non-lease components. Accordingly, the Company accounts for the lease and non-lease components in an arrangement as a single lease component. In addition, for all existing asset classes, the Company has made an accounting policy election not to apply the lease recognition requirements to short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, we recognize lease payments related to our short-term leases in our statement of operations on a straight-line basis over the lease term which has not changed from our prior recognition. To the extent that there are variable lease payments, we recognize those payments in our statement of operations in the period in which the obligation for those payments is incurred. The components of total lease expense for the fiscal year ended June 28, 2020, the majority of which is included in general and administrative expense, are as follows (in thousands): Fiscal Year Ended June 28, 2020 Operating lease cost $ 670 Sublease income (195 ) Total lease expense, net of sublease income $ 475 Supplemental cash flow information related to operating leases is included in the table below (in thousands): Fiscal Year Ended June 28, 2020 Cash paid for amounts included in the measurement of lease liabilities $ 684 Supplemental balance sheet information related to operating leases is included in the table below (in thousands): Fiscal Year Ended June 28, 2020 Operating lease right of use assets, net $ 3,567 Operating lease liabilities, current 632 Operating lease liabilities, net of current portion 3,471 Weighted average remaining lease term and weighted average discount rate for operating leases are as follows: Fiscal Year Ended June 28, 2020 Weighted average remaining lease term 5.3 Years Weighted average discount rate 4.0 % Operating lease liabilities with enforceable contract terms that are greater than one year mature as follows (in thousands): Operating Leases 2021 $ 785 2022 804 2023 813 2024 766 Thereafter 1,448 Total operating lease payments 4,616 Less: imputed interest $ (513 ) Total operating lease liability $ 4,103 F-16 Index Premises occupied by Company-owned restaurants were leased for initial terms of five to ten years, and each has multiple renewal terms. Certain lease agreements contain either a provision requiring additional rent if sales exceed specified amounts or an escalation clause based upon a predetermined multiple. Future minimum rental payments under active non-cancelable leases with initial or remaining terms of one year or more at June 28, 2020 were as follows (in thousands): Operating Leases 2021 $ 1,629 2022 1,592 2023 1,444 2024 1,182 2025 1,030 Thereafter 1,027 $ 7,904 Future minimum sublease rental income under active non-cancelable leases with initial or remaining terms of one year or more at June 28, 2020 were as follows (in thousands): Sublease Rental Income 2021 $ 174 2022 175 2023 177 2024 128 2025 53 $ 707 Rental expense consisted of the following (in thousands): Fiscal Year Ended June 28 , 2020 June 30 , 2019 Minimum rentals $ 676 $ 757 Sublease rentals (168 ) (149 ) $ 508 $ 608 NOTE H - EMPLOYEE BENEFITS: The Company has a tax advantaged savings plan that is designed to meet the requirements of Section 401(k) of the Internal Revenue Code (the “Code”). The current plan is a modified continuation of a similar savings plan established by the Company in 1985. Employees who have completed three months of service and are at least 21 years of age are eligible to participate in the plan. The plan provides that participating employees may elect to have between 1% and 15% of their compensation deferred and contributed to the plan subject to certain IRS limitations. Effective June 27, 2005, the Company has a discretionary matching contribution. Separate accounts are maintained with respect to contributions made on behalf of each participating employee. Employer matching contributions and earnings thereon are invested in the same investments as each participant’s employee deferral. The plan is subject to the provisions of the Employee Retirement Income Security Act, as amended, and is a profit-sharing plan as defined in Section 401(k) of the Code. For the fiscal year ended June 28, 2020, no matching contributions were made to the tax advantage savings plan by the Company. For the fiscal year ended June 30, 2019, total matching contributions to the tax advantaged savings plan by the Company on behalf of participating employees were approximately $39 thousand. NOTE I - STOCK BASED COMPENSATION PLANS: In June 2005, the 2005 Employee Incentive Stock Option Award Plan (the “2005 Employee Plan”) was approved by the Company’s shareholders with a plan effective date of June 23, 2005. Under the 2005 Employee Plan, officers and employees of the Company were eligible to receive options to purchase shares of the Company’s common stock. Options were granted at market value of the stock on the date of grant, were subject to various vesting and exercise periods as determined by the Compensation Committee of the board of directors and could be designated as non-qualified or incentive stock options. A total of 1,000,000 shares of common stock were authorized for issuance under the 2005 Employee Plan. The 2005 Employee Plan expired by its terms on June 23, 2015. F-17 Index The shareholders also approved the 2005 Non-Employee