Rave Restaurant Group Earnings 2021-03-28

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

10-Q 1 brhc10023935_10q.htm 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☑

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 28, 2021

☐

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-12919

RAVE RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

Missouri		45-3189287
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

3551 Plano Parkway

The Colony, Texas 75056

(Address of principal executive offices)

(469) 384-5000

(Registrant’s telephone number,

including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.01 par value		RAVE		Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☑	Smaller reporting company ☑
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of May 4, 2021, 18,004,904 shares of the issuer’s common stock were outstanding.

RAVE RESTAURANT GROUP, INC.

Index

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	Page

	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended March 28, 2021 and March 29, 2020	3

	Condensed Consolidated Balance Sheets at March 28, 2021 (unaudited) and June 28, 2020	4

	Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the three and nine months ended March 28, 2021 and March 29, 2020	5

	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 28, 2021 and March 29, 2020	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6.	Exhibits	27

Signatures		28

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	March 28, 2021			March 29, 2020			March 28, 2021			March 29, 2020
REVENUES:	$	2,183		$	2,705		$	6,214		$	8,411

COSTS AND EXPENSES:
Cost of sales		76			104			229			353
General and administrative expenses		1,250			1,655			3,524			4,583
Franchise expenses		629			860			1,782			2,564
(Gain) loss on sale of assets		(156	)		18			(156	)		7
Impairment of long-lived assets and other lease charges		—			495			21			836
Bad debt expense (recovery)		(97	)		11			18			39
Interest expense		23			24			69			75
Depreciation and amortization expense		41			45			128			141
Total costs and expenses		1,766			3,212			5,615			8,598

INCOME (LOSS) BEFORE TAXES		417			(507	)		599			(187	)
Income tax expense		1			4,008			5			4,077
NET INCOME (LOSS)		416			(4,515	)		594			(4,264	)

INCOME (LOSS) PER SHARE OF COMMON STOCK - BASIC:	$	0.02		$	(0.30	)	$	0.03		$	(0.28	)

INCOME (LOSS) PER SHARE OF COMMON STOCK - DILUTED:	$	0.02		$	(0.30	)	$	0.03		$	(0.28	)

Weighted average common shares outstanding - basic		17,991			15,133			17,061			15,123

Weighted average common and potential dilutive common shares outstanding		18,789			15,133			17,859			15,123

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Index

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

	March 28, 2021			June 28, 2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	6,487		$	2,969
Restricted cash		—			234
Accounts receivable, less allowance for bad debts of $64 and $269, respectively		1,192			965
Notes receivable, current		1,040			546
Deferred contract charges, current		34			44
Prepaid expenses and other		231			174
Total current assets		8,984			4,932

LONG-TERM ASSETS
Property, plant and equipment, net		295			366
Operating lease right of use asset, net		2,772			3,567
Intangible assets definite-lived, net		127			155
Notes receivable, net of current portion		60			449
Deferred contract charges, net of current portion		218			231
Deposits and other		—			5
Total assets	$	12,456		$	9,705

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable – trade	$	445		$	446
Accounts payable - lease termination impairments		—			407
Accrued expenses		976			775
Operating lease liability, current		586			632
Deferred revenues, current		169			254
Total current liabilities		2,176			2,514

LONG-TERM LIABILITIES
Convertible notes		1,569			1,549
PPP loan		657			657
Operating lease liability, net of current portion		2,532			3,471
Deferred revenues, net of current portion		756			960
Other long-term liabilities		—			51
Total liabilities		7,690			9,202

COMMITMENTS AND CONTINGENCIES (SEE NOTE D)

SHAREHOLDERS’ EQUITY
Common stock, $.01 par value; authorized 26,000,000 shares; issued 25,090,058 and 22,550,376 shares, respectively; outstanding 18,004,904 and 15,465,222 shares, respectively		251			225
Additional paid-in capital		37,174			33,531
Accumulated deficit		(8,122	)		(8,716	)
Treasury stock at cost
Shares in treasury: 7,085,154 and 7,085,154, respectively		(24,537	)		(24,537	)
Total shareholders’ equity		4,766			503

Total liabilities and shareholders’ equity	$	12,456		$	9,705

See accompanying Notes to Unaudited Condensed Consolidated Financial Statement.

