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 25, 2023. 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. 18 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 Description of Registrant’s Securities. (filed as Exhibit 4.4 to Form 10-K for the fiscal year ended June 27, 2021 and incorporated herein by reference). 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 10.5 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. (filed as Exhibit 10.6 to Form 10-K for the fiscal year ended June 27, 2021 and incorporated herein by reference). 10.7 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).* 10.8 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).* 10.9 Letter agreement dated June 16, 2021, between Rave Restaurant Group, Inc. and Clinton Fendley (filed as Exhibit 10.1 to Form 8-K filed June 17, 2021 and incorporated herein by reference).* 21.1 List of Subsidiaries (filed as Exhibit 21.1 to Form 10-K filed September 30, 2019 and incorporated herin by reference).* 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. 19 Index SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Rave Restaurant Group, Inc. Date: September 21, 2023 By: /s/ Brandon L. Solano Brandon L. Solano Chief Executive Officer (principal executive officer) By: /s/ Clinton D. Fendley Clinton D. Fendley Chief Financial Officer (principal financial officer) 20 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 21, 2023 /s/ Clinton D. Fendley Clinton D. Fendley Chief Financial Officer (principal financial officer) September 21, 2023 /s/ Mark E. Schwarz Mark E. Schwarz Director and Chairman of the Board September 21, 2023 /s/ Robert B. Page Robert B. Page Director September 21, 2023 /s/ William C. Hammett, Jr. William C. Hammett, Jr. Director September 21, 2023 /s/ Clinton J. Coleman Clinton J. Coleman Director September 21, 2023 21 Index RAVE RESTAURANT GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Description Page No. Report of Independent Registered Public Accounting Firm (Whitley Penn LLP, PCAOB ID: 726 ) F-2 Report of Independent Registered Public Accounting Firm (Armanino, LLP, PCAOB ID: 32 ) F-3 Consolidated Statements of Income for the fiscal years ended June 25, 2023 and June 26, 2022 F-4 Consolidated Balance Sheets at June 25, 2023 and June 26, 2022 F-5 Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 25, 2023 and June 26, 2022 F-6 Consolidated Statements of Cash Flows for the fiscal years ended June 25, 2023 and June 26, 2022 F-7 Supplemental Disclosures of Cash Flow Information for the fiscal years ended June 25, 2023 and June 26, 2022 F-7 Notes to Consolidated Financial Statements F-8 F-1 Index Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Rave Restaurant Group, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Rave Restaurant Group, Inc and subsidiaries (the “Company”) as of June 25, 2023, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 25, 2023, 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 (“GAAP”). Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 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 entity’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 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 provides a reasonable basis for our opinion. Critical Audit Matter Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates Assessment of Realizability of Deferred Tax Assets Critical Audit Matter Description As disclosed in Note A and Note F to the consolidated financial statements, the Company recognizes deferred income taxes for tax attributes and for differences between the financial statement and tax carrying amounts of assets and liabilities at enacted statutory tax rates in effect for the years in which the deferred tax liability or asset are expected to be settled or realized. 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 the 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 June 25, 2023, the Company has deferred tax assets of approximately $5.3 million. Auditing management’s assessment of realizability of deferred tax assets involved subjective estimation and complex auditor judgment in determining whether sufficient future taxable income, including projected pre-tax income, will be generated to support the realization of the existing deferred tax assets before expiration. How We Addressed the Matter We evaluated the assumptions used by the Company to develop projections of future taxable income, including the pre-tax income, by income tax jurisdiction and tested the completeness and accuracy of the underlying data used in the projections. For example, we compared the projections of pre-tax income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends. We