RAVE 10-Q Quarter ended Sept. 27, 2020

☑

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

☐

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

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

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

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

PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements	Page
		Condensed Consolidated Statements of Operations (Unaudited) for the three months ended September 27, 2020 and September 29, 2019	3
		Condensed Consolidated Balance Sheets at September 27, 2020 (Unaudited) and June 28, 2020	4
		Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended September 27, 2020 and September 29, 2019	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended September 27, 2020 and September 29, 2019	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	22
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	23
Item 1A.		Risk Factors	23
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.		Defaults Upon Senior Securities	23
Item 4.		Mine Safety Disclosures	23
Item 5.		Other Information	23
Item 6.		Exhibits	24
Signatures			25

		Three Months Ended
		September 27 , 2020				September 29 , 2019
REVENUES:		$	1,903			$	2,876
COSTS AND EXPENSES:
Cost of sales			78				134
General and administrative expenses			1,089				1,363
Franchise expenses			547				866
Gain on sale of assets			—				(11	)
Impairment of long-lived assets and other lease charges			17				148
Bad debt expense (recovery)			27				(8	)
Interest expense			23				27
Depreciation and amortization expense			44				47
Total costs and expenses			1,825				2,566
INCOME BEFORE TAXES			78				310
Income tax expense			2				73
NET INCOME			76				237
INCOME PER SHARE OF COMMON STOCK - BASIC:		$	0.00			$	0.02
INCOME PER SHARE OF COMMON STOCK - DILUTED:		$	0.00			$	0.01
Weighted average common shares outstanding - basic			15,451				15,106
Weighted average common and potential dilutive common shares outstanding			16,249				15,924

		September 27 , 2020				June 28 , 2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,936			$	2,969
Restricted cash			234				234
Accounts receivable, less allowance for bad debts of $77 and $269, respectively			1,012				965
Notes receivable			484				546
Deferred contract charges			36				44
Prepaid expenses and other			218				174
Total current assets			4,920				4,932
LONG-TERM ASSETS
Property, plant and equipment, net			358				366
Operating lease right of use asset, net			3,421				3,567
Intangible assets definite-lived, net			146				155
Notes receivable, net of current portion			445				449
Long-term deferred contract charges			242				231
Deposits and other			—				5
Total assets		$	9,532			$	9,705
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable – trade		$	469			$	446
Accounts payable - lease termination impairments			421				407
Accrued expenses			685				775
Operating lease liability, current			644				632
Deferred revenues			293				254
Total current liabilities			2,512				2,514
LONG-TERM LIABILITIES
Convertible notes			1,556				1,549
PPP loan			657				657
Operating lease liability, net of current portion			3,307				3,471
Deferred revenues, net of current portion			873				960
Other long-term liabilities			51				51
Total liabilities			8,956				9,202
COMMITMENTS AND CONTINGENCIES (SEE NOTE D)
SHAREHOLDERS’ EQUITY
Common stock, $.01 par value; authorized 26,000,000 shares; issued 22,550,376 and 22,550,376 shares, respectively; outstanding 15,465,222 and 15,465,222 shares, respectively			225				225
Additional paid-in capital			33,528				33,531
Accumulated deficit			(8,640	)			(8,716	)
Treasury stock at cost
Shares in treasury: 7,085,154 and 7,085,154, respectively			(24,537	)			(24,537	)
Total shareholders’ equity			576				503
Total liabilities and shareholders’ equity		$	9,532			$	9,705

		Common Stock								Additional Paid-in Capital				Accumulated Deficit				Treasury Stock								Total
		Shares				Amount												Shares				Amount
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 cost - 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

		Common Stock								Additional Paid-in Capital				Accumulated Deficit				Treasury Stock								Total
		Shares				Amount												Shares				Amount
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