Directors Stock Award Plan (the “2005 Directors Plan”) in June 2005, to be effective as of June 23, 2005. Directors not employed by the Company were eligible to receive stock options under the 2005 Directors Plan. Options for common stock equal to twice the number of shares of common stock acquired during the previous fiscal year, up to 40,000 shares per year, were automatically granted to each non-employee director on the first day of each fiscal year. Options were granted at market value of the stock on the first day of each fiscal year, with vesting periods beginning at a minimum of six months and with exercise periods up to ten years. A total of 650,000 shares of Company common stock were authorized for issuance pursuant to the 2005 Directors Plan. The 2005 Directors Plan expired by its terms on June 23, 2015. The 2015 Long Term Incentive Plan (the “2015 LTIP”) was approved by the Company’s shareholders on November 18, 2014 and became effective June 1, 2015. Officers, employees and non-employee directors of the Company are eligible to receive awards under the 2015 LTIP. A total of 1,200,000 shares of common stock are authorized for issuance under the 2015 LTIP. Awards authorized under the 2015 LTIP include incentive stock options, non-qualified stock options, restricted shares, restricted stock units and rights (either with or without accompanying options). The 2015 LTIP provides for options to be granted at market value of the stock on the date of grant and have exercise periods determined by the Compensation Committee of the board of directors. The Compensation Committee may also determine the vesting periods, performance criteria and other terms and conditions of all awards under the 2015 LTIP. The Compensation Committee has adopted resolutions under the 2015 LTIP automatically granting to each non-employee director on the first day of each fiscal year options to purchase twice the number of shares of common stock acquired during the previous fiscal year, up to a maximum of 40,000 shares. Such options are exercisable at the market value of the stock on the first day of the fiscal year, vest six months from the date of grant and expire 10 years from the date of grant. Share based compensation expense is included in general and administrative expense in the consolidated statement of operations. Stock Options: A summary of stock option transactions under all of the Company’s stock option plans and information about fixed-price stock options is as follows: Fiscal Year Ended June 28 , 2020 June 30 , 2019 Shares Shares Outstanding at beginning of year 216,550 478,056 Granted – – Exercised – – Forfeited/Canceled/Expired (9,800 ) (216,506 ) Outstanding at end of period 206,750 261,550 Exercisable at end of period 206,750 261,550 Fiscal Year Ended June 28 , 2020 June 30 , 2019 Weighted- Average Exercise Price Weighted- Average Exercise Price Outstanding at beginning of year $ 4.82 $ 4.16 Granted – – Exercised – – Forfeited/Canceled/Expired 1.87 4.27 Outstanding at end of period $ 4.96 4.82 Exercisable at end of year $ 4.96 4.82 The intrinsic value of options outstanding at June 28, 2020 was zero. F-18 Index The following table provides information on options outstanding and options exercisable as of June 28, 2020: Options Outstanding Options Exercisable Range of Exercise Prices Options Outstanding at June 28 , 2020 Weighted-Average Remaining Contractual Life (Years) Weighted- Average Exercise Price Shares Exercisable at June 28 , 2020 Weighted- Average Exercise Price $ 2.36 - 2.75 40,000 1.0 $ 2.71 40,000 $ 2.71 $ 2.76 - 3.30 55,000 2.0 $ 3.11 55,000 $ 3.11 $ 3.31 - 3.95 50,000 6.0 $ 3.95 50,000 $ 3.95 $ 5.51 - 5.74 8,664 3.0 $ 5.74 8,664 $ 5.74 $ 5.95 - 6.25 28,800 4.0 $ 6.23 28,800 $ 6.23 $ 6.26 - 13.11 24,286 5.0 $ 13.11 24,286 $ 13.11 206,750 3.4 $ 4.96 206,750 $ 4.96 We determine fair value following the authoritative guidance as follows: Valuation and Amortization Method. We estimate the fair value of share-based awards granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods. Expected Life . The expected life of awards granted represents the period of time that they are expected to be outstanding. Unless a life is specifically stated, we determine the expected life using the “simplified method” in accordance with Staff Accounting Bulletin No. 110 since we do not have sufficient historical share option exercise experience. Expected Volatility . Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock. Risk-Free Interest Rate . We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. Expected Dividend Yield. We have not paid any cash dividends on our common stock in the last ten years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. Expected Forfeitures . We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest. At June 28, 2020, the Company had no unvested options. Stock compensation expense related to stock options of zero and $35 thousand was recognized in fiscal years 2020 and 2019, respectively. Restricted Stock Units: Restricted stock units awarded under the 2015 LTIP represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions. During fiscal 2020 and 2019, there were no grants of performance-based restricted stock units. The restricted stock units granted to each recipient are allocated among performance criteria