RAVE RESTAURANT GROUP, INC. 10-Q

Item 1. Financial Statements RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands , except per share amounts) (Unaudited) Three Months Ended September 26 , 2021 September 27 , 2020 REVENUES: $ 2,553 $ 1,903 COSTS AND EXPENSES: Cost of sales — 78 General and administrative expenses 1,206 1,089 Franchise expenses 986 547 Impairment of long-lived assets and other lease charges — 17 Bad debt expense 5 27 Interest expense 24 23 Depreciation and amortization expense 44 44 Total costs and expenses 2,265 1,825 INCOME BEFORE TAXES 288 78 Income tax expense 3 2 NET INCOME 285 76 INCOME PER SHARE OF COMMON STOCK - BASIC: $ 0.02 $ 0.00 INCOME PER SHARE OF COMMON STOCK - DILUTED: $ 0.02 $ 0.00 Weighted average common shares outstanding - basic 18,005 15,451 Weighted average common and potential dilutive common shares outstanding 18,803 16,249 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) September 26 , 2021 June 27 , 2021 ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,876 $ 8,330 Accounts receivable, less allowance for bad debts of $ 25 and $ 47 , respectively 832 911 Notes receivable, current 568 901 Deferred contract charges, current 33 35 Prepaid expenses and other 150 196 Total current assets 9,459 10,373 LONG-TERM ASSETS Property, plant and equipment, net 420 445 Operating lease right of use asset, net 1,981 2,085 Intangible assets definite-lived, net 202 183 Notes receivable, net of current portion 302 52 Deferred contract charges, net of current portion 212 207 Total assets $ 12,576 $ 13,345 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable - trade $ 521 $ 644 Accrued expenses 500 924 Other current liabilities 46 46 Operating lease liability, current 470 465 Short term loan, current 120 250 Convertible notes short term, net of unamortized debt issuance costs and discounts 1,583 1,576 Deferred revenues, current 648 626 Total current liabilities 3,888 4,531 LONG-TERM LIABILITIES Operating lease liability, net of current portion 1,792 1,911 Deferred revenues, net of current portion 836 1,170 Total liabilities 6,516 7,612 COMMITMENTS AND CONTINGENCIES (SEE NOTE D) SHAREHOLDERS’ EQUITY Common stock, $ 0.01 par value; authorized 26,000,000 shares; issued 25,090,058 and 25,090,058 shares, respectively; outstanding 18,004,904 and 18,004,904 shares, respectively 251 251 Additional paid-in capital 37,257 37,215 Accumulated deficit ( 6,911 ) ( 7,196 ) Treasury stock at cost Shares in treasury: 7,085,154 and 7,085,154 , respectively ( 24,537 ) ( 24,537 ) Total shareholders’ equity 6,060 5,733 Total liabilities and shareholders’ equity $ 12,576 $ 13,345 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 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 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 Common Stock Treasury Stock Shares Amount Additional Paid-in Capital Accumulated Deficit Shares Amount Total Balance, June 27, 2021 25,090 $ 251 $ 37,215 $ ( 7,196 ) ( 7,085 ) $ ( 24,537 ) $ 5,733 Stock compensation expense — — 42 — — — 42 Net income — — — 285 — — 285 Balance, September 26, 2021 25,090 $ 251 $ 37,257 $ ( 6,911 ) ( 7,085 ) $ ( 24,537 ) $ 6,060 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 Index RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands ) (Unaudited) Three Months Ended September 26 , 2021 September 27 , 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 285 $ 76 Adjustments to reconcile net income to cash used in operating activities: Impairment of long-lived assets and other lease charges — 17 Stock compensation expense 42 — Depreciation and amortization 36 35 Amortization of operating right of use assets 104 146 Amortization of intangible assets definite-lived 8 9 Amortization of debt issue costs 7 7 Provision for bad debt 5 27 Changes in operating assets and liabilities: Accounts receivable 74 ( 74 ) Notes receivable 26 62 Deferred contract charges ( 3 ) ( 3 ) Prepaid expenses and other 46 ( 44 ) Deposits and other — 5 Accounts payable - trade ( 123 ) 23 Accounts payable - lease termination impairments — ( 3 ) Accrued expenses ( 424 ) ( 90 ) Operating lease liability ( 114 ) ( 152 ) Deferred revenue ( 312 ) ( 48 ) Cash used in operating activities ( 343 ) ( 7 ) CASH FLOWS FROM INVESTING ACTIVITIES: Payments received on notes receivable 57 4 Purchase of intangible assets definite-lived ( 27 ) — Purchase of property, plant and equipment ( 11 ) ( 27 ) Cash provided by/(used in) investing activities 19 ( 23 ) CASH FLOWS FROM FINANCING ACTIVITIES: Equity issuance costs - ATM offering — ( 3 ) Short term loan, current ( 130 ) — Cash used in financing activities ( 130 ) ( 3 ) Net decrease in cash, cash equivalents and restricted cash ( 454 ) ( 33 ) Cash, cash equivalents and restricted cash, beginning of period 8,330 3,203 Cash, cash equivalents and restricted cash, end of period $ 7,876 $ 3,170 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR: Interest $ — $ — Income taxes $ ( 2 ) $ 7 Non-cash activities: Conversion of notes to common shares $ — $ — Operating lease right of use assets at adoption $ — $ — Operating lease liability at adoption $ — $ — 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 27, 2021. 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. Fiscal Quarters The three month periods ended September 26, 2021 and September 27, 2020 each contained 13 weeks. 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: 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 twenty years . Fees received for renewal periods are amortized over the life of the renewal period. 