RAVE RESTAURANT GROUP, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K and may contain certain forward-looking statements. See “Forward-Looking Statements.” Overview The Company franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”), express (“Express Units”) restaurants and ghost kitchens (“Pizza Inn Ghost Kitchen Units”) under the trademark “Pizza Inn” and franchises fast casual pizza restaurants (“Pie Five Units”) and ghost kitchens (“Pie Five Ghost Kitchen 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. At June 30, 2024, franchised and licensed restaurants consisted of the following: Fiscal Year Ended June 30, 2024 (in thousands, except unit data) Pizza Inn Pie Five All Concepts Ending Units Retail Sales Ending Units Retail Sales Ending Units Retail Sales Domestic Franchised/Licensed 105 $ 106,418 20 $ 16,886 125 $ 123,304 International Franchised 24 $ 5,486 — $ — 24 $ 5,486 The domestic units were located in 15 states predominately situated in the southern half of the United States. The international restaurants were located in eight foreign countries predominantly in the Middle East. Fiscal years 2024 and 2023 included 53 weeks and 52 weeks, respectively. In order to reflect comparable 53 week periods, the first week of fiscal 2024 has been included in both periods in the presentation of retail sales, average units open and comparable store retail sales. The following table summarizes domestic comparable store retail sales for the Company. 53 Weeks Ended June 30, 2024 July 2, 2023 (in thousands) Pizza Inn Domestic Comparable Store Retail Sales $ 100,875 $ 98,610 Pie Five Domestic Comparable Store Retail Sales 16,801 17,450 Total Rave Comparable Store Retail Sales $ 117,676 $ 116,060 10 Index Pizza Inn Brand Summary The following tables summarize certain key indicators for the Pizza Inn franchised and licensed domestic units that management believes are useful in evaluating performance: 53 Weeks Ended June 30, 2024 July 2, 2023 Pizza Inn Retail Sales - Total Domestic Units (in thousands, except unit data) Buffet Units - Franchised $ 102,498 $ 96,872 Delco/Express Units - Franchised 3,846 5,418 PIE Units - Licensed 70 208 Pizza Inn Ghost Kitchen Units - Franchised 4 — Total Domestic Retail Sales $ 106,418 $ 102,498 Pizza Inn Comparable Store Retail Sales - Total Domestic $ 100,875 $ 98,610 Pizza Inn Average Units Open in Period Buffet Units - Franchised 76 73 Delco/Express Units - Franchised 29 44 PIE Units - Licensed 4 8 Pizza Inn Ghost Kitchen Units - Franchised — — Total Domestic Units 109 125 Pizza Inn total domestic retail sales increased by $3.9 million, or 3.8%, for fiscal 2024 when compared to the prior 53 weeks. Compared to the prior year, average Buffet Units open in the period increased from 73 to 76. Comparable store retail sales increased by $2.3 million to $100.9 million for fiscal 2024 as compared to the prior 53 weeks. For fiscal 2024, the increase in domestic retail sales were primarily the result of the increase in Buffet Units, supplemented by an increase in comparable domestic store retail sales. The following chart summarizes Pizza Inn restaurant activity for the fiscal year ended June 30, 2024: Fiscal Year Ended June 30, 2024 Beginning Units Opened Concept Change Transfer Closed Ending Units Buffet Units - Franchised 77 2 2 4 3 78 Delco/Express Units - Franchised 41 1 — — 19 23 PIE Units - Licensed 5 — — — 2 3 Pizza Inn Ghost Kitchen Units - Franchised — 1 — — — 1 Total Domestic Units 123 4 2 4 24 105 International Units (all types) 34 6 — — 16 24 Total Units 157 10 2 4 40 129 There was a net decrease of 18 units in the total domestic Pizza Inn unit count during fiscal 2024. There were four transfers in the total domestic Pizza Inn unit count during fiscal 2024. For fiscal 2024, the number of international Pizza Inn units decreased by 10 units. Twelve units were terminated in Saudi Arabia for failure to pay royalties and subsequently a 50-unit development agreement was signed with a new franchise partner who opened five Pizza Inn units in Saudi Arabia in fiscal year 2024. There were zero transfers in the total international Pizza Inn unit count during fiscal 2024. The Company believes the number of both domestic and international Pizza Inn units will increase modestly in future periods. Pie Five Brand Summary The following tables summarize certain key indicators for the Pie Five franchised restaurants that management believes are useful in evaluating performance: 53 Weeks Ended June 30, 2024 July 2, 2023 Pie Five Retail Sales - Total Units (in thousands, except unit data) Pie Five Units - Franchised $ 16,875 $ 20,385 Pie Five Ghost Kitchen Units - Franchised 11 — Total Domestic Retail Sales $ 16,886 $ 20,385 Pie Five Comparable Store Retail Sales - Total $ 16,801 $ 17,450 Pie Five Average Units Open in Period Pie Five Units - Franchised 24 30 Pie Five Ghost Kitchen Units - Franchised 1 — Total Domestic Units 25 30 11 Index Pie Five total domestic retail sales decreased by $3.5 million, or 17.2%, for fiscal 2024 when compared to the prior year. Compared to the prior year, average units open in the period decreased from 30 to 25. Comparable store retail sales decreased by $0.6 million to $16.8 million for fiscal 2024 as compared to the prior year. For fiscal 2024, the decrease in domestic retail sales were primarily the result of the decrease in store