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 24 , 2023 September 25 , 2022 REVENUES $ 3,089 $ 3,005 COSTS AND EXPENSES: General and administrative expenses 1,319 1,343 Franchise expenses 1,172 1,202 Impairment of long-lived assets and other lease charges — 5 Bad debt expense 25 4 Interest expense — 1 Depreciation and amortization expense 55 51 Total costs and expenses 2,571 2,606 INCOME BEFORE TAXES 518 399 Income tax expense ( 132 ) ( 92 ) NET INCOME 386 307 INCOME PER SHARE OF COMMON STOCK - BASIC: $ 0.03 $ 0.02 INCOME PER SHARE OF COMMON STOCK - DILUTED: $ 0.03 $ 0.02 Weighted average common shares outstanding - basic 14,154 16,632 Weighted average common shares outstanding - diluted 14,762 16,632 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 24 , 2023 June 25 , 2023 ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,944 $ 5,328 Accounts receivable, less allowance for bad debts of $ 12 and $ 58 , respectively 1,072 1,145 Notes receivable, current 122 105 Assets held for sale 34 19 Deferred contract charges, current 31 33 Prepaid expenses and other current assets 388 204 Total current assets 7,591 6,834 LONG-TERM ASSETS Property and equipment, net 231 258 Operating lease right of use assets, net 1,115 1,227 Intangible assets definite-lived, net 312 328 Notes receivable, net of current portion 44 28 Deferred tax asset, net 5,234 5,342 Deferred contract charges, net of current portion 202 220 Total assets $ 14,729 $ 14,237 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable - trade $ 583 $ 502 Accrued expenses 1,172 891 Operating lease liabilities, current 446 463 Deferred revenues, current 222 342 Total current liabilities 2,423 2,198 LONG-TERM LIABILITIES Operating lease liabilities, net of current portion 848 958 Deferred revenues, net of current portion 602 690 Total liabilities 3,873 3,846 COMMITMENTS AND CONTINGENCIES (SEE NOTE C) 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 14,154,453 shares, respectively 251 251 Additional paid-in capital 37,808 37,729 Retained earnings 2,825 2,439 Treasury stock, at cost Shares in treasury: 10,935,605 and 10,935,605 respectively ( 30,028 ) ( 30,028 ) Total shareholders’ equity 10,856 10,391 Total liabilities and shareholders’ equity $ 14,729 $ 14,237 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 Retained Earnings Shares Amount Total Balance, June 26, 2022 25,090 $ 251 $ 37,384 $ 826 ( 7,579 ) $ ( 25,049 ) $ 13,412 Stock-based compensation expense — — 86 — — — 86 Purchase of treasury stock — — — — ( 1,111 ) ( 1,384 ) ( 1,384 ) Net income — — — 307 — — 307 Balance, September 25, 2022 25,090 $ 251 $ 37,470 $ 1,133 ( 8,690 ) $ ( 26,433 ) $ 12,421 Common Stock Treasury Stock Shares Amount Additional Paid-in Capital Retained Earnings Shares Amount Total Balance, June 25, 2023 25,090 $ 251 $ 37,729 $ 2,439 ( 10,936 ) $ ( 30,028 ) $ 10,391 Stock-based compensation expense — — 79 — — — 79 Net income — — — 386 — — 386 Balance, September 24, 2023 25,090 $ 251 $ 37,808 $ 2,825 ( 10,936 ) $ ( 30,028 ) $ 10,856 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 24 , 2023 September 25 , 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 386 $ 307 Adjustments to reconcile net income to cash provided by operating activities: Impairment of long-lived assets and other lease charges — 5 Stock-based compensation expense 79 86 Depreciation and amortization 34 35 Amortization of operating right of use assets 112 108 Amortization of intangible assets definite-lived 21 16 Allowance for bad debts 25 4 Deferred income tax 108 — Changes in operating assets and liabilities: Accounts receivable 48 491 Notes receivable ( 48 ) 5 Deferred contract charges 20 9 Prepaid expenses and other assets ( 184 ) 38 Accounts payable - trade 81 20 Accrued expenses 281 284 Operating lease liabilities ( 127 ) ( 120 ) Deferred revenues ( 208 ) ( 153 ) Cash provided by operating activities 628 1,135 CASH FLOWS FROM INVESTING ACTIVITIES: Payments received on notes receivable 15 30 Purchase of intangible assets definite-lived ( 5 ) ( 39 ) Purchase of property and equipment ( 22 ) ( 14 ) Cash used in investing activities ( 12 ) ( 23 ) CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock — ( 1,384 ) Payments on short term loan — ( 30 ) Cash used in financing activities — ( 1,414 ) Net increase/(decrease) in cash and cash equivalents 616 ( 302 ) Cash and cash equivalents, beginning of period 5,328 7,723 Cash and cash equivalents, end of period $ 5,944 $ 7,421 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH (REFUNDED)/PAID FOR: Income taxes $ ( 5 ) $ 9 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”), franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” 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”. We facilitate food, equipment, and supply distribution to our domestic and international system of restaurants through agreements with third party distributors. 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 25, 2023. 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 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. Fiscal Quarters The three month periods ended September 24, 2023 and September 25, 2022 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 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. 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. 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 accompanying Condensed 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 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. 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 The Company 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 24, 2023 September 25, 2022 Franchise royalties $ 1,225 $ 1,214 Supplier and distributor incentive revenues 1,100 1,070 Franchise license fees 101 30 Area development exclusivity fees and foreign master license fees 4 4 Advertising funds contributions 422 466 Supplier convention funds 187 172 Rental income 46 47 Other 4 2 $ 3,089 $ 3,005 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. 