RAVE RESTAURANT GROUP, INC. - Quarter Report: 2020 March (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 29, 2020

☐

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)

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:

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.

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 June 29, 2020, 15,463,022 shares of the issuer’s common stock were outstanding.

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RAVE RESTAURANT GROUP, INC.

PART I. FINANCIAL INFORMATION

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statement.

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

(Unaudited)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements of Rave Restaurant Group, Inc. (the "Company") 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 30, 2019.

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.

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.

Fiscal Quarters

The three and nine month periods ended March 29, 2020 and March 24, 2019 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:

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.

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.

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 29, 2020				March 24, 2019
Restaurant sales		$	36			$	315
Franchise royalties			948				1,126
Supplier and distributor incentive revenues			1,085				1,070
Franchise license fees			175				316
Area development fees and foreign master license fees			4				7
Advertising funds			391				148
Supplier convention funds			-				79
Rental income			54				-
Other			12				9
		$	2,705			$	3,070

		Nine Months Ended
		March 29, 2020				March 24, 2019
Restaurant sales		$	240			$	534
Franchise royalties			3,084				3,610
Supplier and distributor incentive revenues			3,141				3,302
Franchise license fees			796				928
Area development fees and foreign master license fees			16				35
Advertising funds			675				514
Supplier convention funds			278				295
Rental income			144				-
Other			37				38
		$	8,411			$	9,256

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.

(2)	Adoption of ASU 2014-09, “Revenue from Contracts with Customers”

The Company adopted ASU 2014-09 and Topic 606 using the modified retrospective transition method effective June 25, 2018. A cumulative effect adjustment of $1.6 million was recorded as a reduction to retained earnings as of June 25, 2018 to reflect the impact of adopting Topic 606.

The adoption of Topic 606 did not impact the recognition and reporting of our two largest sources of revenue: franchise royalties and supplier and distributor incentives. The items impacted by the adoption include the timing of franchise and development revenue recognition and the presentation of advertising funds and supplier convention contributions.

Cumulative adjustment from adoption

As noted above, an after-tax reduction of $1.6 million was recorded to retained earnings to reflect the cumulative impact of adopting Topic 606. This was comprised of $1.3 million related to domestic franchise and renewal fees, $0.2 million related to domestic area development fees and $0.3 million related to international development and franchise master license fees partially offset by $0.2 million in deferral of contract-related expenses.

(3)	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:

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 is as follows (in thousands):

		July 1,
		2019
		Adoption				Reclassification (1)				Total Adjustment
Balance Sheet:
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.

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 but are disclosed below. Short-term lease costs exclude expenses related to leases with a lease term of one month or less.

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.

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.

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.

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

The Company 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.

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.

Leases typically do not provide an implicit rate. Accordingly, the Company is required to use 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.

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.

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.

The components of total lease expense for the nine months ended March 29, 2020, the majority of which is included in general and administrative expense, are as follows (in thousands):

		Nine Months Ended
		March 29, 2020
Operating lease cost		$	474
Sublease income			(143	)
Total lease expense, net of sublease income		$	331

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

		Nine Months Ended
		March 29, 2020
Cash paid for amounts included in the measurement of lease liabilities		$	491

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

		March 29, 2020
Operating lease right of use asset, net		$	3,712
Operating Lease liability - current			620
Operating lease liability - long-term			3,635

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

		March 29, 2020
Weighted average remaining lease term		5.5 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 2020		$	193
2021			785
2022			804
2023			813
2024			766
Thereafter			1,449
Total operating lease payments		$	4,810
Less: imputed interest			(555	)
Total operating lease liability		$	4,255

(4)	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 29, 2020 or March 24, 2019.

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.

For the fiscal quarters ended March 29, 2020 and March 24, 2019, the Company did not recognize any stock-based compensation expense related to stock options. As of March 29, 2020, there was no unamortized stock-based compensation expense related to stock options.

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

For the three and nine months ended March 29, 2020, the Company had stock-based compensation credit of $19 thousand and $104 thousand, respectively, related to RSU’s. For the three and nine months ended March 24, 2019, the Company had stock-based compensation expense of $0.1 million and $0.4 million, respectively. As of March 29, 2020, unamortized stock-based compensation expense related to RSU’s was $9 thousand.

A summary of the status of restricted stock units as of March 29, 2020, and changes during the nine months then ended is presented below:

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).