Index

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Common Stock										Treasury Stock
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Shares			Amount			Total
Balance, June 30, 2019		22,208	$	222	$	33,327		$	(4,483	)		(7,117	)	$	(24,632	)	$	4,434

Conversion of senior notes, net		—		—		(31	)		—			32			95			64
Equity issue costs - ATM offering		—		—		(2	)		—			—			—			(2	)
Net income		—		—		—			237			—			—			237
Balance, September 29, 2019		22,208	$	222	$	33,294		$	(4,246	)		(7,085	)	$	(24,537	)	$	4,733

Stock compensation expense		—		—		(85	)		—			—			—			(85	)
Issuance of common stock		9		—		—			—			—			—			—
Equity issue costs - ATM offering		—		—		1			—			—			—			1
Net income		—		—		—			14			—			—			14
Balance, December 29, 2019		22,217		222	$	33,210		$	(4,232	)		(7,085	)	$	(24,537	)	$	4,663

Stock compensation expense		—		—		(19	)		—			—			—			(19	)
Issuance of common stock		14		—		14			—			—			—			14
Equity issue costs - ATM offering		—		—		(2	)		—			—			—			(2	)
Net loss		—		—		—			(4,515	)		—			—			(4,515	)
Balance, March 29, 2020		22,231		222	$	33,203		$	(8,747	)		(7,085	)	$	(24,537	)	$	141

	Common Stock										Treasury Stock
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Shares			Amount			Total
Balance, June 28, 2020		22,550	$	225	$	33,531		$	(8,716	)		(7,085	)	$	(24,537	)	$	503

Equity issue costs - ATM offering		—		—		(3	)		—			—			—			(3	)
Net income		—		—		—			76			—			—			76
Balance, September 27, 2020		22,550	$	225	$	33,528		$	(8,640	)		(7,085	)	$	(24,537	)	$	576

Issuance of common stock		2,540		26		3,735			—			—			—			3,761
Equity issue costs - ATM offering		—		—		(127	)		—			—			—			(127	)
Net income		—		—		—			102			—			—			102
Balance, December 27, 2020		25,090	$	251	$	37,136		$	(8,538	)		(7,085	)	$	(24,537	)	$	4,312

Stock compensation expense		—		—		39			—			—			—			39
Equity issue costs - ATM offering		—		—		(1	)		—			—			—			(1	)
Net income		—		—		—			416			—			—			416
Balance, March 28, 2021		25,090	$	251	$	37,174		$	(8,122	)		(7,085	)	$	(24,537	)	$	4,766

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Index

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	March 28, 2021			March 29, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	594		$	(4,264	)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Impairment of long-lived assets and other lease charges		21			836
Stock compensation expense		39			(104	)
Depreciation and amortization		128			141
Amortization of operating right of use assets		435			(396	)
Amortization of debt issue costs		20			22
(Gain) loss on the sale of assets		(156	)		7
Provision for bad debt		18			39
Deferred income tax		—			4,060
Changes in operating assets and liabilities:
Accounts receivable		(245	)		(62	)
Notes receivable		(144	)		14
Deferred contract charges		23			(6	)
Inventories		—			7
Prepaid expenses and other		(57	)		(74	)
Deposits and other		5			—
Accounts payable - trade		(1	)		(101	)
Accounts payable - lease termination impairments		(428	)		(972	)
Accrued expenses		201			346
Operating lease liability		(470	)		380
Deferred revenue		(289	)		(655	)
Other long-term liabilities		(51	)		(21	)
Cash used in operating activities		(357	)		(803	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on notes receivable from fixed asset sales		40			117
Purchase of property, plant and equipment		(29	)		(53	)
Cash provided by investing activities		11			64

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock		3,761			14
Equity issuance costs - ATM offering		(131	)		(4	)
Cash provided by financing activities		3,630			10

Net increase/(decrease) in cash, cash equivalents and restricted cash		3,284			(729	)
Cash, cash equivalents and restricted cash, beginning of period		3,203			2,264
Cash, cash equivalents and restricted cash, end of period	$	6,487		$	1,535

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

CASH PAID FOR:
Interest	$	64		$	66
Income taxes	$	16		$	18

Non-cash activities:
Conversion of notes to common shares	$	—		$	64
Operating lease right of use assets at adoption	$	—		$	3,428
Operating lease liability at adoption	$	—		$	3,875

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Index

RAVE RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) operates and franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express, or PIE, kiosks (“PIE Units”) under the trademark “Pizza Inn”. The accompanying condensed consolidated financial statements of Rave Restaurant Group, Inc. have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2020.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments are of a normal recurring nature. Results of operations for the fiscal periods presented are not necessarily indicative of fiscal year-end results.