		Three Months Ended
		September 27 , 2020				September 29 , 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	76			$	237
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Impairment of fixed assets and other assets			17				148
Depreciation and amortization			44				47
Amortization of operating right of use assets			146				115
Amortization of debt issue costs			7				9
Gain on the sale of assets			—				(11	)
Provision for bad debt			27				(8	)
Deferred income tax			—				71
Changes in operating assets and liabilities:
Accounts receivable			(74	)			272
Notes receivable			62				—
Deferred contract charges			(3	)			(3	)
Inventories			—				1
Prepaid expenses and other			(44	)			46
Deposits and other			5				1
Accounts payable – trade			23				(110	)
Accounts payable - lease termination impairments			(3	)			(373	)
Accrued expenses			(90	)			(47	)
Operating lease liability			(152	)			(120	)
Deferred revenue			(48	)			(122	)
Deferred rent and other			—				(21	)
Cash (used in) provided by operating activities			(7	)			132
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on notes receivable from fixed asset sales			4				44
Purchase of property, plant and equipment			(27	)			(17	)
Cash (used in) provided by investing activities			(23	)			27
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity issuance costs			(3	)			(2	)
Cash (used in) financing activities			(3	)			(2	)
Net (decrease)/increase in cash, cash equivalents and restricted cash			(33	)			157
Cash, cash equivalents and restricted cash, beginning of period			3,203				2,264
Cash, cash equivalents and restricted cash, end of period		$	3,170			$	2,421
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest		$	—			$	2
Income taxes		$	7			$	1
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

		Three Months Ended
		September 27 , 2020				September 29 , 2019
Restaurant sales		$	—			$	108
Franchise royalties			858				1,108
Supplier and distributor incentive revenues			767				1,023
Franchise license fees			102				211
Area development fees and foreign master license fees			4				7
Advertising funds			125				152
Supplier convention funds			—				215
Rental income			48				41
Other			(1	)			11
		$	1,903			$	2,876

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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);

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

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

		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.

		Three Months Ended
		September 27, 2020
Operating lease cost		$	670
Sublease income			(195	)
Total lease expense, net of sublease income		$	475

		Three Months Ended
		September 27, 2020
Cash paid for amounts included in the measurement of lease liabilities		$	193

		September 27, 2020
Weighted average remaining lease term		5.0 Years
Weighted average discount rate			4.0	%

		Operating Leases
Remainder of fiscal year 2021		$	593
2022			804
2023			813
2024			766
Thereafter			1,448
Total operating lease payments		$	4,424
Less: imputed interest			(473	)
Total operating lease liability		$	3,951

		Three Months Ended
		September 27 , 2020				September 29 , 2019
		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

		Three Months Ended
		September 27 , 2020				September 29 , 2019
Net income available to common stockholders		$	76			$	237
BASIC:
Weighted average common shares			15,451				15,106
Net income per common share		$	0.00			$	0.02
DILUTED:
Weighted average common shares			15,451				15,106
Convertible notes			798				815
Dilutive stock options			—				3
Weighted average common shares outstanding			16,249				15,924
Net income per common share		$	0.00			$	0.01

		Three Months Ended
		September 27 , 2020				September 29 , 2019
Net sales and operating revenues:
Pizza Inn Franchising		$	1,380			$	1,864
Pie Five Franchising			476				852
Company-Owned Restaurants			—				108
Corporate administration and other			47				52
Consolidated revenues		$	1,903			$	2,876
Depreciation and amortization:
Pizza Inn Franchising		$	—			$	—
Pie Five Franchising			—				—
Company-Owned Restaurants			—				—
Combined			—				—
Corporate administration and other			44				47
Depreciation and amortization		$	44			$	47
Income before taxes:
Pizza Inn Franchising		$	1,100			$	1,412
Pie Five Franchising			209				438
Company-Owned Restaurants			(100	)			(203	)
Combined			1,209				1,647
Corporate administration and other			(1,131	)			(1,337	)
Income before taxes		$	78			$	310
Geographic information (revenues):
United States		$	1,859			$	2,817
Foreign countries			44				59
Consolidated total		$	1,903			$	2,876