(In thousands, except per share amounts)
		Three Months Ended								Nine Months Ended
		March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019
Net income (loss) available to common stockholders		$	(4,515	)		$	(263	)		$	(4,264	)		$	77
Interest saved on convertible notes at 4%		$	16			$	16			$	48			$	47
Adjusted net income (loss)		$	(4,499	)		$	(247	)		$	(4,216	)		$	124
BASIC:
Weighted average common shares			15,133				15,071				15,123				15,069
Net income per common share		$	(0.30	)		$	(0.02	)		$	(0.28	)		$	0.01
DILUTED:
Weighted average common shares			15,133				15,071				15,123				15,069
Convertible notes			-				-				-				833
Dilutive stock options			-				-				-				-
Weighted average common shares outstanding			15,133				15,071				15,123				15,902
Net income per common share		$	(0.30	)		$	(0.02	)		$	(0.28	)		$	0.01

For the three and nine months ended March 29, 2020, options to purchase 216,550 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.

For the three and nine months ended March 24, 2019, options to purchase 288,056 shares of common stock at exercise prices ranging from $1.55 to $13.11 were excluded from the computation of diluted EPS because their inclusion would have been anti-dilutive.

For the nine months ended March 29, 2020, the Company recorded an income tax expense of $4.1 million including federal deferred tax expense of $4.1 million and state deferred tax expense of $12 thousand and $11 thousand in current state 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 the 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. For the quarter ending March 29, 2020, it was determined that the valuation allowance on deferred tax assets should be increased by $4.3 million resulting in a full valuation allowance.

As of March 29, 2020, the Company reflects $6.7 million of deferred tax assets and a valuation allowance of $6.7 million.  The Company will continue to review the need for future adjustments to the valuation allowance.

(9)	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 29, 2020 and March 24, 2019 (in thousands):

		Three Months Ended								Nine Months Ended
		March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019
Net sales and operating revenues:
Pizza Inn Franchising		$	1,942			$	1,645			$	5,454			$	5,338
Pie Five Franchising			665				1,102				2,539				3,348
Company-Owned Restaurants			36				314				240				533
Corporate administration and other			62				9				178				37
Consolidated revenues		$	2,705			$	3,070			$	8,411			$	9,256
Depreciation and amortization:
Pizza Inn Franchising		$	-			$	-			$	-			$	-
Pie Five Franchising			-				-				-				-
Company-Owned Restaurants			-				31				-				93
Combined			-				31				-				93
Corporate administration and other			45				89				141				292
Depreciation and amortization		$	45			$	120			$	141			$	385
Income before taxes:
Pizza Inn Franchising		$	1,568			$	1,308			$	4,303			$	4,081
Pie Five Franchising			179				551				1,126				1,764
Company-Owned Restaurants			(446	)			(253	)			(885	)			(677	)
Combined			1,301				1,606				4,544				5,168
Corporate administration and other			(1,808	)			(1,860	)			(4,731	)			(4,903	)
Income before taxes		$	(507	)		$	(254	)		$	(187	)		$	265
Geographic information (revenues):
United States		$	2,652			$	2,986			$	8,255			$	9,042
Foreign countries			53				84				156				214
Consolidated total		$	2,705			$	3,070			$	8,411			$	9,256

(10)	Subsequent Events

On April 13, 2020, the Company received the proceeds from a loan in the amount of $656,830 (the “PPP Loan”) from JPMorgan Chase Bank, N.A. (the “Lender”) pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”).  The PPP Loan matures on April 10, 2022 and bears interest at a rate of 0.98% per annum. Commencing November 10, 2020, the Company is required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize by April 10, 2022 the principal amount outstanding on the PPP Loan as of October 10, 2020. The Company may prepay the PPP Loan at any time prior to maturity with no prepayment penalties. The PPP Loan is evidenced by a promissory note dated April 10, 2020, which contains various certifications and agreements related to the PPP, as well customary default and other provisions.

The PPP Loan is unsecured by the Company and is guaranteed by the SBA.  All or a portion of the PPP Loan may be forgiven by the SBA upon application by the Company accompanied by documentation of expenditures in accordance with SBA requirements under the PPP.  In the event all or any portion of the PPP Loan is forgiven, the amount forgiven will be applied to outstanding principal.

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 30, 2019 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 30, 2019. 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

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”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third party distributors. At March 29, 2020, Company-owned, franchised and licensed units consisted of the following:

Domestic units are located in 22 states predominantly situated in the southern half of the United States. International units are located in seven foreign countries.

          Basic net loss increased $0.28 per share to $0.30 per share for the three months ended March 29, 2020, compared to basic net loss of $0.02 per share in the comparable period in the prior fiscal year. The Company had net loss of $4.5 million for the three months ended March 29, 2020 compared to net loss of $0.3 million in the comparable period in the prior fiscal year, on revenues of $2.7 million for the three months ended March 29, 2020 compared to $3.1 million in the comparable period in the prior fiscal year. The decline in revenue was primarily due to decreases in restaurant sales, franchise royalties and franchise license fees partially offset by an increase in advertising funds.  The increased net loss for the three months ended March 29, 2020, compared to the comparable period of the prior year was primarily the result of a $4.1 million addition to the reserve against net deferred tax assets.