also compared the projections of future pre-tax income with other forecasted financial information prepared by the Company. With the assistance of our income tax specialists, we evaluated the methodology and models used in management’s forecasting of the reversal of deferred income tax assets and liabilities in order to determine such methodologies were consistent with GAAP, including management’s consideration of definite-lived deferred income tax balances and indefinite-lived deferred income tax balances. We have served as the Company’s auditor since 2023. /s/ Whitley Penn LLP Plano, Texas September 21, 2023 F-2 Index Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Rave Restaurant Group, Inc. The Colony, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Rave Restaurant Group, Inc. (the “Company”) and subsidiaries as of June 26, 2022 and June 27, 2021, the related consolidated statements of income, changes in shareholders’ 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 26, 2022 and June 27, 2021, and the results of their operations and their cash flows for the years 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 audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits 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 audits , 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 audits 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 audits 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 audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition — Refer to Note A to the Financial Statements Critical Audit Matter Description The Company has two primary sources of revenues: restaurant sales and 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. Each of these sources of revenues have different contract types, lengths, terms, and conditions. As such, revenue recognition requires significant analysis and a high degree of auditor judgment. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company’s revenue recognition included the following: • We obtained the detail of all revenue transactions and performed the following procedures: o Identified the Company’s various revenue streams and any differences in the processes, methods, and policies applicable to each revenue stream. o Reviewed the entity’s revenue recognition policies and evaluated whether following those policies comply with the requirements of ASC 606. o Obtained a listing of franchise revenue related contracts, agreements, and invoices during the year, sampled the detail, and tested revenues by examining and documenting supporting contracts, invoices, and other documentation to determine whether revenue was recognized at the proper amount. o Performed various cutoff procedures to ensure revenue was recognized in the proper period. Armanino LLP Dallas, Texas We served as the Company’s auditor from 2020 through 2022 . September 23, 2022 F-3 Index RAVE RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Fiscal Year Ended June 25, 2023 June 26, 2022 REVENUES $ 11,889 $ 10,692 COSTS AND EXPENSES: Cost of sales — 1 General and administrative expenses 5,490 5,446 Franchise expenses 3,956 3,284 Impairment of long-lived assets and other lease charges 5 6 Bad debt expense 73 46 Interest expense 1 61 Depreciation and amortization expense 214 187 Total costs and expenses 9,739 9,031 OTHER INCOME: Employee retention credit — 704 Total other income — 704 INCOME BEFORE TAXES 2,150 2,365 Income tax (expense) benefit ( 537 ) 5,657 NET INCOME $ 1,613 $ 8,022 INCOME PER SHARE OF COMMON STOCK - BASIC: $ 0.11 $ 0.45 INCOME PER SHARE OF COMMON STOCK - DILUTED: $ 0.10 $ 0.45 Weighted average common shares outstanding - basic 15,323 17,993 Weighted average common and potential dilutive common shares outstanding 15,911 17,993 See accompanying Notes to Consolidated Financial Statements. F-4 Index RAVE RESTAURANT GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) June 25, 2023 June 26, 2022 ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,328 $ 7,723 Accounts receivable, less allowance for bad debts of $ 58 and $ 27 , respectively 1,145 1,981 Notes receivable, current 105 172 Property held for sale 19 — Deferred contract charges, current 33 36 Prepaid expenses and other current assets 204 146 Total current assets 6,834 10,058 LONG-TERM ASSETS Property and equipment, net 258 365 Operating lease right of use asset, net 1,227 1,664 Intangible assets definite-lived, net 328 232 Notes receivable, net of current portion 28 201 Deferred tax asset, net 5,342 5,772 Deferred contract charges, net of current portion 220 224 Total assets $ 14,237 $ 18,516 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable - trade $ 