Note A - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All appropriate intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash as of June 28, 2020 consisted of an interest-bearing money market account restricted pursuant to a letter of credit for an insurance claim dating back to the mid-1980’s. The $0.2 million in restricted cash was released during the third quarter of 2021.

Fiscal Quarters

The three and nine month periods ended March 28, 2021 and March 29, 2020 each contained 13 weeks and 39 weeks, respectively.

Use of Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company’s management to make estimates and assumptions that affect its reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and other various assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically, and actual results could differ materially from estimates.

Revenue Recognition

Revenue is measured based on consideration specified in contracts with customers and excludes incentives and amounts collected on behalf of third parties, primarily sales tax. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

The following describes principal activities, separated by major product or service, from which the Company generates its revenues:

Restaurant Sales

Revenue from restaurant sales is recognized when food and beverage products are sold in Company-owned restaurants. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities.

Index

Franchise Revenues

Franchise revenues consist of 1) franchise royalties, 2) supplier and distributor incentive revenues, 3) franchise license fees, 4) area development exclusivity fees and foreign master license fees, 5) advertising funds, and 6) supplier convention funds.

Franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as sales occur.

Supplier and distributor incentive revenues are recognized when title to the underlying commodities transfer.

Franchise license fees are typically billed upon execution of the franchise agreement and amortized over the term of the franchise agreement which can range from five to 20 years. Fees received for renewal periods are amortized over the life of the renewal period.

Area development exclusivity fees and foreign master license fees are typically billed upon execution of the area development and foreign master license agreements. Area development exclusivity fees are included in deferred revenue in the Condensed Consolidated Balance Sheets and allocated on a pro rata basis to all stores opened under that specific development agreement. Area development exclusivity fees that include rights to subfranchise are amortized as revenue over the term of the contract.

Advertising fund contributions for Pie Five units represent contributions collected where we have control over the activities of the fund. Contributions are based on a percentage of net retail sales. The adoption of Topic 606 revised the determination of whether these arrangements are considered principal versus agent. For Pie Five, we have determined that we are the principal in these arrangements, and advertising fund contributions and expenditures are, therefore, reported on a gross basis in the Condensed Consolidated Statements of Income. In general, we expect such advertising fund contributions and expenditures to be largely offsetting and, therefore, do not expect a significant impact on our reported income before income taxes. Our obligation related to these funds is to develop and conduct advertising activities. Pie Five marketing fund contributions are billed and collected weekly.

Supplier convention funds are deferred until the obligations of the agreement are met and the event takes place.

Rental Income

The Company also subleases some of its restaurant space to third parties. The Company’s two subleases have terms that end in 2023 and 2025. The sublease agreements are noncancelable through the end of the term and both parties have substantive rights to terminate the lease when the term is complete. Sublease agreements are not capitalized and are recorded as rental income in the period that rent is received.

Total revenues consist of the following (in thousands):

	Three Months Ended
	March 28, 2021		March 29, 2020
Restaurant sales	$	—	$	36
Franchise royalties		933		948
Supplier and distributor incentive revenues		916		1,085
Franchise license fees		79		175
Area development fees and foreign master license fees		9		4
Advertising funds		194		391
Supplier convention funds		—		—
Rental income		52		54
Other		—		12
	$	2,183	$	2,705

	Nine Months Ended
	March 28, 2021		March 29, 2020
Restaurant sales	$	—	$	240
Franchise royalties		2,638		3,084
Supplier and distributor incentive revenues		2,491		3,141
Franchise license fees		261		796
Area development fees and foreign master license fees		17		16
Advertising funds		469		675
Supplier convention funds		177		278
Rental income		152		144
Other		9		37
	$	6,214	$	8,411

Index

Stock-Based Compensation

The Company accounts for stock options using the fair value recognition provisions of the authoritative guidance on share-based payments. The Company uses the Black-Scholes formula to estimate the value of stock-based compensation for options granted to employees and directors and expects to continue to use this acceptable option valuation model in the future. The authoritative guidance also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow.

Compensation cost for restricted stock units (“RSU’s”) is measured as an amount equal to the fair value of the RSU’s on the date of grant and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the best estimate of the ultimate achievement level.

Note B - Adoption of ASC 842, “Leases”

In February 2016, FASB issued Accounting Standards Codification 842, Leases (“ASC 842”) which requires an entity to recognize a right of use asset and lease liability for all leases. Classification of leases as either a finance or operating lease determines the recognition, measurement and presentation of expenses.