Basic net income declined $0.29 per share for the nine months ended March 29, 2020, compared to the comparable period in the prior fiscal year. The Company had net loss of $4.3 million for the nine months ended March 29, 2020 compared to net income of $0.1 million in the comparable period in the prior fiscal year, on revenues of $8.4 million for the nine months ended March 29, 2019 compared to $9.3 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 incentive revenues and franchise license fees partially offset by increases in advertising funds and rental income. The increased net loss for the nine months ended March 29, 2020, compared to the comparable period of the prior year was primarily the result of a $4.1 million addition to the reserve against net deferred tax assets taken during the latest fiscal quarter.

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 have been subject to “shelter-in-place” and social distancing restrictions prohibiting in-store sales and, therefore, have been limited to carry-out and/or delivery orders.  In some areas, these restrictions have also limited non-essential movement outside the home, which has discouraged or precluded even carry-out orders.  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, two domestic franchised Buffet Units and 11 domestic franchised Pie Five Units have closed at least temporarily since restrictions were announced. The closure of one Company-owned Pie Five restaurant in January 2020 was unrelated to the COVID-19 outbreak but the quick closure of a Pie Five Unit recently acquired from a franchisee was accelerated by the pandemic.

Due to the timing of events, the COVID-19 pandemic had only a moderate impact on our operations during the three and nine months ended March 29, 2020.  However, we expect a more significant adverse impact on our results of operations and liquidity during the fourth quarter of fiscal 2020 and continuing into fiscal 2021.  Operational disruptions have 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.  Although we have furloughed certain employees, reduced base salary by 20% for all remaining employees and otherwise reduced expenses, future results of operations are likely to be materially adversely impacted.

As restrictions to in-store dining begin to be eased, we expect that Buffet Units and Pie Five Units 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.

		Three Months Ended								Nine Months Ended
		March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019
Net income		$	(4,515	)		$	(263	)		$	(4,264	)		$	77
Interest expense			24				26				75				77
Income taxes			4,008				9				4,077				188
Depreciation and amortization			45				120				141				385
EBITDA		$	(438	)		$	(108	)		$	29			$	727
Stock compensation expense (income)			(19	)			129				(104	)			410
Severance			38				-				157				-
Loss (gain) on sale/disposal of assets			18				104				7				(250	)
Impairment of long-lived assets and other lease charges			495				219				836				389
Franchisee default and closed store revenue			(133	)			(248	)			(587	)			(714	)
Closed and non-operating store costs			45				70				50				151
Adjusted EBITDA		$	6			$	166			$	388			$	713

		Three Months Ended								Nine Months Ended
		March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019
Pizza Inn Retail Sales - Total Domestic Units		(in thousands, except unit data)								(in thousands, except unit data)
Domestic Units
Buffet Units - Franchised		$	18,313			$	20,469			$	57,866			$	60,070
Delco/Express Units - Franchised			1,485				1,717			$	4,554				5,296
PIE Units - Licensed			69				56			$	245				136
Total Domestic Retail Sales		$	19,867			$	22,242			$	62,665			$	65,502
Pizza Inn Comparable Store Retail Sales - Total Domestic			18,994				20,603				60,182				60,893
Pizza Inn Average Units Open in Period
Domestic Units
Buffet Units - Franchised			83				89				83				88
Delco/Express Units - Franchised			56				59				57				60
PIE Units - Licensed			13				7				12				5
Total Domestic Units			152				155				152				153

		Three Months Ended March 29, 2020
		Beginning Units				Opened				Concept Change				Closed				Ending Units
Domestic Units
Buffet Units - Franchised			82				1				-				-				83
Delco/Express Units - Franchised			59				1				-				4				56
PIE Units - Licensed			12				1				-				-				13
Total Domestic Units			153				3				-				4				152
International Units (all types)			34				3				-								37
Total Units			187				6				-				4				189

		Nine Months Ending March 29, 2020
		Beginning Units				Opened				Concept Change				Closed				Ending Units
Domestic Units
Buffet Units - Franchised			87				2				-				6				83
Delco/Express Units - Franchised			59				2				-				5				56
PIE Units - Licensed			9				4				-				-				13
Total Domestic Units			155				8				-				11				152
International Units (all types)			48				4				-				15				37
Total Units			203				12				-				26				189

		Three Months Ended								Nine Months Ended
		March 29, 2020				March 29, 2019				March 29, 2020				March 29, 2019
		(in thousands, except unit data)								(in thousands, except unit data)
Pie Five Retail Sales - Total Units
Domestic Units - Franchised		$	5,547			$	9,124			$	21,666			$	30,799
Domestic Units - Company-owned			36				314				240				533
Total Domestic Retail Sales		$	5,583			$	9,438			$	21,906			$	31,332
Pie Five Comparable Store Retail Sales - Total		$	4,726			$	6,014			$	19,342			$	22,589
Pie Five Average Units Open in Period
Domestic Units - Franchised			43				62				49				67
Domestic Units - Company-owned			-				2				1				1
Total Domestic Units			43				64				50				68