502 $ 669 Accrued expenses 890 1,082 Other current liabilities 1 81 Operating lease liability, current 463 490 Short term loan — 30 Deferred revenues, current 342 538 Total current liabilities 2,198 2,890 LONG-TERM LIABILITIES Operating lease liability, net of current portion 958 1,421 Deferred revenues, net of current portion 690 793 Total liabilities 3,846 5,104 COMMITMENTS AND CONTINGENCIES (SEE NOTE K) SHAREHOLDERS’ EQUITY Common stock, $ 0.01 par value; authorized 26,000,000 shares; issued 25,090,058 and 25,090,058 shares, respectively; outstanding 14,154,453 and 17,511,430 shares, respectively 251 251 Additional paid-in capital 37,729 37,384 Retained earnings 2,439 826 Treasury stock at cost Shares in treasury: 10,935,605 and 7,578,628 respectively ( 30,028 ) ( 25,049 ) Total shareholders’ equity 10,391 13,412 Total liabilities and shareholders’ equity $ 14,237 $ 18,516 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 Retained Earnings/ Treasury Stock Shares Amount 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 — — 169 — — — 169 Purchase of treasury stock — — — — ( 494 ) ( 512 ) ( 512 ) Net income — — — 8,022 — — 8,022 Balance, June 26, 2022 25,090 $ 251 $ 37,384 $ 826 ( 7,579 ) $ ( 25,049 ) $ 13,412 Common Stock Additional Paid-in Retained Earnings Treasury Stock Shares Amount Capital Shares Amount Total Balance, June 26, 2022 25,090 $ 251 $ 37,384 $ 826 ( 7,579 ) $ ( 25,049 ) $ 13,412 Stock compensation expense — — 345 — — — 345 Purchase of treasury stock — — — — ( 3,357 ) ( 4,979 ) ( 4,979 ) Net income — — — 1,613 — — 1,613 Balance, June 25, 2023 25,090 $ 251 $ 37,729 $ 2,439 ( 10,936 ) $ ( 30,028 ) $ 10,391 See accompanying Notes to Consolidated Financial Statements. F-6 Index RAVE RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Year Ended June 25, 2023 June 26, 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,613 $ 8,022 Adjustments to reconcile net income to cash provided by operating activities: Impairment of long-lived assets and other lease charges 5 6 Stock-based compensation expense 345 169 Depreciation and amortization 141 140 Amortization of operating right of use assets 437 421 Amortization of intangible assets definite-lived 73 47 Amortization of debt issue costs — 21 Allowance for bad debts 73 46 Deferred income tax 430 ( 5,772 ) Changes in operating assets and liabilities: Accounts receivable 763 ( 1,116 ) Notes receivable 28 80 Deferred contract charges 7 ( 18 ) Prepaid expenses and other ( 58 ) 50 Accounts payable - trade ( 167 ) 25 Accrued expenses ( 272 ) 158 Other current liabilities — 35 Operating lease liability ( 490 ) ( 465 ) Deferred revenues ( 299 ) ( 465 ) Cash provided by operating activities $ 2,629 $ 1,384 CASH FLOWS FROM INVESTING ACTIVITIES: Payments received on notes receivable 212 500 Proceeds from sale of assets 7 — Purchase of intangible assets definite-lived ( 169 ) ( 96 ) Purchase of property and equipment ( 65 ) ( 66 ) Cash (used in)/provided by investing activities ( 15 ) 338 CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock ( 4,979 ) ( 512 ) Payment of convertible notes — ( 1,597 ) Payments on short term loan ( 30 ) ( 220 ) Cash used in financing activities ( 5,009 ) ( 2,329 ) Net decrease in cash and cash equivalents ( 2,395 ) ( 607 ) Cash and cash equivalents, beginning of period 7,723 8,330 Cash and cash equivalents, end of period $ 5,328 $ 7,723 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR: Interest $ 1 $ 64 Income taxes (net of refunds) $ 87 $ 31 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 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 25, 2023, we had 152 franchised Pizza Inn restaurants, 27 franchised Pie Five Units, and 5 licensed Pizza Inn Express, or PIE, kiosks (“PIE Units”). The 118 domestic franchised Pizza Inn restaurants were comprised of 77 pizza buffet restaurants (“Buffet Units”), 7 delivery/carry-out restaurants (“Delco Units”), and 34 express restaurants (“Express Units”). As of June 25, 2023, there were 34 international franchised Pizza Inn restaurants. Domestic Pizza Inn restaurants and kiosks were located predominantly in the southern half of the United States, with Arkansas, Texas, North Carolina and Mississippi accounting for approximately 23 %, 20 %, 15 % 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. Concentration of Credit Risk: Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. Balances in accounts are insured up to Federal Deposit Insurance Corporation (“FDIC”) limits of $ 250 thousand per institution. At June 25, 2023 and June 26, 2022, the Company had cash balances in excess of FDIC insurance coverage of approximately $ 5.1 million and $ 7.5 million, respectively. 