The new standard was effective for the Company in the first quarter of fiscal 2020 and was adopted using a modified retrospective approach with the date of initial application on July 1, 2019. Consequently, upon transition, the Company recognized an operating lease right of use asset and an operating lease liability.

The Company applied the following practical expedients as provided in the standards update which provide elections to:

•

not apply the recognition requirements to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option);

•

not reassess whether a contract contains a lease, lease classification and initial direct costs; and

•

not reassess certain land easements in existence prior to July 1, 2019.

Through the implementation process, the Company evaluated each of its lease arrangements and enhanced its systems to track and calculate additional information required upon adoption of this standards update. The adoption had an impact to the Condensed Consolidated Balance Sheet as of July 1, 2019 relating to the recognition of operating lease right of use assets and operating lease liabilities which represented approximately a 30% change to total assets and a 64% change to total liabilities. The impact of adoption of this new standards update was as follows (in thousands):

	July 1, 2019
	Adoption		Reclassification (1)		Total Adjustment
Operating lease right of use assets	$	3,428	$	434	$	3,862
Operating lease liabilities – current		528				528
Operating lease liabilities - long-term		3,347				3,347

(1)

As of June 30, 2019, the Company had $132 thousand recorded within deferred rent for lease incentives incurred at the inception of the affected leases and $302 thousand in deferred rent tenant improvements. Upon adoption of the new standards update, these lease incentives were included within the lease liability.

Adoption of the new standard did not materially impact the Condensed Consolidated Statements of Operations, Cash Flows or Shareholders’ Equity.

Leases

The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that it can be determined that an arrangement represents a lease, it is classified as either an operating lease or a finance lease. The Company does not currently have any finance leases. The Company capitalizes operating leases on the Condensed Consolidated Balance Sheets through a right of use asset and a corresponding operating lease liability. Right of use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Short-term leases that have an initial term of one year or less are not capitalized but are disclosed below.

Operating lease right of use assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. In addition to the present value of lease payments, the operating lease right of use asset also includes any lease payments made to the lessor prior to lease commencement less any lease incentives and initial direct costs incurred. Lease expense is recognized on a straight-line basis over the lease term.

Index

Nature of Leases

The Company leases certain office space, restaurant space, and information technology equipment under non-cancelable leases to support its operations. A more detailed description of significant lease types is included below.

Office Agreements

The Company rents office space from third parties for its corporate location. Office agreements are typically structured with non-cancelable terms of one to 10 years. The Company has concluded that its office agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term.

Restaurant Space Agreements

The Company rents restaurant space from third parties for its Company-owned restaurants. Restaurant space agreements are typically structured with non-cancelable terms of one to 10 years. The Company has concluded that its restaurant agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term.

Information Technology Equipment

The Company rents information technology equipment, primarily printers and copiers, from a third party for its corporate office location. Information technology equipment agreements are typically structured with non-cancelable terms of one to five years. The Company has concluded that its information technology equipment commitments are operating leases.

Discount Rate

Leases typically do not provide an implicit rate. Accordingly, the Company is required to use its incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. The Company’s incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company uses the implicit rate in the limited circumstances in which that rate is readily determinable.

Lease Guarantees

The Company has guaranteed the financial responsibilities of certain franchised store leases. These guaranteed leases are not considered operating leases because the Company does not have the right to control the underlying asset. If the franchisee abandons the lease and fails to meet the lease’s financial obligations, the lessor may assign the lease to the Company for the remainder of the term. If the Company does not expect to assign the abandoned lease to a new franchisee within 12 months, the lease will be considered an operating lease and a right-of-use asset and liability will be recognized.

Practical Expedients and Accounting Policy Elections

Certain lease agreements include lease and non-lease components. For all existing asset classes with multiple component types, the Company has utilized the practical expedient that exempts it from separating lease components from non-lease components. Accordingly, the Company accounts for the lease and non-lease components in an arrangement as a single lease component.

In addition, for all existing asset classes, the Company has made an accounting policy election not to apply the lease recognition requirements to short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, we recognize lease payments related to our short-term leases in our statement of operations on a straight-line basis over the lease term which has not changed from our prior recognition. To the extent that there are variable lease payments, we recognize those payments in our statement of operations in the period in which the obligation for those payments is incurred.

