RAVE RESTAURANT GROUP, INC. [RAVE] Filings

10-Q 1 brhc20052421_10q.htm 10-Q

UNITED STATES 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 26, 2023 or

☐

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

For the transition period from ________ to ________.

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)

(Zip Code)

(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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 definitions 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 April 21, 2023, 14,154,453 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 Income (unaudited) for the three and nine months ended March 26, 2023 and March 27, 2022	3

	Condensed Consolidated Balance Sheets at March 26, 2023 (unaudited) and June 26, 2022	4

	Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the nine months ended March 26, 2023 and March 27, 2022	5

	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 26, 2023 and March 27, 2022	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	22

Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Mine Safety Disclosures	24

Item 5.	Other Information	24

Item 6.	Exhibits	25

Signatures		26

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	March 26, 2023			March 27, 2022			March 26, 2023			March 27, 2022
REVENUES:	$	2,970		$	2,620		$	8,841		$	7,869

COSTS AND EXPENSES:
Cost of sales		—			1			—			1
General and administrative expenses		1,486			1,357			4,282			3,940
Franchise expenses		964			705			3,033			2,475
Impairment of long-lived assets and other lease charges		—			—			5			—
Bad debt expense		28			1			37			9
Interest expense		—			14			1			61
Depreciation and amortization expense		54			46			158			138
Total costs and expenses		2,532			2,124			7,516			6,624

INCOME BEFORE TAXES		438			496			1,325			1,245
Income tax expense		(115	)		(3	)		(347	)		(10	)
NET INCOME	$	323		$	493		$	978		$	1,235

INCOME PER SHARE OF COMMON STOCK - BASIC:	$	0.02		$	0.03		$	0.06		$	0.07

INCOME PER SHARE OF COMMON STOCK - DILUTED:	$	0.02		$	0.03		$	0.06		$	0.07

Weighted average common shares outstanding - basic		14,154			18,005			15,712			18,005

Weighted average common and potential dilutive common shares outstanding		14,154			18,452			15,712			18,686

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 26, 2023			June 26, 2022
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	3,867		$	7,723
Accounts receivable, less allowance for bad debts of $59 and $27, respectively		1,492			1,981
Notes receivable, current		165			172
Property held for sale		19			—
Deferred contract charges, current		32			36
Prepaid expenses and other current assets		181			146
Total current assets		5,756			10,058

LONG-TERM ASSETS
Property, plant and equipment, net		283			365
Operating lease right of use asset, net		1,337			1,664
Intangible assets definite-lived, net		302			232
Notes receivable, net of current portion		96			201
Deferred tax asset, net		5,500			5,772
Deferred contract charges, net of current portion		216			224
Total assets	$	13,490		$	18,516

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable - trade	$	465		$	669
Accrued expenses		747			1,082
Other current liabilities		1			81
Operating lease liability, current		481			490
Short term loan		—			30
Deferred revenues, current		342			538
Total current liabilities		2,036			2,890

LONG-TERM LIABILITIES
Operating lease liability, net of current portion		1,066			1,421
Deferred revenues, net of current portion		718			793
Total liabilities		3,820			5,104

COMMITMENTS AND CONTINGENCIES (SEE NOTE D)

SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value; authorized 26,000,000 shares; issued 25,090,058 and 25,090,058 shares, respectively; outstanding 14,154,453 and 17,511,430 shares, respectively		251			251
Additional paid-in capital		37,643			37,384
Retained earnings		1,804			826
Treasury stock at cost
Shares in treasury: 10,935,605 and 7,578,628 respectively		(30,028	)		(25,049	)
Total shareholders’ equity		9,670			13,412

Total liabilities and shareholders’ equity	$	13,490		$	18,516

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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 27, 2021		25,090	$	251	$	37,215	$	(7,196	)		(7,085	)	$	(24,537	)	$	5,733

Stock-based compensation expense		—		—		42		—			—			—			42
Net income		—		—		—		285			—			—			285
Balance, September 26, 2021		25,090	$	251	$	37,257	$	(6,911	)		(7,085	)	$	(24,537	)	$	6,060

Stock-based compensation expense		—		—		43		—			—			—			43
Net income		—		—		—		457			—			—			457
Balance, December 26, 2021		25,090		251		37,300		(6,454	)		(7,085	)		(24,537	)		6,560