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

		Pizza Inn								Pie Five								All Concepts
		Ending Units				Retail Sales				Ending Units				Retail Sales				Ending Units				Retail Sales
Domestic Franchised/Licensed			146			$	16,319				39			$	4,507				185			$	20,826
Company-Owned			—				—				—				—				—				—
Total Domestic Units			146			$	16,319				39			$	4,507				185			$	20,826
International Franchised			32								—								32

		Three Months Ended
		September 27 , 2020				September 29 , 2019
Net income		$	76			$	237
Interest expense			23				27
Income taxes			2				73
Depreciation and amortization			44				47
EBITDA		$	145			$	384
Gain on sale/disposal of assets			—				(11	)
Impairment of long-lived assets and other lease charges			17				148
Franchisee default and closed store revenue			(67	)			(147	)
Closed and non-operating store costs			82				6
Adjusted EBITDA		$	177			$	380

		Three Months Ended
		September 27 , 2020				September 29 , 2019
Pizza Inn Retail Sales - Total Domestic Units		(in thousands, except unit data)
Domestic Units
Buffet Units - Franchised		$	14,724			$	20,285
Delco/Express Units - Franchised			1,536				1,545
PIE Units - Licensed			59				64
Total Domestic Retail Sales		$	16,319			$	21,894
Pizza Inn Comparable Store Retail Sales - Total Domestic			15,812				20,155
Pizza Inn Average Units Open in Period
Domestic Units
Buffet Units - Franchised			79				84
Delco/Express Units - Franchised			55				59
PIE Units - Licensed			12				9
Total Domestic Units			146				152

		Three Months Ended September 27, 2020
		Beginning Units				Opened				Concept Change				Closed				Ending Units
Domestic Units
Buffet Units - Franchised			83				—				—				4				79
Delco/Express Units - Franchised			55				—				—				—				55
PIE Units - Licensed			13				—				—				1				12
Total Domestic Units			151				—				—				5				146
International Units (all types)			38				1				—				7				32
Total Units			189				1				—				12				178

		Three Months Ended
		September 27 , 2020				September 29 , 2019
		(in thousands, except unit data)
Pie Five Retail Sales - Total Units
Domestic Units - Franchised		$	4,507			$	8,728
Domestic Units - Company-owned			—				108
Total Domestic Retail Sales		$	4,507			$	8,836
Pie Five Comparable Store Retail Sales - Total		$	4,039			$	5,268
Pie Five Average Units Open in Period
Domestic Units - Franchised			39				57
Domestic Units - Company-owned			—				1
Total Domestic Units			39				58

		Three Months Ended September 27, 2020
		Beginning Units				Opened				Transfer				Closed				Ending Units
Domestic - Franchised			42				1				—				4				39
Domestic - Company-owned			—				—				—				—				—
Total Domestic Units			42				1				—				4				39

Pie Five - Company-Owned Restaurants		Three Months Ended
(in thousands, except store weeks and average data)		September 27 ,				September 29 ,
		2020				2019
Store weeks (excluding partial weeks)			—				13
Average weekly sales			—				8,308
Average number of units			—				1
Restaurant sales (excluding partial weeks)			—				108
Restaurant sales			—				108
Loss before taxes			(100	)			(203	)
Allocated marketing and advertising expenses			—				5
Impairment, other lease charges and non-operating store costs			100				154
Restaurant operating cash flow			—				(44	)

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“EBITDA” represents earnings before interest, taxes, depreciation and amortization.

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“Adjusted EBITDA” represents earnings before interest, taxes, depreciation and amortization, stock compensation expense, 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.

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“Retail sales” represents the restaurant sales reported by our franchisees and Company-owned restaurants, which may be segmented by brand or domestic/international locations.