Index

The components of total lease expense for the nine months ended March 28, 2021, the majority of which is included in general and administrative expense, are as follows (in thousands):

	Nine Months Ended
	March 28, 2021
Operating lease cost	$	550
Sublease income		(151	)
Total lease expense, net of sublease income	$	399

Supplemental cash flow information related to operating leases is included in the table below (in thousands):

	Nine Months Ended
	March 28, 2021
Cash paid for amounts included in the measurement of lease liabilities	$	586

Weighted average remaining lease term and weighted average discount rate for operating leases are as follows:

	March 28, 2021
Weighted average remaining lease term	5.0 Years
Weighted average discount rate		4.0	%

Operating lease liabilities with enforceable contract terms that are greater than one year mature as follows (in thousands):

	Operating Leases

Remainder of fiscal year 2021	$	174
2022		701
2023		707
2024		661
Thereafter		1,211
Total operating lease payments	$	3,454
Less: imputed interest		(336	)
Total operating lease liability	$	3,118

Note C - Stock Purchase Plan

On May 23, 2007, the Company’s board of directors approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase of up to 1,016,000 shares of its common stock in the open market or in privately negotiated transactions. On June 2, 2008, the Company’s board of directors amended the 2007 Stock Purchase Plan to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. On April 22, 2009, the Company’s board of directors amended the 2007 Stock Purchase Plan again to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. There were no stock purchases in the fiscal quarters ended March 28, 2021 or March 29, 2020.

Note D - Commitments and Contingencies

The Company is subject to various claims and contingencies related to employment agreements, franchise disputes, lawsuits, taxes, food product purchase contracts and other matters arising out of the normal course of business. Management believes that any such claims and actions currently pending are either covered by insurance or would not have a material adverse effect on the Company’s annual results of operations or financial condition if decided in a manner that is unfavorable to the Company.

Note E - Stock-Based Compensation

Stock Options:

For the fiscal quarters ended March 28, 2021 and March 29, 2020, the Company did not recognize any stock-based compensation expense related to stock options. As of March 28, 2021, there was no unamortized stock-based compensation expense related to stock options.

Index

The following table summarizes the number of shares of the Company’s common stock subject to outstanding stock options:

	Nine Months Ended
	March 28, 2021		March 29, 2020
	Shares		Shares
Outstanding at beginning of year		206,750		216,550

Granted		—		—
Exercised		—		—
Forfeited/Canceled/Expired		—		—

Outstanding at end of period		206,750		216,550

Exercisable at end of period		206,750		216,550

Restricted Stock Units:

For the three months ended March 28, 2021 and March 29, 2020, the Company had stock-based compensation expense of $39 thousand and a credit of $19 thousand, respectively, related to RSU’s. For the nine months ended March 28, 2021 and March 29, 2020, the Company had stock-based compensation expense of $39 thousand and a credit of $104 thousand, respectively, related to RSU’s. As of March 28, 2021, there was no unamortized stock-based compensation expense related to RSU’s.

A summary of the status of restricted stock units as of March 28, 2021, and changes during the three months then ended is presented below:

Unvested at June 28, 2020			—
Granted			545,600
Vested			—
Forfeited			—
Unvested at March 28, 2021			545,600

Note F - Earnings per Share (EPS)

The following table shows the reconciliation of the numerator and denominator of the basic EPS calculation to the numerator and denominator of the diluted EPS calculation (in thousands, except per share amounts).

	Three Months Ended					Nine Months Ended
	March 28, 2021		March 29, 2020			March 28, 2021		March 29, 2020
Net income available to common stockholders	$	416	$	(4,515	)	$	594	$	(4,264	)

BASIC:
Weighted average common shares		17,991		15,133			17,061		15,123

Net income (loss) per common share	$	0.02	$	(0.30	)	$	0.03	$	(0.28	)

DILUTED:
Weighted average common shares		17,991		15,133			17,061		15,123
Convertible notes		798		—			798		—
Dilutive stock options		—		—			—		—
Weighted average common shares outstanding		18,789		15,133			17,859		15,123

Net income (loss) per common share	$	0.02	$	(0.30	)	$	0.03	$	(0.28	)

For the three and nine months ended March 28, 2021, options to purchase 206,750 shares of common stock at exercise prices from $2.71 to $13.11 were excluded from the computation of diluted EPS because their inclusion would have been anti-dilutive.

Index

For the three and nine months ended March 29, 2020, options to purchase 216,550 shares of common stock at exercise prices ranging from $2.71 to $13.11 were excluded from the computation of diluted EPS because their inclusion would have been anti-dilutive.