Stock-based compensation expense		—		—		42		—			—			—			42
Net income		—		—		—		493			—			—			493
Balance, March 27, 2022		25,090		251	$	37,342	$	(5,961	)		(7,085	)	$	(24,537	)	$	7,095

	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

Stock-based compensation expense		—		—		87		—		—			—			87
Purchase of treasury stock		—		—		—		—		(2,246	)		(3,595	)		(3,595	)
Net income		—		—		—		348		—			—			348
Balance, December 25, 2022		25,090	$	251	$	37,557	$	1,481		(10,936	)	$	(30,028	)	$	9,261

Stock-based compensation expense		—		—		86		—		—			—			86
Net income		—		—		—		323		—			—			323
Balance, March 26, 2023		25,090	$	251	$	37,643	$	1,804		(10,936	)	$	(30,028	)	$	9,670

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 26, 2023			March 27, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	978		$	1,235
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		259			127
Depreciation and amortization		105			105
Amortization of operating right of use assets		327			314
Amortization of intangible assets definite-lived		53			33
Amortization of debt issue costs		—			21
Allowance for bad debts		37			9
Deferred income tax		272			—
Changes in operating assets and liabilities:
Accounts receivable		452			(273	)
Notes receivable		22			28
Deferred contract charges		12			(17	)
Prepaid expenses and other		(35	)		65
Accounts payable - trade		(204	)		(29	)
Accrued expenses		(415	)		(175	)
Operating lease liability		(364	)		(347	)
Deferred revenues		(271	)		(571	)
Cash provided by operating activities		1,233			525

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on notes receivable		90			240
Proceeds from sale of assets		5			—
Purchase of intangible assets definite-lived		(123	)		(46	)
Purchase of property, plant and equipment		(52	)		(25	)
Cash (used in)/provided by investing activities		(80	)		169

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock		(4,979	)		—
Payment of convertible notes		—			(1,597	)
Payments on short term loan		(30	)		(190	)
Cash used in financing activities		(5,009	)		(1,787	)

Net decrease in cash and cash equivalents		(3,856	)		(1,093	)
Cash and cash equivalents, beginning of period		7,723			8,330
Cash and cash equivalents, end of period	$	3,867		$	7,237
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Income taxes	$	90		$	8

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”), 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 26, 2022.

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 and nine month periods ended March 26, 2023 and March 27, 2022 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 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 can range from five to 20 years. Fees received for renewal periods are amortized over the life of the renewal period.

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. Area development exclusivity fees that include rights to sub-franchise are amortized as revenue over the term of the contract.

Advertising fund contributions for Pie Five and Pizza Inn 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.

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
	March 26, 2023		March 27, 2022
Franchise royalties	$	1,295	$	1,137
Supplier and distributor incentive revenues		1,045		1,056
Franchise license fees		39		36
Area development exclusivity fees and foreign master license fees		5		5
Advertising funds contributions		528		339
Rental income		47		47
Other		11		—
	$	2,970	$	2,620

	Nine Months Ended
	March 26, 2023		March 27, 2022
Franchise royalties	$	3,680	$	3,315
Supplier and distributor incentive revenues		3,260		3,051
Franchise license fees		109		106
Area development exclusivity fees and foreign master license fees		13		14
Advertising funds contributions		1,448		1,083
Supplier convention funds		172		143
Rental income		140		140
Other		19		17
	$	8,841	$	7,869

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.

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 ten years. The Company has concluded that its office agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental 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.

As of March 26, 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.

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, leases that, at commencement, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, we recognize lease payments related to short-term leases in our income statements on a straight-line basis over the lease term. To the extent that there are variable lease payments, we recognize those payments in our Condensed Consolidated Statements of Income the period in which the obligation for those payments is incurred.

The components of total lease expense for the nine months ended March 26, 2023, the majority of which is included in general and administrative expense in the accompanying Condensed Consolidated Statements of Income, are as follows (in thousands):

	Nine Months Ended
	March 26, 2023
Operating lease cost	$	371
Rental income		(140	)
Total lease expense, net of sublease income	$	231

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

	Nine Months Ended
	March 26, 2023
Cash paid for amounts included in the measurement of lease liabilities	$	417

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

	March 26, 2023
Weighted average remaining lease term		2.3 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
2023	$	141
2024		511
2025		433
2026		382
Thereafter		191
Total operating lease payments	$	1,658
Less: imputed interest		(111	)
Total operating lease liability	$	1,547

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 on our behalf of up to 1,016,000 shares of our 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. On June 28, 2022, 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 5,000,000 shares to a total of 8,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date.