count, supplemented by a decrease in comparable store retail sales. The following chart summarizes Pie Five restaurant activity for the fiscal year ended June 30, 2024: Fiscal Year Ended June 30, 2024 Beginning Units Opened Concept Change Transfer Closed Ending Units Pie Five Units - Franchised 27 — (2 ) 6 7 18 Pie Five Ghost Kitchen Units - Franchised — 2 — 1 — 2 Total Domestic Units 27 2 (2 ) 7 7 20 The was a net decrease of seven units in the total domestic Pie Five unit count during fiscal 2024. There was a net increase of one Pie Five Ghost Kitchen Units during fiscal 2024. Two Pie Five units converted to become Pizza Inn Buffet units. Of the seven Pie Five closures, two were due to lease expirations, one was closed by mutual decision of the franchise owner and Rave management, and four were unilaterally closed by franchise owner decision. We believe that Pie Five units will decrease modestly in future periods. Non-GAAP Financial Measures and Other Terms The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). However, the Company also presents and discusses certain non-GAAP financial measures that it believes are useful to investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the effectiveness of business strategies and for planning and budgeting purposes. However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements. We consider EBITDA and Adjusted EBITDA to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in our industry. We believe that EBITDA is helpful to investors in evaluating our results of operations without the impact of expenses affected by financing methods, accounting methods and the tax environment. We believe that Adjusted EBITDA provides additional useful information to investors by excluding non-operational or non-recurring expenses to provide a measure of operating performance that is more comparable from period to period. Management also uses these non-GAAP financial measures for evaluating operating performance, assessing the effectiveness of business strategies, projecting future capital needs, budgeting and other planning purposes. The following key performance indicators presented herein, some of which represent non-GAAP financial measures, have these meanings and are calculated as follows: • “EBITDA” represents earnings before interest, taxes, depreciation and amortization. • “Adjusted EBITDA” represents earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, severance, gain/loss on sale of assets, costs related to impairment and other lease charges, franchisee default and closed store revenue/expense, and closed and non-operating store costs. • “Retail sales” represents the restaurant sales reported by our franchisees, which may be segmented by brand or domestic/international locations. • “Comparable store retail sales” includes the retail sales for restaurants that have been open for at least 18 months as of the end of the reporting period. The sales results for a restaurant that was closed temporarily for remodeling or relocation within the same trade area are included in the calculation only for the days that the restaurant was open in both periods being compared. • “Store weeks” represent the total number of full weeks that specified restaurants were open during the period. • “Average units open” reflects the number of restaurants open during a reporting period weighted by the percentage of the weeks in a reporting period that each restaurant was open. • “Average weekly sales” for a specified period is calculated as total retail sales (excluding partial weeks) divided by store weeks in the period. • “Non-operating store costs” represent gain or loss on asset disposal, store closure expenses, lease termination expenses and expenses related to abandoned store sites. • “Franchisee default and closed store revenue/expense” represents the net of accelerated revenues and costs attributable to defaulted area development agreements and closed franchised stores. 12 Index Financial Results The Company defines its operating segments as Pizza Inn Franchising and Pie Five Franchising. The following is additional business segment information for the Fiscal Years ended June 30, 2024 and June 25, 2023 (in thousands): Pizza Inn Franchising Pie Five Franchising Corporate Total Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 REVENUES: Franchise and license revenues $ 10,295 $ 9,810 $ 1,708 $ 1,870 $ — $ — $ 12,003 $ 11,680 Rental income — — — — 131 186 131 186 Other income — — 16 23 — — 16 23 Total revenues 10,295 9,810 1,724 1,893 131 186 12,150 11,889 COSTS AND EXPENSES: General and administrative expenses — — — — 5,267 5,490 5,267 5,490 Franchise expenses 2,985 3,059 671 897 — — 3,656 3,956 Impairment of long-lived assets and other lease charges — — — — — 5 — 5 Provision for credit losses — — — — 69 73 69 73 Interest (income) expense — — — — (153 ) 1 (153 ) 1 Depreciation and amortization expense — — — — 219 214 219 214 Total costs and expenses 2,985 3,059 671 897 5,402 5,783 9,058 9,739 INCOME/(LOSS) BEFORE TAXES $ 7,310 $ 6,751 $ 1,053 $ 996 $ (5,271 ) $ (5,597 ) $ 3,092 $ 2,150 Revenues: Revenues are derived from franchise royalties, supplier and distributer incentives, franchise license fees, area development exclusivity fees and foreign master license fees, advertising funds, supplier convention funds, sublease rental income, and other income. The volume