pertaining to various aspects of the Company’s business, as well as its overall operations, measured based on the second fiscal year following the date of grant. Achievement of the various performance criteria entitles the recipient to receive shares of common stock in amounts ranging from 50% to 150% of the number of restricted stock units granted. Grantees of restricted stock units do not have any rights of a stockholder, and do not participate in any distributions on our common stock, until the award fully vests upon satisfaction of the vesting schedule, performance criteria and other conditions set forth in their award agreement. Therefore, unvested restricted stock units are not considered participating securities under ASC 260, “ Earnings Per Share ,” and are not included in the calculation of basic or diluted earnings per share. F-19 Index Compensation cost is measured as an amount equal to the fair value of the restricted stock units on the date of grant and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the best estimate of the ultimate achievement level. A summary of the status of restricted stock units as of June 28, 2020 and June 30, 2019, and changes during the fiscal years then ended is presented below: June 28 , 2020 June 30 , 2019 Unvested at beginning of year 155,106 908,293 Vested during the year (9,053 ) – Forfeited during the year (146,053 ) (753,187 ) Unvested at end of year – 155,106 NOTE J - SHAREHOLDERS’ EQUITY: On April 22, 2009, the board of directors of the Company amended the stock repurchase plan first authorized on May 23, 2007, and previously amended on June 2, 2008, by increasing the aggregate number of shares of common stock the Company may repurchase under the plan to a total of 3,016,000 shares. No shares were repurchased during fiscal 2020 and, as of June 28, 2020, there were 848,425 shares available to be repurchased under the plan. On December 5, 2017, the Company entered into an At Market Issuance Sales Agreement with B. Riley FBR, Inc. (“B. Riley FBR”) pursuant to which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $5,000,000 from time to time through B. Riley FBR acting as agent (the “2017 ATM Offering”). The 2017 ATM Offering is being undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on November 6, 2017. Through June 28, 2020, the Company had sold an aggregate of 524,660 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of $0.7 million. The Company pays to B. Riley FBR a fee equal to 3% of the gross sales price in addition to reimbursing certain costs. The Company had $15 thousand in expenses associated with the 2017 ATM Offering in fiscal 2020. NOTE K - COMMITMENTS AND CONTINGENCIES: The Company is subject to various claims and contingencies related to employment agreements, franchise disputes, lawsuits, taxes, food product purchase contracts and other matters arising out of the normal course of business. Management believes that any such claims and actions currently pending are either covered by insurance or would not have a material adverse effect on the Company’s annual results of operations or financial condition if decided in a manner that is unfavorable to the Company. On March 11, 2020, the World Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, and the disease has spread rapidly throughout the United States and the world. Federal, state and local responses to the COVID-19 pandemic, as well as our internal efforts to protect customers, franchisees and employees, have severely disrupted our business operations. Most of the domestic Pizza Inn buffet restaurants and Pie Five restaurants are in areas that were for varying periods subject to “shelter-in-place” and social distancing restrictions prohibiting in-store sales and, therefore, were limited to carry-out and/or delivery orders. In some areas, these restrictions limited non-essential movement outside the home, which discouraged or even precluded carry-out orders. In most cases, in-store dining has now resumed subject to seating capacity limitations, social distancing protocols, and enhanced cleaning and disinfecting practices. Further, the COVID-19 pandemic has precipitated significant job losses and a national economic downturn that typically impacts the demand for restaurant food service. Although most of our domestic restaurants have continued to operate under these conditions, we have experienced temporary closures from time to time during the pandemic. The closure of one Company-owned Pie Five restaurant in January 2020 was unrelated to the COVID-19 outbreak but the quick closure of a Pie Five Unit recently acquired from a franchisee was accelerated by the pandemic. The COVID-19 pandemic has resulted in dramatically reduced aggregate in-store retail sales at Buffet Units and Pie Five Units, modestly offset by increased aggregate carry-out and delivery sales. The decreased aggregate retail sales have correspondingly decreased supplier rebates and franchise royalties payable to the Company. During the fourth quarter of fiscal 2020, we participated in a government-sponsored loan program. (See, “Note E--PPP Loan.”) We also furloughed certain employees, reduced base salary by 20% for all remaining employees and reduced expenses. While the Company will remain focused on controlling expenses, future results of operations are likely