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 25, 2023 and June 26, 2022, and at various times during the fiscal years then ended, the Company had concentrations of credit risk with three franchisees on notes receivables with both short and long term maturities. As of June 25, 2023, the Company had zero short term notes receivable and three long term notes receivable with three franchisees. The financed asset sales were executed with a weighted average interest rate of 0.0 %. Principal payments are due monthly and mature from September 1, 2024 to January 1, 2027. F-8 Index Property and Equipment : Property 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 any property or equipment, 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. 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. The Company recognized, pre-tax, non-cash impairment charges of $ 5 thousand and $ 6 thousand during fiscal 2023 and 2022, respectively. The Company had $ 0.2 million in sublease income during fiscal 2023 and 2022. Accounts Receivable: Accounts receivable consist primarily of receivables generated from franchise royalties and supplier concessions. The Company records an allowance for bad debts 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. Bad Debt Expense: The Company monitors franchisee receivable balances and adjusts credit terms when necessary to minimize the Company’s exposure to high risk accounts receivable. Bad debt expense increased by $ 27 thousand to $ 73 thousand in fiscal 2023 compared to $ 46 thousand in fiscal 2022 primarily related to collectability concerns on international accounts receivable. 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 principal payments are due monthly. Notes receivable mature at various dates through 2025 and bore interest at a weighted average rate of 0.0 % at June 25, 2023. 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. F-9 Index The expected principal collections on notes receivable for the next two years are as follows as of June 25, 2023 (in thousands): Notes Receivable 2024 $ 105 2025 28 $ 133 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 the 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. Based on this analysis, the Company reversed the full amount of the established valuation allowance as of June 26, 2022 (see Note F). For the year ended June 25, 2023, the Company recorded an income tax expense of $ 0.5 million. The federal and state tax expense was $ 0.4 million and $ 0.1 million, respectively. The Company utilized net operating losses to offset federal taxes. As of June 25, 2023, the Company had federal net operating loss carryforwards totaling $ 21 million that are available to reduce future taxable income and will begin to expire in 2035 . Under the Tax Cuts and Jobs Act, approximately $ 1.4 million of the loss carryforwards are limited to 80 % and do not expire. Tax years that remain subject to examination by the IRS are the years ended June 28, 2020 through June 26, 2022 . Tax years that remain subject to examination by state authorities are the years ended June 30, 2019 through June 26, 2022 . There are no uncertain tax positions. Management’s position is that all relevant requirements are met and necessary returns have been filed, and therefore the tax positions taken on the tax returns would be sustained upon examination. 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 Income. 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 typically range from five to 20 years . Fees received for renewal periods are amortized over the life of the renewal period. F-10 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 accompanying Consolidated Balance Sheets and allocated on a pro rata basis to all stores opened under that specific development agreement as the stores are opened. Area development exclusivity fees that include rights to sub-franchise are amortized as revenue over the term of the contract. Advertising fund contributions for Pizza Inn and 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. Pizza Inn and Pie Five marketing fund contributions are billed and collected weekly or monthly. Supplier convention funds are deferred until the obligations of the agreement are met and the event takes place. Rental income is income from our subleasing of some of our restaurant space to third parties. Total revenues consist of the following (in thousands): Fiscal Year Ended June 25, 2023 June 26, 2022 Franchise royalties $ 4,978 $ 4,543 Supplier and distributor incentive revenues 4,418 4,214 Franchise license fees 152 154 Area development exclusivity fees and foreign master license fees 18 19 Advertising funds contributions 1,943 1,412 Supplier convention funds 172 143 Rental income 186 186 Other 22 21 $ 11,889 $ 10,692 The opening balance of accounts receivable on June 28, 2021 was $ 0.9 million. The opening balance of deferred revenues on June 28, 2021 was $ 1.8 million. Revenue recognized in fiscal 2023 that was in the deferred revenue balance at June 26, 2022 was $ 0.6 million. 