of supplier incentive revenues is dependent on the level of chain-wide retail sales, which are impacted by changes in comparable store sales and restaurant count, as well as the products sold to franchisees through third-party food distributors. Total revenues for fiscal 2024 and fiscal 2023 were $12.2 million and $11.9 million, respectively. Pizza Inn Franchise and License Pizza Inn franchise revenues increased by $0.5 million to $10.3 million for fiscal 2024 as compared to $9.8 million for fiscal 2023. The 4.9% increase was driven by increases in supplier and distributor incentives. Pie Five Franchise and License Pie Five franchise revenues decreased by $0.2 million to $1.7 million for fiscal 2024 as compared to $1.9 million for fiscal 2023. The 8.7% decrease was driven by decreases in domestic royalties and advertising fund revenues, offset by increases in default and closed store revenues. Costs and Expenses: General and Administrative Expenses Total general and administrative expenses decreased by $0.2 million to $5.3 million for fiscal 2024 as compared to $5.5 million for fiscal 2023. The 4.1% decrease was driven by decreased salary and stock-based compensation expense. 13 Index Franchise Expenses Franchise expenses include general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. Total franchise expenses decreased by $0.3 million to $3.7 million in fiscal 2024 as compared to $4.0 million for fiscal 2023. Pizza Inn franchise expenses decreased $0.1 million to $3.0 million for fiscal 2024 compared to $3.1 million for fiscal 2023. The 2.4% decrease was driven by decreases in advertising fees. Pie Five franchise expenses decreased $0.2 million to $0.7 million for fiscal 2024 compared to $0.9 million for fiscal 2023. The 25.2% decrease was driven by decreases in advertising fees and salaries. Impairment of Long-lived Assets and Other Lease Charges Impairment of long-lived assets and other lease charges was zero for fiscal 2024 compared to $5 thousand for fiscal 2023. The decrease was primarily due to impaired beverage equipment in the prior period. Provision for Credit Losses The Company monitors franchisee receivable balances and adjusts credit terms when necessary to minimize the Company’s exposure to high risk accounts receivable. Provision for credit losses decreased by $4 thousand to $69 thousand for fiscal 2024 as compared to $73 thousand for fiscal 2023. The 4.7% decrease was driven by the write-off of bad debt, partially offset by the increase in accounts over 90 days. Interest Expense and Income Interest expense decreased $1 thousand for fiscal 2024 to zero compared to $1 thousand in the prior year. Interest income increased $153 thousand for fiscal 2024 to $153 thousand compared to zero in the prior year. The increase was primarily driven by interest received on U.S. Treasury bills. Amortization and Depreciation Expense Amortization and depreciation expense increased slightly for fiscal 2024, compared to fiscal 2023. The increase was primarily the result of higher amortization of intangible assets from an increase in expenditures for developing a new prototype. Provision for Income Taxes Total income tax expense consists of the following (in thousands): Fiscal Year Ended June 30, 2024 June 25, 2023 Federal tax expense $ 530 $ 394 State tax expense 89 143 Total income tax expense $ 619 $ 537 For the year ended June 30, 2024, the Company recorded an income tax expense of $619 thousand. The federal and state tax expense was $530 thousand and $89 thousand, respectively. The change in both federal and state tax expense was primarily driven by the increase in net income, utilization of jurisdictional operating losses and a current year tax deduction for stock-based compensation. The Company utilized net operating losses to offset federal taxes. At the end of tax year ended June 30, 2024, the Company had federal net operating loss carryforwards totaling $18.9 million that are available to reduce future taxable income and will begin to expire in 2035. Under the Tax Cuts and Jobs Act, approximately $1.3 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, 2021 through June 25, 2023. Tax years that remain subject to examination by state authorities are the years ended June 30, 2020 through June 25, 2023. The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of any required valuation allowance. There are no material 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. 14 Index Basic net income per common share increased $0.06 to net income of $0.17 per share for fiscal 2024 compared to a net income of $0.11 per share in the prior fiscal year. Diluted net income per common share increased $0.07 to net income of $0.17 per share for fiscal 2024 compared to a net income of $0.10 per share in the prior fiscal year. Net income increased $0.9 million to net income of $2.5 million for fiscal 2024 compared to a net income of $1.6 million for the prior fiscal year on revenues of $12.2 million for fiscal 2024 as compared to $11.9 million in fiscal 2023. Adjusted EBITDA for the fiscal year ended June 30, 2024, increased to $3.2 million compared to $2.7 million for the prior fiscal year. The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods shown (in thousands): Fiscal Year Ended June 30, 2024 June 25, 2023 Net income $ 2,473 $ 1,613 Interest (income) expense (153 ) 1 Income taxes 619 537 