8 Index 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 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 agreement subsequent to the primary term. Restaurant Space Agreements The Company rents restaurant space from third parties for its Company-owned restaurants. Restaurant space agreements are typically structured with non-cancelable terms of one to 10 years . The Company has concluded that its restaurant agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term. The Company 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 24, 2023 and June 25, 2023, 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. 9 Index 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, have 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 three months ended September 24, 2023 and September 25, 2022, the majority of which is included in general and administrative expense in the accompanying Condensed Consolidated Statements of Income, are as follows (in thousands ): Three Months Ended Three Months Ended September 24, 2023 September 25, 2022 Operating lease cost $ 123 $ 124 Sublease income ( 47 ) ( 47 ) Total lease expense, net of sublease income $ 76 $ 77 Weighted average remaining lease term and weighted average discount rate for operating leases are as follows: September 24, 2023 September 25, 2022 Weighted average remaining lease term 1.8 Years 2.8 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 $ 370 2025 433 2026 382 2027 191 Total operating lease payments $ 1,376 Less: imputed interest ( 82 ) Total operating lease liability $ 1,294 Note C - 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 results of operations or financial condition if decided in a manner that is unfavorable to the Company. Note D - Stock-Based Compensation Stock Options: For the three months ended September 24, 2023 and September 25, 2022, the Company recognized stock-based compensation expense related to stock options of zero and $ 4 thousand, respectively. As of September 24, 2023, 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 24, 2023 September 25, 2022 Shares Shares Outstanding at beginning of year 151,750 111,750 Granted — 40,000 Exercised — — Forfeited/Canceled/Expired ( 8,664 ) — Outstanding at end of period 143,086 151,750 Exercisable at end of period 143,086 111,750 Restricted Stock Units: For the three months ended September 24, 2023 and September 25, 2022, the Company had stock-based compensation expense related to RSUs of $ 79 thousand and $ 82 thousand, respectively. As of September 24, 2023, there was $ 138 thousand unamortized stock-based compensation expense related to RSUs. As of September 24, 2023 and September 25, 2022, the RSUs will be amortized during the next one and 13 months, respectively. A summary of the status of restricted stock units as of September 24, 2023, and changes during the three months then ended is presented below: Three Months Ended September 24, 2023 September 25 , 2022 Unvested at beginning of year 885,687 885,687 Performance Adjustment ( 25,223 ) — Granted — — Issued — — Forfeited — — Unvested at end of period 860,464 885,687 10 Index Note E - 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 24, 2023 September 25, 2022 Net income available to common shareholders $ 386 $ 307 BASIC: Weighted average common shares 14,154 16,632 Net income per common share $ 0.03 $ 0.02 DILUTED: Weighted average common shares 14,154 16,632 Dilutive RSU 589 — Dilutive stock options 19 — Weighted average common shares outstanding 14,762 16,632 Net income per common share $ 0.03 $ 0.02 For the three months ended September 24, 2023, exercisable options to purchase 103,086 shares of common stock at exercise prices from $ 3.95 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 24, 2023, 90,625 RSUs were excluded from the computation of diluted EPS because performance criteria is not probable at period end. For the three months ended September 25, 2022, exercisable options to purchase 111,750 shares of common stock at exercise prices ranging from $ 3.95 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 25, 2022, zero RSUs were excluded from the computation of diluted EPS . Note F - Income Taxes For the three months ended September 24, 2023, the Company recorded an income tax expense of $ 132 thousand. For the three months ended September 25, 2022, the Company recorded an income tax expense of $ 92 thousand. For the three months ended September 24, 2023, the federal and state tax expense were $ 108 thousand and $ 24 thousand, respectively. For the three months ended September 25, 2022, the federal and state tax expense were $ 82 thousand and $ 10 thousand, respectively. 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. Note G - Segment Reporting The Company has two 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 and (2) Pie Five Franchising. 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 September 24, 2023, 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. 11 Index 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 the three months ended September 24, 2023 and September 25, 2022 (in thousands) : Three Months Ended September 24, 2023 September 25, 2022 Net sales and operating revenues: Pizza Inn Franchising $ 2,604 $ 2,469 Pie Five Franchising 438 488 Corporate administration and other 47 48 Consolidated revenues $ 3,089 $ 3,005 Depreciation and amortization: Corporate administration and other $ 55 $ 51 Depreciation and amortization $ 55 $ 51 Income before taxes: Pizza Inn Franchising $ 1,661 $ 1,511 Pie Five Franchising 209 244 Combined 1,870 1,755 Corporate administration and other ( 1,352 ) ( 1,356 ) Income before taxes $ 518 $ 399 Geographic information (revenues): United States $ 3,036 $ 2,929 Foreign countries 53 76 Consolidated revenues $ 3,089 $ 3,005 12 Index