The following table furnishes information for purchases made pursuant to the 2007 Stock Purchase Plan during fiscal 2023:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan
June 27, 2022 - July 31, 2022		891,350	$	1.20		3,552,399		4,463,601
August 1, 2022 - August 28, 2022		219,541		1.35		3,771,940		4,244,060
August 29, 2022 - September 25, 2022		0		0		3,771,940		4,244,060
September 26, 2022 - October 30, 2022		0		0		3,771,940		4,244,060
October 31, 2022 - November 27, 2022		0		0		3,771,940		4,244,060
November 28, 2022 - December 25, 2022		2,246,086		1.60		6,018,026		1,997,974
December 26, 2022 - January 29, 2023		0		0		6,018,026		1,997,974
January 30, 2023 - February 26, 2023		0		0		6,018,026		1,997,974
February 27, 2023 - March 26, 2023		0		0		6,018,026		1,997,974
Total		3,356,977	$	1.48

The Company’s ability to purchase shares of our common stock is subject to various laws, regulations and policies as well as the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company may also purchase shares of our common stock other than pursuant to the 2007 Stock Purchase Plan or other publicly announced plans or programs.

On December 21, 2022, the Company entered into a Stock Purchase Agreement with Hallmark Financial Services, Inc. (“Hallmark”) pursuant to which the Company purchased from certain direct or indirect subsidiaries of Hallmark an aggregate of 2,246,086 shares of the Company’s common stock at a price of $1.60 per share, resulting in an aggregate purchase price of $3,593,738. The price per share represented the average closing price of the Company’s common stock on the Nasdaq Capital Market for the preceding 15 trading days. The transaction was approved by the Audit Committee of the Company, which consists of all of the independent directors of the Company. The Chairman of the Company, Mark E. Schwarz, who is also the Executive Chairman and Chief Executive Officer of Hallmark, recused himself from all deliberations with respect to the Stock Purchase Agreement with Hallmark.

Index

Note D - Commitments and Contingencies

On January 6, 2020, the Company’s former Chief Executive Officer, Scott Crane, filed suit in the U.S. District Court for the Eastern District of Texas alleging various claims in connection with the Company’s termination of his employment in July 2019. In general, the suit asserted that the Company terminated Mr. Crane for the purpose of depriving him of certain equity compensation that would otherwise have become due to him on October 15, 2019. The case proceeded to a jury trial, which resulted in a verdict in favor of Crane on his breach of contract claim. On February 9, 2022, the Court entered a $1.9 million judgment against the Company inclusive of attorney fees, court costs and pre-judgment interest. The Company has filed an appeal of the judgment to the Fifth Circuit Court of Appeals. There are three possibilities upon decision by the Fifth Circuit Court of Appeals: the judgment could be affirmed; the judgment could be reversed and the matter sent for a new trial; or, the judgment could be reversed and judgment entered in favor of the Company. Due to the range of possible decisions by the Fifth Circuit Court of Appeals, it is impossible to predict the ultimate outcome at this time.

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

Note E - Stock-Based Compensation

Stock Options:

For the three and nine months ended March 26, 2023, the Company recognized stock-based compensation expense related to stock options of $4 thousand and $11 thousand, respectively. For the three and nine months ended March 27, 2022, the Company recognized stock-based compensation expense related to stock options of zero and zero, respectively. As of March 26, 2023, there was $4 thousand 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:

	Nine Months Ended
	March 26, 2023		March 27, 2022
	Shares		Shares
Outstanding at beginning of year		111,750		166,750

Granted		40,000		—
Exercised		—		—
Forfeited/Canceled/Expired		—		—

Outstanding at end of period		151,750		166,750

Exercisable at end of period		111,750		166,750

Restricted Stock Units:

For the three and nine months ended March 26, 2023, the Company had stock-based compensation expense of $82 thousand and $248 thousand, respectively, related to RSUs. For the three and nine months ended March 27, 2022, the Company had stock-based compensation expense of $42 thousand and $127 thousand, respectively, related to RSUs. As of March 26, 2023, there was $330 thousand unamortized stock-based compensation expense related to RSUs.