Note G - Income Taxes

For the nine months ended March 28, 2021 the Company recorded an income tax expense of $5 thousand, all of which is attributable to current state taxes. The Company utilized net operating losses to offset federal taxes.

The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. As of March 28, 2021 the Company had established a full valuation allowance of $6.5 million against its deferred tax assets. The Company will continue to review the need for an adjustment to the valuation allowance.

Note H - Segment Reporting

The Company has three reportable operating segments as determined by management using the “management approach” as defined by the authoritative guidance on Disclosures about Segments of an Enterprise and Related Information: (1) Pizza Inn Franchising, (2) Pie Five Franchising and (3) Company-Owned Restaurants. These segments are a result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the three operating segments. Other revenue consists of non-recurring items.

The Pizza Inn and Pie Five Franchising segments establish franchisees, licensees and territorial rights. Revenue for this segment is primarily derived from franchise royalties, franchise license fees, sale of area development and foreign master license rights, incentive payments from third party suppliers and distributors, advertising funds, and supplier convention funds. Assets for these segments include equipment, furniture and fixtures.

The Company-Owned Restaurant segment includes sales and operating results for all Company-owned restaurants. Assets for this segment include equipment, furniture and fixtures for the Company-owned restaurants.

Revenue for corporate administration and other consists of rental income and interest income. Assets primarily include cash and short-term investments, as well as furniture and fixtures located at the corporate office and trademarks and other intangible assets. All assets are located within the United States.

Summarized in the following table are net sales and operating revenues, depreciation and amortization expense, and income before taxes, for the Company’s reportable segments as of the three months and nine months ended March 28, 2021 and March 29, 2020 (in thousands):

	Three Months Ended						Nine Months Ended
	March 28, 2021			March 29, 2020			March 28, 2021			March 29, 2020
Net sales and operating revenues:
Pizza Inn Franchising	$	1,714		$	1,942		$	4,718		$	5,454
Pie Five Franchising		418			665			1,350			2,539
Company-Owned Restaurants		—			36			—			240
Corporate administration and other		51			62			146			178
Consolidated revenues	$	2,183		$	2,705		$	6,214		$	8,411

Depreciation and amortization:
Pizza Inn Franchising	$	—		$	—		$	—		$	—
Pie Five Franchising		—			—			—			—
Company-Owned Restaurants		—			—			—			—
Combined		—			—			—			—
Corporate administration and other		41			45			128			141
Depreciation and amortization	$	41		$	45		$	128		$	141

Income before taxes:
Pizza Inn Franchising	$	1,339		$	1,568		$	3,723		$	4,303
Pie Five Franchising		164			179			563			1,126
Company-Owned Restaurants		(77	)		(446	)		(256	)		(885	)
Combined		1,426			1,301			4,030			4,544
Corporate administration and other		(1,009	)		(1,808	)		(3,431	)		(4,731	)
Income (loss) before taxes	$	417		$	(507	)	$	599		$	(187	)

Geographic information (revenues):
United States	$	2,114		$	2,652		$	6,047		$	8,255
Foreign countries		69			53			167			156
Consolidated total	$	2,183		$	2,705		$	6,214		$	8,411

Index

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 28, 2020 and may contain certain forward-looking statements that are based on current management expectations. Generally, verbs in the future tense and the words “believe,” “expect,” “anticipate,” “estimate,” “intends,” “opinion,” “potential” and similar expressions identify forward-looking statements. Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and franchisees, our liquidity and capital resources, and the impact of our historical and potential business strategies on our business, financial condition, and operating results. Our actual results could differ materially from our expectations. Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year ended June 28, 2020. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Results of Operations

Overview

Three Months Ended March 28, 2021

(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		137	$	17,503		35	$	4,074		172	$	21,577
Company-Owned		—		—		—		—		—		—
Total Domestic Units		137	$	17,503		35	$	4,074		172	$	21,577

International Franchised		33				—				33

Nine Months Ending March 28, 2021

(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		137	$	49,579		35	$	12,913		172	$	62,492
Company-Owned		—		—		—		—		—		—
Total Domestic Units		137	$	49,579		35	$	12,913		172	$	62,492

International Franchised		33				—				33

Index

Domestic units are located in 19 states predominantly situated in the southern half of the United States. International units are located in six foreign countries.

