RAVE RESTAURANT GROUP, INC. 10-Q

Item 1. Financial Statements RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019 REVENUES: $ 2,128 $ 2,830 $ 4,031 $ 5,706 COSTS AND EXPENSES: Cost of sales 75 115 153 249 General and administrative expenses 1,185 1,565 2,274 2,928 Franchise expenses 606 838 1,153 1,704 Gain on sale of assets — — — (11 ) Impairment of long-lived assets and other lease charges 4 193 21 341 Bad debt expense 88 36 115 28 Interest expense 23 24 46 51 Depreciation and amortization expense 43 49 87 96 Total costs and expenses 2,024 2,820 3,849 5,386 INCOME BEFORE TAXES 104 10 182 320 Income tax expense (benefit) 2 (4 ) 4 69 NET INCOME 102 14 178 251 INCOME PER SHARE OF COMMON STOCK - BASIC: $ 0.01 $ 0.00 $ 0.01 $ 0.02 INCOME PER SHARE OF COMMON STOCK - DILUTED: $ 0.01 $ 0.00 $ 0.01 $ 0.02 Weighted average common shares outstanding - basic 17,712 15,129 16,596 15,106 Weighted average common and potential dilutive common shares outstanding 18,510 15,930 17,394 15,924 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 Index RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) (Unaudited) December 27, 2020 June 28, 2020 ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,292 $ 2,969 Restricted cash 235 234 Accounts receivable, less allowance for bad debts of $166 and $269, respectively 919 965 Notes receivable 1,006 546 Deferred contract charges 35 44 Prepaid expenses and other 261 174 Total current assets 8,748 4,932 LONG-TERM ASSETS Property, plant and equipment, net 324 366 Operating lease right of use asset, net 3,274 3,567 Intangible assets definite-lived, net 136 155 Notes receivable, net of current portion 65 449 Long-term deferred contract charges 232 231 Deposits and other — 5 Total assets $ 12,779 $ 9,705 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable – trade $ 649 $ 446 Accounts payable - lease termination impairments — 407 Accrued expenses 791 775 Operating lease liability, current 658 632 Deferred revenues 155 254 Total current liabilities 2,253 2,514 LONG-TERM LIABILITIES Convertible notes 1,562 1,549 PPP loan 657 657 Operating lease liability, net of current portion 3,138 3,471 Deferred revenues, net of current portion 806 960 Other long-term liabilities 51 51 Total liabilities 8,467 9,202 COMMITMENTS AND CONTINGENCIES (SEE NOTE D) SHAREHOLDERS’ EQUITY Common stock, $.01 par value; authorized 26,000,000 shares; issued 25,090,058 and 22,550,376 shares, respectively; outstanding 18,004,904 and 15,465,222 shares, respectively 251 225 Additional paid-in capital 37,136 33,531 Accumulated deficit (8,538 ) (8,716 ) Treasury stock at cost Shares in treasury: 7,085,154 and 7,085,154, respectively (24,537 ) (24,537 ) Total shareholders’ equity 4,312 503 Total liabilities and shareholders’ equity $ 12,779 $ 9,705 See accompanying Notes to Unaudited Condensed Consolidated Financial Statement. 4 Index RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) (Unaudited) Common Stock Treasury Stock Shares Amount Additional Paid-in Capital Accumulated 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 Equity issue costs - ATM offering — — (2 ) — — — (2 ) Net income — — — 237 — — 237 Balance, September 29, 2019 22,208 $ 222 $ 33,294 $ (4,246 ) (7,085 ) $ (24,537 ) $ 4,733 Stock compensation expense — — (85 ) — — — (85 ) Issuance of common stock 9 — — — — — — Equity issue costs - ATM offering — — 1 — — — 1 Net income — — — 14 — — 14 Balance, December 29, 2019 22,217 222 $ 33,210 $ (4,232 ) (7,085 ) $ (24,537 ) $ 4,663 Common Stock Treasury Stock Shares Amount Additional Paid-in Capital Accumulated Deficit Shares Amount Total Balance, June 28, 2020 22,550 $ 225 $ 33,531 $ (8,716 ) (7,085 ) $ (24,537 ) $ 503 Equity issue costs - ATM offering — — (3 ) — — — (3 ) Net income — — — 76 — — 76 Balance, September 27, 2020 22,550 $ 225 $ 33,528 $ (8,640 ) (7,085 ) $ (24,537 ) $ 576 Issuance of common stock 2,540 26 3,735 — — — 3,761 Equity issue costs - ATM offering — — (127 ) — — — (127 ) Net income — — — 102 — — 102 Balance, December 27, 2020 25,090 $ 251 $ 37,136 $ (8,538 ) (7,085 ) $ (24,537 ) $ 4,312 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 Index RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended December 27, 2020 December 29, 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 178 $ 251 Adjustments to reconcile net income to cash (used in) provided by operating activities: Impairment of long-lived assets and other lease charges 21 341 Stock compensation expense — (85 ) Depreciation and amortization 87 96 Amortization of right of use assets 293 230 Amortization of debt issue costs 13 15 Gain on the sale of assets — (11 ) Provision for bad debt 115 28 Deferred income tax — 60 Changes in operating assets and liabilities: Restricted cash (1 ) — Accounts receivable (69 ) 126 Notes receivable (102 ) — Deferred contract charges 8 (2 ) Inventories — 1 Prepaid expenses and other (87 ) 59 Deposits and other 5 — Accounts payable – trade 203 (35 ) Accounts payable - lease termination impairments (428 ) (658 ) Accrued expenses 17 (2 ) Operating lease liability (307 ) (241 ) Deferred revenue (253 ) (505 ) Deferred rent and other — (21 ) Cash used in operating activities (307 ) (353 ) CASH FLOWS FROM INVESTING ACTIVITIES: Payments received on notes receivable from fixed asset sales 26 108 Purchase of property, plant and equipment (26 ) (47 ) Cash provided by investing activities — 61 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of stock 3,761 — Equity issuance costs (130 ) (1 ) Cash (used in) provided by financing activities 3,631 (1 ) Net (decrease)/increase in cash, cash equivalents and restricted cash 3,324 (293 ) Cash, cash equivalents and restricted cash, beginning of period 3,203 2,264 Cash, cash equivalents and restricted cash, end of period $ 6,527 $ 1,971 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR: Interest $ — $ 2 Income taxes $ 16 $ 18 Non-cash activities: Conversion of notes to common shares $ — $ 64 Operating lease right of use assets at adoption of ASC 842 $ — $ 3,428 Operating lease liability at adoption of ASC 842 $ — $ 3,875 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 Index RAVE RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) operates and franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express, or PIE, kiosks (“PIE Units”) under the trademark “Pizza Inn”. The accompanying condensed consolidated financial statements of Rave Restaurant Group, Inc. have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2020. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments are of a normal recurring nature. Results of operations for the fiscal periods presented are not necessarily indicative of fiscal year-end results. Note A - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All appropriate intercompany 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 December 27, 2020 and June 28, 2020 is omitted from cash and cash equivalents and is included in current 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. Fiscal Quarters The three and six month periods ended December 27, 2020 and December 29, 2019 each contained 13 weeks and 26 weeks, respectively. Use of Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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, and actual results could differ materially from estimates. 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. 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, 6) supplier convention funds, and 7) rental income. 7 Index 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 Condensed 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 subfranchise 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. The adoption of Topic 606 revised the determination of whether these arrangements are considered principal versus agent. For Pie Five, 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 Condensed Consolidated Statements of Operations. 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. Rental Income 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. Total revenues consist of the following (in thousands): Three Months Ended December 27, 2020 December 29, 2019 Restaurant sales $ — $ 96 Franchise royalties 847 1,028 Supplier and distributor incentive revenues 808 1,033 Franchise license fees 80 410 Area development exclusivity fees and foreign master license fees 4 6 Advertising funds 150 132 Supplier convention funds 177 63 Rental income 52 48 Other 10 14 $ 2,128 $ 2,830 Six Months Ended December 27, 2020 December 29, 2019 Restaurant sales $ — $ 204 Franchise royalties 1,705 2,136 Supplier and distributor incentive revenues 1,575 2,056 Franchise license fees 182 621 Area development exclusivity fees and foreign master license fees 8 13 Advertising funds 275 284 Supplier convention funds 177 278 Rental income 100 89 Other 9 25 $ 4,031 $ 5,706 8 Index 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. Compensation cost for restricted stock units (“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. Note B - 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 was 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): July 1, 2019 Adoption Reclassification (1) Total Adjustment Operating lease right of use assets $ 3,428 $ 434 $ 3,862 Operating lease liabilities – current 528 528 Operating lease liabilities - long-term 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 lease liability. Adoption of the new standard did not materially impact the Condensed Consolidated Statements of Operations, Cash Flows or Shareholders’ Equity. Leases 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 operating lease liability. Right of use assets represent the Company’s right to use an underlying asset for the lease term and operating 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. 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 is recognized on a straight-line basis over the lease term. 9 Index 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. 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 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 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 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. 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. 10 Index The components of total lease expense for the six months ended December 27, 2020, the majority of which is included in general and administrative expense, are as follows (in thousands): Six Months Ended December 27, 2020 Operating lease cost $ 367 Sublease income (99 ) Total lease expense, net of sublease income $ 268 Supplemental cash flow information related to operating leases is included in the table below (in thousands): Six Months Ended December 27, 2020 Cash paid for amounts included in the measurement of lease liabilities $ 388 Weighted average remaining lease term and weighted average discount rate for operating leases are as follows: December 27, 2020 Weighted average remaining lease term 5.0 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 Remainder of fiscal year 2021 $ 398 2022 804 2023 813 2024 766 Thereafter 1,448 Total operating lease payments $ 4,229 Less: imputed interest (433 ) Total operating lease liability $ 3,796 Note C - Stock Purchase Plan On May 23, 2007, the Company’s board of directors approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase of up to 1,016,000 shares of its common stock in the open market or in privately negotiated transactions. On June 2, 2008, the Company’s board of directors amended the 2007 Stock Purchase Plan to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. On April 22, 2009, the Company’s board of directors amended the 2007 Stock Purchase Plan again to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. There were no stock purchases in the fiscal quarters ended December 27, 2020 or December 29, 2019. Note D - 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. 