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 (“RSUs”) 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 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. 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. 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. F-11 Index 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 years ended June 25, 2023 and June 26, 2022 each contained 52 weeks. NOTE B - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS: Property and equipment consist of the following (in thousands): Estimated Useful Lives June 25, 2023 June 26, 2022 Equipment, furniture and fixtures 3 - 7 yrs $ 1,114 $ 1,080 Software 5 yrs — 792 Leasehold improvements 10 yrs or lease term, if shorter 472 472 1,586 2,344 Less: accumulated depreciation/amortization ( 1,328 ) ( 1,979 ) $ 258 $ 365 Depreciation and amortization expense for property and equipment was approximately $ 141 thousand and $ 140 thousand for the fiscal years ended June 25, 2023 and June 26, 2022, respectively. Intangible assets consist of the following (in thousands): June 25, 2023 June 26, 2022 Estimated Useful Lives Acquisition Cost Accumulated Amortization Net Value Acquisition Cost Accumulated Amortization Net Value Trademarks and tradenames 10 years $ 278 $ ( 248 ) $ 30 $ 279 $ ( 233 ) $ 46 Name change 15 years 70 ( 39 ) 31 70 ( 35 ) 35 Prototypes 5 years 339 ( 72 ) 267 170 ( 19 ) 151 $ 687 $ ( 359 ) $ 328 $ 519 $ ( 287 ) $ 232 Amortization expense for intangible assets was approximately $ 73 thousand and $ 47 thousand for the fiscal years ended June 25, 2023 and June 26, 2022, respectively. NOTE C - ACCRUED EXPENSES: Accrued expenses consist of the following (in thousands): June 25, 2023 June 26, 2022 Compensation $ 776 $ 875 Other 21 118 Professional fees 93 89 $ 890 $ 1,082 F-12 Index 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 bore 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 was payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes were secured by a pledge of all outstanding equity securities of our two primary direct operating subsidiaries. During the fiscal year ended June 26, 2022, no Notes were converted to common shares. The Notes matured on February 15, 2022 , at which time all principal and unpaid interest was paid in cash. Therefore, as of June 25, 2023 and June 26, 2022, there were no Notes outstanding. NOTE E - EMPLOYEE RETENTION CREDIT: On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “CAA”) was signed into law. The CAA expanded eligibility for an employee retention credit for companies impacted by the COVID-19 pandemic with fewer than five hundred employees and at least a twenty percent decline in gross receipts compared to the same quarter in 2019, to encourage retention of employees. This payroll tax credit was a refundable tax credit against certain federal employment taxes. For the fiscal year ended June 26, 2022, the Company recorded $ 0.7 million of other income for the employee retention credit. As of June 25, 2023, $ 0.6 million has been received and $ 0.1 million is still outstanding. NOTE F - INCOME TAXES: Provision for income taxes from continuing operations consists of the following (in thousands): Fiscal Year Ended June 25, 2023 June 26, 2022 Current - Federal $ — $ — Current - State ( 107 ) ( 115 ) Deferred - Federal ( 394 ) 5,537 Deferred - State ( 36 ) 235 Provision for income taxes $ ( 537 ) $ 5,657 The effective income tax rate varied from the statutory rate for the fiscal years ended June 25, 2023 and June 26, 2022 as reflected below (in thousands): June 25, 2023 June 26, 2022 Federal income taxes based on a statutory rate of 21 % $ ( 452 ) $ ( 496 ) State income taxes (net of federal benefit) ( 119 ) 127 Permanent adjustments ( 7 ) — Return to provision 49 — Change in valuation allowance — 6,052 Other ( 8 ) ( 26 ) Provision for income taxes $ ( 537 ) $ 5,657 F-13 Index The tax effects of temporary differences that give rise to the net deferred tax assets consisted of the following (in thousands): June 25, 2023 June 26, 2022 Allowance for bad debt $ 13 $ 6 Deferred fees 49 45 Other reserves and accruals 619 652 Operating lease liabilities 330 444 Credit carryforwards 156 156 Net operating loss carryforwards 4,521 4,987 Total gross deferred tax asset 5,688 6,290 Valuation allowance — — Total deferred tax