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“System-wide retail sales” represents combined retail sales for franchisee and Company-owned restaurants for a specified brand.

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“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.

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“Store weeks” represent the total number of full weeks that specified restaurants were open during the period.

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“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.

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“Average weekly sales” for a specified period is calculated as total retail sales (excluding partial weeks) divided by store weeks in the period.

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“Restaurant operating cash flow” represents the pre-tax income earned by Company-owned restaurants before (1) allocated marketing and advertising expenses, (2) impairment and other lease charges, and (3) non-operating store costs.

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“Non-operating store costs” represent gain or loss on asset disposal, store closure expenses, lease termination expenses and expenses related to abandoned store sites.

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“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.

		Pizza Inn Franchising								Pie Five Franchising								Company-Owned Restaurants								Corporate								Total
		Fiscal Quarter Ended								Fiscal Quarter Ended								Fiscal Quarter Ended								Fiscal Quarter Ended								Fiscal Quarter Ended
		September 27 , 2020				September 29 , 2019				September 27 , 2020				September 29 , 2019				September 27 , 2020				September 29 , 2019				September 27 , 2020				September 29 , 2019				September 27 , 2020				September 29 , 2019
REVENUES:
Franchise and license revenues		$	1,380			$	1,864			$	476			$	852			$	—			$	—			$	—			$	—			$	1,856			$	2,716
Restaurant sales			—				—				—				—				—				108				—				—				—				108
Rental income			—				—				—				—				—				—				48				41				48				41
Interest income and other			—				—				—				—				—				—				(1	)			11				(1	)			11
Total revenues			1,380				1,864				476				852				—				108				47				52				1,903				2,876
COSTS AND EXPENSES:
Cost of sales			—				—				—				—				78				134				—				—				78				134
General and administrative expenses			—				—				—				—				5				29				1,084				1,334				1,089				1,363
Franchise expenses			280				452				267				414				—				—				—				—				547				866
Gain on sale of assets			—				—				—				—				—				—				—				(11	)			—				(11	)
Impairment of long-lived assets and other lease charges			—				—				—				—				17				148				—				—				17				148
Bad debt expense (recovery)			—				—				—				—				—				—				27				(8	)			27				(8	)
Interest expense			—				—				—				—				—				—				23				27				23				27
Amortization and depreciation expense			—				—				—				—				—				—				44				47				44				47
Total costs and expenses			280				452				267				414				100				311				1,178				1,389				1,825				2,566
INCOME/(LOSS) BEFORE TAXES		$	1,100			$	1,412			$	209			$	438			$	(100	)		$	(203	)		$	(1,131	)		$	(1,337	)		$	78			$	310

3.1	Amended and Restated Articles of Incorporation of Rave Restaurant Group, Inc. (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 8, 2015).
3.2	Amended and Restated Bylaws of Rave Restaurant Group, Inc. (incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed January 8, 2015).
4.1	Indenture for 4% Convertible Senior Notes due 2022 (filed as Exhibit 4.1 to Form S-3/A filed January 6, 2017 and incorporated herein by reference).
4.2	Pledge Agreement (filed as Exhibit 4.2 to Form S-3/A filed January 6, 2017 and incorporated herein by reference).
4.3	Supplemental Indenture Number (filed as Exhibit 4.1 to Form 8-K filed November 9, 2017 and incorporated herein by reference).
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
32.1	Section 1350 Certification of Principal Executive Officer.
32.2	Section 1350 Certification of Principal Financial Officer.
101	Interactive data files pursuant to Rule 405 of Regulation S-T.

	RAVE RESTAURANT GROUP, INC. (Registrant)
	By:	/s/ Brandon L. Solano
		Brandon L. Solano
		Chief Executive Officer
		(principal executive officer)
	By:	/s/ Clinton D. Fendley
		Clinton D. Fendley
		Vice President of Finance
		(principal financial officer)
Dated: November 12, 2020