Depreciation and amortization 219 214 EBITDA $ 3,158 $ 2,365 Stock-based compensation expense 149 345 Severance 5 — Impairment of long-lived assets and other lease charges — 5 Franchisee default and closed store revenue (156 ) (13 ) Adjusted EBITDA $ 3,156 $ 2,702 Results of operations for the fiscal years 2024 and 2023 included 53 weeks and 52 weeks, respectively. Liquidity and Capital Resources Sources and Uses of Funds During fiscal 2024, the Company’s primary source of liquidity was proceeds from operating activities. Cash flows from operating activities generally reflect net income adjusted for certain non-cash items including depreciation and amortization, changes in deferred taxes, stock-based compensation, and changes in working capital. Cash provided by operating activities was $2.7 million in fiscal 2024 compared to cash provided by operating activities of $2.6 million in fiscal 2023. The primary driver of increased operating cash flow during fiscal 2024 was increased net income due to lower employee related expenses. Cash flows from investing activities reflect purchases and maturities of short term investments as well as net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash used in investing activities during fiscal 2024 was $4.9 million compared to cash used in investing activities of $15 thousand in fiscal 2023. Cash flows used in financing activities generally reflect changes in the Company’s stock and debt activity during the period. Net cash used in financing activities was $0.3 million for fiscal 2024 compared to net cash used in financing activities of $5.0 million for fiscal 2023. Net cash used by financing activities in fiscal 2024 was primarily attributable to taxes paid on vested Restricted Stock Units (“RSUs”). Net cash used by financing activities in fiscal 2023 was primarily attributable to repurchases of the Company’s stock. Liquidity We expect to fund continuing operations and planned capital expenditures for the next fiscal year primarily from cash on hand and operating cash flow. Based on budgeted and year-to-date cash flow information, we believe that we have sufficient liquidity to satisfy our cash requirements for the 2025 fiscal year and beyond. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically. Actual results could differ materially from estimates. The Company believes the following critical accounting policies require estimates about the effect of matters that are inherently uncertain, are susceptible to change, and therefore require subjective judgments. Changes in the estimates and judgments could significantly impact the Company’s results of operations and financial condition in future periods. 15 Index Accounts receivable consist primarily of receivables generated from franchise royalties and supplier concessions. The Company records an allowance for credit losses to allow for any amounts which may be unrecoverable based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends. Actual realization of accounts receivable could differ materially from the Company’s estimates. 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 indicated, 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 zero and $5 thousand during fiscal 2024 and 2023, respectively. The Company had $0.1 million and $0.2 million in sublease income during fiscal 2024 and 2023, respectively. Franchise revenue consists of income from license fees, royalties, area development and foreign master license agreements, advertising fund revenues, supplier incentive and convention contribution revenues. Franchise fees, area development and foreign master license agreement fees are amortized into revenue on a straight-line basis over the term of the related contract agreement. In the event of a closed franchise or defaulted development agreement, the remaining balance of unamortized license fees will be recognized in entirety as of the date of the closure or default. Royalties and advertising fund revenues, which are based on a percentage of franchise retail sales, are recognized as income as retail sales occur. Supplier incentive revenues are recognized as earned, typically as the underlying commodities are shipped. 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. The Company assess whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a “more likely than not” standard. 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. In making such assessment, more weight is given to evidence that can be objectively verified, including recent operating performance. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. The Company accounts for uncertain tax positions in accordance with ASC 740-10, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. ASC 740-10 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of June 30, 2024 and June 25, 2023, the Company had no uncertain tax positions. The Company assesses its exposures to loss contingencies from legal matters based upon factors such as the current status of the cases and consultations with external counsel and provides for the exposure by accruing an amount if it is judged to be probable and can be reasonably estimated. If the actual loss from a contingency differs from management’s estimate, operating results could be adversely impacted. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not required for a smaller reporting company.