assets $ 5,688 $ 6,290 Right-of-use asset ( 285 ) ( 387 ) Other deferred tax liabilities ( 61 ) ( 131 ) Total deferred tax liabilities $ ( 346 ) $ ( 518 ) Net deferred tax asset $ 5,342 $ 5,772 For the year ended June 25, 2023, the Company recorded an income tax expense of $ 0.5 million. The federal and state tax expense was $ 0.4 million and $ 0.1 million, respectively. The Company utilized net operating losses to offset federal taxes. As of June 25, 2023, the Company had federal net operating loss carryforwards totaling $ 21 million that are available to reduce future taxable income and will begin to expire in 2035 . For the year ended June 26, 2022, the Company recorded an income tax benefit of $ 5.7 million including federal deferred tax benefit of $ 5.5 million and current/deferred state tax benefit of $ 0.2 million. As of June 26, 2022, the Company had net operating loss carryforwards totaling $ 23.1 million that are available to reduce future taxable income and will begin to expire in 2032 , of which $ 1.8 million are limited to 80 % and do not expire. Under the Tax Cuts and Jobs Act, approximately $ 1.4 million of the loss carryforwards are limited to 80 % and do not expire. Tax years that remain subject to examination by the IRS are the years ended June 28, 2020 through June 26, 2022 . Tax years that remain subject to examination by state authorities are the years ended June 30, 2019 through June 26, 2022 . 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 the 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. Based on this analysis, the Company reversed the full amount of the established valuation allowance as of June 26, 2022 . There are no uncertain tax positions. Management’s position is that all relevant requirements are met and necessary returns have been filed, and therefore the tax positions taken on the tax returns would be sustained upon examination. 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. 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 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. The Company does not presently have any short-term leases. 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. F-14 Index 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 25, 2023 and June 26, 2022, 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. 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 lease liability will be recognized. Future minimum rental payments for guaranteed leases with initial or remaining terms of one year or more at June 25, 2023 were as follows (in thousands): Guaranteed Leases 2024 $ 333 2025 252 2026 108 2027 87 2028 87 Thereafter — $ 867 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 income statements 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 income statements in the period in which the obligation for those payments is incurred. The components of total lease expense for the fiscal years ended June 25, 2023 and June 26, 2022, the majority of which is included in general and administrative expense in the accompanying Consolidated Statements of Income, are as follows (in thousands): Fiscal Year Ended June 25, 2023 Fiscal Year Ended June 26, 2022 Operating lease cost $ 494 $ 498 Sublease income ( 186 ) ( 186 ) Total lease expense, net of sublease income $ 308 $ 312 F-15 Index Supplemental cash flow information related to operating leases is included in the table below (in thousands): Fiscal Year Ended June 25, 2023 Fiscal Year Ended June 26, 2022 Cash paid for amounts included in the measurement of lease liabilities $ 558 $ 551 Supplemental balance sheet information related to operating leases is included in the table below (in thousands): Fiscal Year Ended June 25, 2023 Fiscal Year Ended June 26, 2022 Operating lease right of use asset, net $ 1,227 $ 1,664 Operating lease liabilities, current 463 490 Operating lease liabilities, net of current portion 958 1,421 Weighted average remaining lease term and weighted average discount rate for operating leases are as follows: Fiscal Year Ended June 25, 2023 Fiscal Year Ended June 26, 2022 Weighted average remaining lease term 2.1 Years 3.1 Years Weighted average discount rate 4.0 % 4.0 % Operating lease liabilities with enforceable contract terms that are greater than one year mature as follows (in thousands): Operating Leases 2024 $ 511 2025 433 2026 382 2027 191 2028 — Thereafter — Total operating lease payments $ 1,517 Less: imputed interest $ ( 96 ) Total operating lease liability $ 1,421 Premises previously 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 sublease rental income under active non-cancelable leases with initial or remaining terms of one year or more at June 25, 2023 were as follows (in thousands): Sublease Rental Income 2024 $ 128 2025 53 $ 181 F-16 Index Rental expense consisted of the following (in thousands): Fiscal Year Ended June 25, 2023 June 26, 2022 Minimum rentals $ 494 $ 498 Sublease rentals ( 186 ) ( 186 ) $ 308 $ 312 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”). 