11 Index COVID-19 Pandemic 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 costumers, 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 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. We also temporarily furloughed certain employees and reduced base salary by 20% for all remaining employees for the fourth quarter of fiscal 2020, as well as reducing other expenses. While the Company will remain focused on controlling expenses, future results of operations are likely to be materially adversely impacted by the pandemic and its aftermath. 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 E - Stock-Based Compensation Stock Options: For the fiscal quarters ended December 27, 2020 and December 29, 2019, the Company did not recognize any stock-based compensation expense related to stock options. As of December 27, 2020, there was no unamortized stock-based compensation expense related to stock options. The following table summarizes the number of shares of the Company’s common stock subject to outstanding stock options: Six Months Ended December 27, 2020 December 29, 2019 Shares Shares Outstanding at beginning of year 206,750 216,550 Granted — — Exercised — — Forfeited/Canceled/Expired — — Outstanding at end of period 206,750 216,550 Exercisable at end of period 206,750 216,550 Restricted Stock Units: For the three months ended December 27, 2020 and December 29, 2019, the Company had no stock-based compensation expenses related to RSU’s. As of December 27, 2020, there was no unamortized stock-based compensation expense related to RSU’s. 12 Index A summary of the status of restricted stock units as of December 27, 2020, and changes during the three months then ended is presented below: Unvested at June 28, 2020 — Granted — Vested — Forfeited — Unvested at December 27, 2020 — Note F - Earnings per Share (EPS) 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). (In thousands, except per share amounts) Three Months Ended Six Months Ended December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019 Net income available to common stockholders $ 102 $ 14 $ 178 $ 251 BASIC: Weighted average common shares 17,712 15,129 16,596 15,106 Net income per common share $ 0.01 $ 0.00 $ 0.01 $ 0.02 DILUTED: Weighted average common shares 17,712 15,129 16,596 15,106 Convertible notes 798 800 798 815 Dilutive stock options — 1 — 3 Weighted average common shares outstanding 18,510 15,930 17,394 15,924 Net income per common share $ 0.01 $ 0.00 $ 0.01 $ 0.02 For the three and six months ended December 27, 2020, options to purchase 206,750 shares of common stock at exercise prices from $2.71 to $13.11 were excluded from the computation of diluted EPS because they were not in-the-money. For the three and six months ended December 29, 2019, options to purchase 216,550 shares of common stock at exercise prices ranging from $2.71 to $13.11 were excluded from the computation of diluted EPS because they were not in-the-money. Note G - Income Taxes For the six months ended December 27, 2020, the Company recorded an income tax expense of $4 thousand, all of which was attributable to current state taxes. The Company utilized net operating losses to offset federal taxes. 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. As of December 27, 2020, the Company had established a full valuation allowance of $6.5 million against its deferred tax assets. The Company will continue to review the need for an adjustment to the valuation allowance. Note H - 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 non-recurring items. The Pizza Inn and Pie Five Franchising segments establish franchisees, licensees and territorial rights. Revenue for this segment is primarily derived from franchise royalties, franchise license fees, sale of area development and foreign master license rights, incentive payments from third party suppliers and distributors, advertising funds, and supplier convention funds. Assets for these segments include equipment, furniture and fixtures. 13 Index The Company-Owned Restaurant 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. Revenue for corporate administration and other consists of rental income and interest income. 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 table are net sales and operating revenues, depreciation and amortization expense, and income before taxes, for the Company’s reportable segments as of the three months and six months ended December 27, 2020 and December 29, 2019 (in thousands): Three Months Ended Six Months Ended December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019 Net sales and operating revenues: Pizza Inn Franchising $ 1,624 $ 1,648 $ 3,004 $ 3,512 Pie Five Franchising 456 1,021 932 1,873 Company-Owned Restaurants — 96 — 204 Corporate administration and other 48 65 95 117 Consolidated revenues $ 2,128 $ 2,830 $ 4,031 $ 5,706 Depreciation and amortization: Pizza Inn Franchising $ — $ — $ — $ — Pie Five Franchising — — — — Company-Owned Restaurants — — — — Combined — — — — Corporate administration and other 43 49 87 96 Depreciation and amortization $ 43 $ 49 $ 87 $ 96 Income before taxes: Pizza Inn Franchising $ 1,284 $ 1,323 $ 2,384 $ 2,735 Pie Five Franchising 190 508 399 946 Company-Owned Restaurants (79 ) (236 ) (179 ) (439 ) Combined 1,395 1,595 2,604 3,242 Corporate administration and other (1,291 ) (1,585 ) (2,422 ) (2,922 ) Income before taxes $ 104 $ 10 $ 182 $ 320 Geographic information (revenues): United States $ 2,074 $ 2,778 $ 3,933 $ 5,595 Foreign countries 54 52 98 111 Consolidated total $ 2,128 $ 2,830 $ 4,031 $ 5,706