A summary of the status of restricted stock units as of March 26, 2023, and changes during the nine months then ended is presented below:

Unvested at June 26, 2022			885,688
Granted			—
Issued			—
Forfeited			—
Unvested at March 26, 2023			885,688

Index

Note F - Earnings per Share (EPS)

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

	Three Months Ended				Nine Months Ended
	March 26, 2023		March 27, 2022		March 26, 2023		March 27, 2022
Net income available to common stockholders	$	323	$	493	$	978	$	1,235

BASIC:
Weighted average common shares		14,154		18,005		15,712		18,005

Net income per common share	$	0.02	$	0.03	$	0.06	$	0.07

DILUTED:
Weighted average common shares		14,154		18,005		15,712		18,005
Convertible notes		—		447		—		681
Dilutive stock options		—		—		—		—
Weighted average common shares outstanding		14,154		18,452		15,712		18,686

Net income per common share	$	0.02	$	0.03	$	0.06	$	0.07

For the three and nine months ended March 26, 2023, exercisable options to purchase 111,750 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 and nine months ended March 27, 2022, exercisable options to purchase 166,750 shares of common stock at exercise prices ranging from $3.11 to $13.11 were excluded from the computation of diluted EPS because they had an intrinsic value of zero.

Note G - Income Taxes

For the three and nine months ended March 26, 2023, the Company recorded an income tax expense of $115 thousand and $347 thousand, respectively. For the three and nine months ended March 27, 2022, the Company recorded an income tax expense of $3 thousand and $10 thousand, respectively. For the three months ended March 26, 2023, the federal and state tax expense were $91 thousand and $24 thousand, respectively. For the nine months ended March 26, 2023, the federal and state tax expense were $272 thousand and $75 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 H - Segment Reporting

The Company has three reportable operating segments as determined by management using the “management approach” as defined by ASC 280 Disclosures about Segments of an Enterprise and Related Information: (1) Pizza Inn Franchising, (2) Pie Five Franchising and (3) Company-Owned Restaurants. These segments are a result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the three operating segments. Other revenue consists of nonrecurring items.

The Pizza Inn and Pie Five Franchising segments establish franchisees, licensees and territorial rights. Revenue for these segments are derived from franchise royalties, franchise fees, sale of area development and foreign master license rights, 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 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 March 26, 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.

Index

Summarized in the following tables are net sales and operating revenues, depreciation and amortization expense, income from continuing operations before taxes, capital expenditures and assets for the Company’s reportable segments as of the three and nine months ended March 26, 2023 and March 27, 2022 (in thousands):

	Three Months Ended						Nine Months Ended
	March 26, 2023			March 27, 2022			March 26, 2023			March 27, 2022
Net sales and operating revenues:
Pizza Inn Franchising	$	2,450		$	2,091		$	7,270		$	6,279
Pie Five Franchising		473			482			1,431			1,450
Company-Owned Restaurants		—			—			—			—
Corporate administration and other		47			47			140			140
Consolidated revenues	$	2,970		$	2,620		$	8,841		$	7,869

Depreciation and amortization:
Corporate administration and other	$	54		$	46		$	158		$	138
Depreciation and amortization	$	54		$	46		$	158		$	138

Income before taxes:
Pizza Inn Franchising	$	1,701		$	1,648		$	4,907		$	4,506
Pie Five Franchising		258			220			761			748
Company-Owned Restaurants		—			(1	)		—			(3	)
Combined		1,959			1,867			5,668			5,251
Corporate administration and other		(1,521	)		(1,371	)		(4,343	)		(4,006	)
Income before taxes	$	438		$	496		$	1,325		$	1,245

Geographic information (revenues):
United States	$	2,910		$	2,547		$	8,638		$	7,643
Foreign countries		60			73			203			226
Consolidated revenues	$	2,970		$	2,620		$	8,841		$	7,869

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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 26, 2022 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 26, 2022. 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 26, 2023

(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		122	$	25,689		30	$	4,998		152	$	30,687