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. 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 years ended June 25, 2023 and June 26, 2022, total matching contributions to the tax advantaged savings plan by the Company on behalf of participating employees were approximately $ 24 thousand and $ 33 thousand, respectively. 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. 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 3,000,000 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. F-17 Index Stock based compensation expense is included in general and administrative expense in the accompanying Consolidated Statements of Income. 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 Fiscal Year Ended June 25, 2023 June 26, 2022 June 25, 2023 June 26, 2022 Shares Shares Weighted- Average Exercise Price Weighted- Average Exercise Price Outstanding at beginning of year 111,750 166,750 $ 6.67 $ 5.49 Granted 40,000 — 1.06 — Exercised — — — — Forfeited/Canceled/Expired — ( 55,000 ) — 3.11 Outstanding at end of period 151,750 111,750 $ 5.19 $ 6.67 Exercisable at end of period 111,750 111,750 $ 6.67 $ 6.67 The intrinsic value of options outstanding at June 25, 2023 was $ 33 thousand. The following table provides information on options outstanding and options exercisable as of June 25, 2023: Options Outstanding Options Exercisable Range of Exercise Prices Options Outstanding at June 25, 2023 Weighted-Average Remaining Contractual Life (Years) Weighted- Average Exercise Price Shares Exercisable at June 25, 2023 Weighted- Average Exercise Price $ 1.00 - 1.90 40,000 9.01 $ 1.06 — $ — $ 3.31 - 3.95 50,000 3.01 $ 3.95 50,000 $ 3.95 $ 5.51 - 5.74 8,664 0.02 $ 5.74 8,664 $ 5.74 $ 5.95 - 6.25 28,800 1.01 $ 6.23 28,800 $ 6.23 $ 6.26 - 13.11 24,286 2.02 $ 13.11 24,286 $ 13.11 151,750 3.88 $ 5.19 111,750 $ 6.67 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. F-18 Index 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. The following weighted average assumptions were used for options granted during fiscal 2023: Fiscal Year Ended June 25, 2023 Expected life (in years) 5.5 Expected volatility 79.6 % Risk-free interest rate 2.9 % Expected forfeiture rate 48.8 % At June 25, 2023, 111,750 of the stock options that the Company had granted were vested. $ 15 thousand stock compensation expense related to stock options was recognized in fiscal 2023. No stock compensation expense related to stock options was recognized in fiscal 2022. There were 40,000 of the stock options that were unvested at June 25, 2023. 40,000 of the stock options vested on June 27, 2023 and, therefore, there was zero unamortized stock compensation expense at June 25, 2023. 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 2023 and 2022, zero and 362,500 performance-based restricted stock units, respectively, were granted to certain employees. For the years ended June 25, 2023 and June 26, 2022, the Company had stock compensation expense of $ 329 thousand and $ 169 thousand, respectively, related to RSUs. As of June 25, 2023, there was $ 212 thousand and $ 36 thousand unamortized stock compensation expense related to RSUs, which should be recognized during fiscal years 2024 and 2025, respectively. 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. Contingent unvested restricted stock units are considered participating securities under ASC 260, “ Earnings Per Share ,” and are included in the calculation of diluted earnings per share. 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 25, 2023 and June 26, 2022, and changes during the fiscal years then ended is presented below: June 25, 2023 June 26, 2022 Unvested at beginning of year 885,687 545,600 Granted during the year — 362,500 Vested during the year — — Forfeited during the year — ( 22,413 ) Unvested at end of year 885,687 885,687 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. On June 28, 2022, the Company’s board of directors again amended the stock repurchase plan to increase the number of shares of common stock the Company may repurchase by 5,000,000 shares to a total of 8,016,000 shares. During fiscal 2023, 3,356,977 shares were repurchased and, as of June 25, 2023, there were 1,997,974 shares available to be repurchased under the plan. Subsequent to fiscal 2023, the Company has not repurchased any additional outstanding shares of its