to be materially adversely impacted. F-20 Index We expect that Buffet Units and Pie Five Units will continue to be subject to capacity restrictions for some time as social distancing protocols remain in place. Additionally, an outbreak or perceived outbreak of COVID-19 connected to restaurant dining could cause negative publicity directed at any of our brands and cause customers to avoid our restaurants. We cannot predict how long the pandemic will last or whether it will reoccur, what additional restrictions may be enacted, to what extent off-premises dining will continue, or if individuals will be comfortable returning to our Buffet Units and Pie Five Units following social distancing protocols. Any of these changes could materially adversely affect the Company’s future financial performance. However, the ultimate impact of COVID-19 on our future results of operations and liquidity cannot presently be predicted. NOTE L - EARNINGS PER SHARE: The Company computes and presents earnings per share (“EPS”) in accordance with the authoritative guidance on Earnings Per Share . Basic EPS excludes the effect of potentially dilutive securities while diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised, converted or resulted in the issuance of common stock that then shared in the earnings of the Company. The following table shows the reconciliation of the numerator and denominator of the basic EPS calculation to the numerator and denominator of the diluted EPS calculation (in thousands, except per share amounts). Fiscal Year Ended June 28 , 2020 June 30 , 2019 Loss from continuing operations $ (4,233 ) $ (750 ) Interest saved on convertible notes at 4% $ 65 $ 63 Adjusted net loss $ (4,168 ) $ (687 ) BASIC: Weighted average common shares 15,144 15,070 Net income/(loss) per common share $ (0.28 ) $ (0.05 ) DILUTED: Weighted average common shares 15,144 15,070 Convertible notes — — Dilutive stock options — — Weighted average common shares outstanding 15,144 15,070 Income/(loss) from continuing operations per common share $ (0.28 ) $ (0.05 ) We had 206,750 and 261,550 shares of common stock potentially issuable upon exercise of employee stock options for years ended June 28, 2020 and June 30, 2019, respectively, that were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive. These instruments expire at varying times from fiscal 2020 through fiscal 2026. NOTE M– SEGMENT REPORTING: The Company has three reportable operating segments as determined by management using the “management approach” as defined by the authoritative guidance on Disclosures about Segments of an Enterprise and Related Information : (1) Pizza Inn Franchising, (2) Pie Five Franchising and (3) Company-Owned Restaurants. These segments are a result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the three operating segments. Other revenue consists of nonrecurring items. The Pizza Inn and Pie Five Franchising segments establish franchisees, licensees and territorial rights. Revenue for this segment is derived from franchise royalties, franchise fees, sale of area development and foreign master license rights and incentive payments from third party suppliers and distributors. Assets for these segments include equipment, furniture and fixtures. The Company-Owned Restaurants segment includes sales and operating results for all Company-owned restaurants. Assets for this segment include equipment, furniture and fixtures for the Company-owned restaurants. F-21 Index Corporate administration and other assets primarily include cash and short-term investments, as well as furniture and fixtures located at the corporate office and trademarks and other intangible assets. All assets are located within the United States. Summarized in the following tables are net sales and operating revenues, depreciation and amortization expense, income from continuing operations before taxes, capital expenditures and assets for the Company’s reportable segments as of and for the fiscal years ended June 28, 2020 and June 30, 2019 (in thousands): Fiscal Year Ended June 28 , 2020 June 30 , 2019 Net sales and operating revenues: Pizza Inn Franchising $ 6,662 $ 7,192 Pie Five Franchising 2,894 4,192 Company-Owned Restaurants 240 887 Corporate administration and other 232 48 Consolidated revenues $ 10,028 $ 12,319 Depreciation and amortization: Pizza Inn Franchising $ – $ – Pie Five Franchising – – Company-Owned Restaurants – 123 Combined – 123 Corporate administration and other (1) 186 343 Depreciation and amortization $ 186 $ 466 Income/(Loss) before taxes: Pizza Inn Franchising $ 5,365 $ 5,512 Pie Five Franchising 1,140 2,094 Company-Owned Restaurants (1,006 ) (2,001 ) Combined 5,499 5,605 Corporate administration and other (5,654 ) (6,406 ) Income/(loss) before taxes $ (155 ) $ (801 ) Notes: (1) Portions of corporate administration and other have been allocated to segments. The following table provides information on our foreign and domestic revenues: Geographic information (revenues): United States $ 9,847 $ 12,086 Foreign countries 181 233 Consolidated total $ 10,028 $ 12,319 F-22 Index NOTE N - SUBSEQUENT EVENTS: In preparation of its financial statements, the Company considered subsequent events through September 28, 2020 which was the date the Company’s financial statements were available to be issued. F-23