Basic net income per share increased $0.32 per share to $0.02 per share for the three months ended March 28, 2021, compared to the comparable period in the prior fiscal year. The Company had net income of $0.4 million for the three months ended March 28, 2021 compared to a net loss of $4.5 million in the comparable period in the prior fiscal year, on revenues of $2.2 million for the three months ended March 28, 2021 compared to $2.7 million in the comparable period in the prior fiscal year. The decline in revenue was primarily due to decreases in restaurant sales, franchise royalties, supplier and distributer incentives and franchise license fees. The $4.9 million increase in net income for the three months ended March 28, 2021, compared to the comparable period of the prior year was primarily the result of a $1.4 million decrease in expenses and a $4.1 million addition to the reserve against deferred taxes in the prior year partially offset by the $0.5 million decrease in revenues.

Basic net income per share increased $0.31 per share to $0.03 per share for the nine months ended March 28, 2021, compared to the comparable period in the prior fiscal year. The Company had net income of $0.6 million for the nine months ended March 28, 2021 compared to net loss of $4.3 million in the comparable period in the prior fiscal year, on revenues of $6.2 million for the nine months ended March 28, 2021 compared to $8.4 million in the comparable period in the prior fiscal year. The decline in revenue was primarily due to decreases in restaurant sales, franchise royalties, supplier convention funds and franchise license fees. The $4.9 million increase in net income for the nine months ended March 28, 2021 compared to the comparable period of the prior year was primarily the result of a $3.0 million decrease in expenses and a $4.1 million addition to the reserve against deferred taxes in the prior year offset by the $2.2 million decrease in revenues.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, and the disease has spread rapidly throughout the United States and the world. Federal, state and local responses to the COVID-19 pandemic, as well as our internal efforts to protect customers, franchisees and employees, have severely disrupted our business operations. Most of the domestic Pizza Inn buffet restaurants and Pie Five restaurants are in areas that were for varying periods subject to “shelter-in-place” and social distancing restrictions prohibiting in-store sales and, therefore, were limited to carry-out and/or delivery orders. In some areas, these restrictions limited non-essential movement outside the home, which discouraged or even precluded carry-out orders. In most cases, in-store dining has now resumed subject to seating capacity limitations, social distancing protocols, and enhanced cleaning and disinfecting practices. Further, the COVID-19 pandemic has precipitated significant job losses and a national economic downturn that typically impacts the demand for restaurant food service. Although most of our domestic restaurants have continued to operate under these conditions, we have experienced temporary closures from time to time during the pandemic.

The COVID-19 pandemic has resulted in dramatically reduced aggregate in-store retail sales at Buffet Units and Pie Five Units, modestly offset by increased aggregate carry-out and delivery sales. The decreased aggregate retail sales have correspondingly decreased supplier rebates and franchise royalties payable to the Company. During the fourth quarter of fiscal 2020, we participated in a government-sponsored loan program. (See, “Liquidity and Capital Resources--PPP Loan,” below.) We also temporarily furloughed certain employees and reduced base salary by 20% for all remaining employees for the fourth quarter of fiscal 2020, as well as reducing other expenses. While the Company will remain focused on controlling expenses, future results of operations are likely to be materially adversely impacted by the pandemic and its aftermath.

We expect that Buffet Units and Pie Five Units in many areas will continue to be subject to capacity restrictions for some time as social distancing protocols remain in place. Additionally, an outbreak or perceived outbreak of COVID-19 connected to restaurant dining could cause negative publicity directed at any of our brands and cause customers to avoid our restaurants. We cannot predict how long the pandemic will last or whether it will reoccur, what additional restrictions may be enacted, to what extent off-premises dining will continue, or if individuals will be comfortable returning to our Buffet Units and Pie Five Units following social distancing protocols. Any of these changes could materially adversely affect the Company’s future financial performance. However, the ultimate impact of COVID-19 on our future results of operations and liquidity cannot presently be predicted.

Adjusted EBITDA

Adjusted EBITDA for the fiscal quarter ended March 28, 2021, increased $0.4 million compared to the same period of the prior fiscal year. Year-to-date Adjusted EBITDA increased $0.4 million compared to the same period of the prior fiscal year. The following table sets forth a reconciliation of net income to Adjusted EBITDA for the periods shown (in thousands):

Index

RAVE RESTAURANT GROUP, INC.