common stock. F-19 Index NOTE K - COMMITMENTS AND CONTINGENCIES: On January 6, 2020, the Company’s former Chief Executive Officer, Scott Crane, filed suit in the U.S. District Court for the Eastern District of Texas alleging various claims in connection with the Company’s termination of his employment in July 2019. In general, the suit asserted that the Company terminated Crane for the purpose of depriving him of certain equity compensation that otherwise would have been due to him on October 15, 2019. The Company asserted that Crane failed to meet the contractual qualifications for the equity, as well as other defenses. The matter proceeded to trial which resulted in a verdict in favor of Crane, and the trial court entered judgment in Crane’s favor. The Company appealed the judgment to the Fifth Circuit Court of Appeals, which on May 31, 2023 issued an opinion reversing the trial court and rendering judgment in favor of the Company on all claims brought by Crane, and returning the matter to the trial court for consideration of costs and attorney fees to be awarded to the Company as the prevailing party in the litigation. The Company is subject to other 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 L - EARNINGS PER SHARE: The Company computes and presents earnings per share (“EPS”) in accordance with ASC 260 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. F-20 Index 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 25, 2023 June 26, 2022 Net income available to common shareholders $ 1,613 $ 8,022 Interest saved on convertible notes at 4 % $ — $ 40 Adjusted net income $ 1,613 $ 8,062 BASIC: Weighted average common shares 15,323 17,993 Net income per common share $ 0.11 $ 0.45 DILUTED: Weighted average common shares 15,323 17,993 Dilutive restricted stock units 588 — Dilutive stock options — — Weighted average common shares outstanding 15,911 17,993 Income from continuing operations per common share $ 0.10 $ 0.45 F-21 Index We had 151,750 and 111,750 shares of common stock potentially issuable upon exercise of employee stock options for years ended June 25, 2023 and June 26, 2022, respectively, which were excluded from the weighted average number of shares outstanding on a diluted basis because they had an intrinsic value of zero . These options expire at varying times from fiscal 2024 through fiscal 2032. We had 271,825 and 859,501 restricted stock units for years ended June 25, 2023 and June 26, 2022, respectively, which were excluded from the weighted average number of shares outstanding on a diluted basis because the performance criteria had not been met and vesting was not probable . NOTE M - SEGMENT REPORTING: The Company has three reportable operating segments as determined by management using the “management approach” as defined by ASC 280 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 these segments are 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. As of June 25, 2023 and June 26, 2022, the Company did not operate any Company-Owned restaurants. 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 operating revenues, depreciation and amortization expense, and income before taxes for the Company’s reportable segments as of and for the fiscal years ended June 25, 2023 and June 26, 2022 (in thousands): Fiscal Year Ended June 25, 2023 June 26, 2022 Net sales and operating revenues: Pizza Inn Franchising $ 9,810 $ 8,535 Pie Five Franchising 1,893 1,967 Company-Owned Restaurants — — Corporate administration and other 186 190 Consolidated revenues $ 11,889 $ 10,692 Depreciation and amortization: Pizza Inn Franchising $ — $ — Pie Five Franchising — — Company-Owned Restaurants — — Combined — — Corporate administration and other 214 187 Depreciation and amortization $ 214 $ 187 Income before taxes: Pizza Inn Franchising $ 6,751 $ 6,222 Pie Five Franchising 996 996 Company-Owned Restaurants — ( 3 ) Combined 7,747 7,215 Corporate administration and other ( 5,597 ) ( 4,850 ) Income before taxes $ 2,150 $ 2,365 The following table provides information on our foreign and domestic revenues: Geographic information (revenues): United States $ 11,627 $ 10,399 Foreign countries 262 293 Consolidated total $ 11,889 $ 10,692 F-22 Index NOTE N - SUBSEQUENT EVENTS: In preparation of its financial statements, the Company considered subsequent events through September 21, 2023 which was the date the Company’s financial statements were available to be issued. The Company terminated its master licensee of Pizza Inn in Saudi Arabia in September 2023. This termination resulted in the closure of 12 international units. These locations represented approximately $ 0.1 million in revenue during fiscal 2023 . F-23