7 Index 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 and Pizza Inn franchised 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 and Pizza Inn, 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 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 and Pizza Inn marketing fund contributions are billed and collected weekly. Recognition of supplier convention funds is deferred until the obligations of the agreements 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 September 26, 2021 September 27, 2020 Franchise royalties $ 1,082 $ 858 Supplier and distributor incentive revenues 866 767 Franchise license fees 31 102 Area development fees and foreign master license fees 5 4 Advertising funds 375 125 Supplier convention funds 143 — Rental income 47 48 Other 4 ( 1 ) $ 2,553 $ 1,903 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 (“RSUs”) is measured as an amount equal to the fair value of the RSUs 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. 8 Note B - 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. 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 ten 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 ten 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 September 26, 2021, 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 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. 9 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 condensed consolidated statement of income 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 condensed consolidated statement of income in the period in which the obligation for those payments is incurred. The components of total lease expense for the three months ended September 26, 2021, t he majority of which is included in general and administrative expense, are as follows (in thousands): Three Months Ended September 26, 2021 Operating lease cost $ 125 Rental income ( 47 ) Total lease expense, net of sublease income $ 78 Supplemental cash flow information related to operating leases is included in the table below (in thousands): Three Months Ended September 26, 2021 Cash paid for amounts included in the measurement of lease liabilities $ 138 Weighted average remaining lease term and weighted average discount rate for operating leases are as follows: September 26, 2021 Weighted average remaining lease term 4.0 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 2022 $ 414 2023 558 2024 511 2025 433 2026 382 Thereafter 191 Total operating lease payments $ 2,489 Less: imputed interest ( 227 ) Total operating lease liability $ 2,262 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 September 26, 2021 or September 27, 2020. 10 Index 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. Note E - Stock-Based Compensation Stock Options: For the fiscal quarters ended September 26, 2021 and September 27, 2020, the Company did no t recognize any stock-based compensation expense related to stock options. As of September 26, 2021, 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: Three Months Ended September 26, 2021 September 27, 2020 Shares Shares Outstanding at beginning of year 166,750 206,750 Granted — — Exercised — — Forfeited/Canceled/Expired — — Outstanding at end of period 166,750 206,750 Exercisable at end of period 166,750 206,750 Restricted Stock Units: For the three months ended September 26, 2021 and September 27, 2020, the Company had stock-based compensation expense of $ 42 thousand and zero , respectively, related to RSUs. As of September 26, 2021, there was no unamortized stock-based compensation expense related to RSUs. A summary of the status of restricted stock units as of September 26, 2021, and changes during the three months then ended is presented below: Unvested at June 27 , 2021 545,600 Granted — Issued — Forfeited ( 22,412 ) Unvested at September 26 , 2021 523,188 11 Index 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): Three Months Ended September 26, 2021 September 27, 2020 Net income available to common shareholders $ 285 $ 76 BASIC: Weighted average common shares 18,005 15,451 Net income per common share $ 0.02 $ 0.00 DILUTED: Weighted average common shares 18,005 15,451 Convertible notes 798 798 Dilutive stock options — — Weighted average common shares outstanding 18,803 16,249 Net income per common share $ 0.02 $ 0.00 For the three months ended September 26, 2021, options to purchase 166,750 shares of common stock at exercise prices from $ 3.11 to $ 13.11 were excluded from the computation of diluted EPS because they had an intrinsic value of zero . For the three months ended September 27, 2020, options to purchase 206,750 shares of common stock at exercise prices ranging from $ 2.71 to $ 13.11 were excluded from the computation of diluted EPS because they had an intrinsic value of zero . Note G - Income Taxes For the three months ended September 26, 2021, the Company recorded an income tax expense of $ 3 thousand, all of which is 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 September 26, 2021, the Company had established a full valuation allowance of $ 6.3 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. 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. 12 Index 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 ended September 26, 2021 and September 27, 2020 (in thousands): Three Months Ended September 26, 2021 September 27, 2020 Net sales and operating revenues: Pizza Inn Franchising $ 2,034 $ 1,380 Pie Five Franchising 472 476 Corporate administration and other 47 47 Consolidated revenues $ 2,553 $ 1,903 Depreciation and amortization: Pizza Inn Franchising $ — $ — Pie Five Franchising — — Company-Owned Restaurants — — Corporate administration and other 44 44 Depreciation and amortization $ 44 $ 44 Income before taxes: Pizza Inn Franchising $ 1,275 $ 1,100 Pie Five Franchising 245 209 Company-Owned Restaurants ( 1 ) ( 100 ) Combined 1,519 1,209 Corporate administration and other ( 1,231 ) ( 1,131 ) Income before taxes $ 288 $ 78 Revenues by geography: United States $ 2,477 $ 1,859 Foreign countries 76 44 Consolidated revenues $ 2,553 $ 1,903 Note I - Subsequent Events On November 1, 2021, the U.S. District Court for the Eastern District of Texas entered judgment against the Company in the amount of $ 924 ,000 plus pre- and post-judgment interest and court costs on breach of contract claims asserted by the Company’s former Chief Executive Officer, Scott Crane. The Company intends to appeal the judgment to the Fifth Circuit Court of Appeals. 13 Index