ADJUSTED EBITDA

(In thousands)

	Three Months Ended					Nine Months Ended
	March 28, 2021		March 29, 2020			March 28, 2021		March 29, 2020
Net income (loss)	$	416	$	(4,515	)	$	594	$	(4,264	)
Interest expense		23		24			69		75
Income taxes		1		4,008			5		4,077
Depreciation and amortization		41		45			128		141
EBITDA	$	481	$	(438	)	$	796	$	29
Stock compensation expense (income)		39		(19	)		39		(104	)
Severance		—		38			—		157
(Gain) loss on sale of assets

Price	2.83	EPS	-0
Shares	16	P/E	-73
MCap	45	P/FCF	113
Net Debt	-2	EBIT	-1
TEV	43	TEV/EBIT	-79
TTM 2019-09-30, in MM, except price, ratios

10-Q	2021-03-28	Filed 2021-05-06
10-Q	2020-12-27	Filed 2021-02-04
10-Q	2020-09-27	Filed 2020-11-12
10-K	2020-06-28	Filed 2020-09-28
10-Q	2020-03-29	Filed 2020-06-29
10-Q	2019-12-29	Filed 2020-02-12
10-Q	2019-09-29	Filed 2019-11-13
10-K	2019-06-30	Filed 2019-09-30
10-Q	2019-03-24	Filed 2019-05-08
10-Q	2018-12-23	Filed 2019-02-06
10-Q	2018-09-23	Filed 2018-11-07
10-Q	2018-09-23	Filed 2018-11-06
10-K	2018-06-24	Filed 2018-09-24
10-Q	2018-03-25	Filed 2018-05-09
10-Q	2017-12-24	Filed 2018-02-06
10-Q	2017-09-24	Filed 2017-11-08
10-K	2017-06-25	Filed 2017-09-25
10-Q	2017-03-26	Filed 2017-05-10
10-Q	2016-12-25	Filed 2017-02-08
10-Q	2016-09-25	Filed 2016-11-09
10-K	2016-06-26	Filed 2016-09-23
10-Q	2016-03-27	Filed 2016-05-11
10-Q	2015-12-27	Filed 2016-02-10
10-Q	2015-09-27	Filed 2015-11-12
10-K	2015-06-28	Filed 2015-09-24
10-Q	2015-03-29	Filed 2015-05-13
10-Q	2014-12-28	Filed 2015-02-11
10-Q	2014-09-28	Filed 2014-11-12
10-K	2014-06-29	Filed 2014-09-23
10-Q	2014-03-30	Filed 2014-05-14
10-Q	2013-12-29	Filed 2014-02-12
10-Q	2013-09-29	Filed 2013-11-12
10-K	2013-06-30	Filed 2013-09-26
10-Q	2013-03-24	Filed 2013-05-08
10-Q	2012-12-23	Filed 2013-02-06
10-Q	2012-09-23	Filed 2012-11-07
10-K	2012-06-24	Filed 2012-09-24
10-Q	2012-03-25	Filed 2012-05-09
10-Q	2011-12-25	Filed 2012-02-08
10-Q	2011-09-25	Filed 2011-11-09
10-K	2011-06-26	Filed 2011-09-14
10-Q	2011-03-27	Filed 2011-05-10
10-Q	2010-12-26	Filed 2011-02-09
10-Q	2010-09-26	Filed 2010-11-09
10-K	2010-06-27	Filed 2010-09-16
10-Q	2010-03-28	Filed 2010-05-10
10-Q	2009-12-27	Filed 2010-02-09

8-K	2020-11-13
8-K	2020-10-15
8-K	2020-09-30
8-K	2020-07-14
8-K	2020-07-08
8-K	2020-06-29
8-K	2020-06-23
8-K	2020-05-08
8-K	2020-04-13
8-K	2020-03-13
8-K	2020-03-12
8-K	2020-03-09
8-K	2020-02-12
8-K	2019-12-16
8-K	2019-12-10
8-K	2019-11-13
8-K	2019-11-09
8-K	2019-10-18
8-K	2019-09-30
8-K	2019-07-10
8-K	2019-06-13
8-K	2019-06-01
8-K	2019-05-24
8-K	2019-05-08
8-K	2019-04-05
8-K	2019-02-11
8-K	2019-02-06
8-K	2018-12-07
8-K	2018-09-24
8-K	2018-09-23
8-K	2018-09-18
8-K	2018-07-31
8-K	2018-06-14
8-K	2018-05-09
8-K	2018-03-01
8-K	2018-02-06
8-K	2018-02-06

EX-31.1	brhc10023935_ex31-1.htm
EX-31.2	brhc10023935_ex31-2.htm
EX-32.1	brhc10023935_ex32-1.htm
EX-32.2	brhc10023935_ex32-2.htm

RAVE 10Q Quarterly Report

Rave Restaurant Group Earnings 2021-03-28