		Three Months Ended March 29, 2020
		Beginning Units				Opened				Transfer				Closed				Ending Units
Domestic - Franchised			52				-				(1	)			8				43
Domestic - Company-owned			1				-				1				2				-
Total Domestic Units			53				-				-				10				43

		Nine Months Ending March 29, 2020
		Beginning Units				Opened				Transfer				Closed				Ending Units
Domestic - Franchised			57				3				(1	)			16				43
Domestic - Company-owned			1				-				1				2				-
Total Domestic Units			58				3				-				18				43

Pie Five - Company-Owned Restaurants		Three Months Ended								Nine Months Ended
(in thousands, except store weeks and average data)		March 29,				March 24,				March 29,				March 24,
		2020				2019				2020				2019
Store weeks (excluding partial weeks)			4				25				30				51
Average weekly sales			9,034				12,560				8,108				10,451
Average number of units			1				2				1				1
Restaurant sales (excluding partial weeks)			36				314				240				533
Restaurant sales			36				314				240				533
Loss before taxes			(446	)			(253	)			(885	)			(677	)
Allocated marketing and advertising expenses			(2	)			16				12				27
Depreciation/amortization expense			-				31				-				93
Impairment, other lease charges and non-operating store costs			332				178				679				428
Restaurant operating cash flow			(116	)			(28	)			(194	)			(129	)

•

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

•

“Adjusted EBITDA” represents earnings before interest, taxes, depreciation and amortization, stock compensation expense, severance, gain/loss on sale of assets, costs related to impairment and other lease charges, discontinued operations, franchisee default and closed store revenue/expense, and closed and non-operating store costs.

•

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

•

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

•

“Comparable store retail sales” includes the retail sales for restaurants that have been open for at least 18 months as of the end of the reporting period. The sales results for a restaurant that was closed temporarily for remodeling or relocation within the same trade area are included in the calculation only for the days that the restaurant was open in both periods being compared.

•

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

•

“Average units open” reflects the number of restaurants open during a reporting period weighted by the percentage of the weeks in a reporting period that each restaurant was open.

•

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

•

“Restaurant operating cash flow” represents the pre-tax income earned by Company-owned restaurants before (1) allocated marketing and advertising expenses, (2) depreciation and amortization, (3) operations management and extraordinary expenses, (4) impairment and other lease charges, and (5) non-operating store costs.

•

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

•

“Franchisee default and closed store revenue/expense” represents the net of accelerated revenues and costs attributable to defaulted area development agreements and closed franchised stores.

Three Months Ended March 29, 2020		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
		March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019
REVENUES:
Franchise and license revenues		$	1,942			$	1,645			$	661			$	1,102			$	-			$	-			$	-			$	-			$	2,603			$	2,747
Restaurant sales			-				-				-				-				36				314				-				-				36				314
Rental income			-				-				-				-				-				-				54				-				54				-
Interest income and other			-				-				4				-				-				-				8				9				12				9
Total revenues			1,942				1,645				665				1,102				36				314				62				9				2,705				3,070
COSTS AND EXPENSES:
Cost of sales			-				-				-				-				104				382				-				-				104				382
General and administrative expenses			-				-				-				-				46				47				1,609				1,522				1,655				1,569
Franchise expenses			374				337				486				551				-				-				-				-				860				888
Loss on sale of assets			-				-				-				-				-				-				18				104				18				104
Impairment of long-lived assets
and other lease charges			-				-				-				-				332				107				163				112				495				219
Bad debt			-				-				-				-				-				-				11				16				11				16
Interest expense			-				-				-				-				-				-				24				26				24				26
Amortization and depreciation expense			-				-				-				-				-				31				45				89				45				120
Total costs and expenses			374				337				486				551				482				567				1,870				1,869				3,212				3,324
INCOME/(LOSS) BEFORE TAXES		$	1,568			$	1,308			$	179			$	551			$	(446	)		$	(253	)		$	(1,808	)		$	(1,860	)		$	(507	)		$	(254	)

Nine Months Ending March 29, 2020		Pizza Inn Franchising								Pie Five Franchising								Company-Owned Stores								Corporate								Total
		Fiscal Year-to-Date								Fiscal Year-to-Date								Fiscal Year-to-Date								Fiscal Year-to-Date								Fiscal Year-to-Date
		March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019				March 29, 2020				March 24, 2019
REVENUES:
Franchise and license revenues		$	5,454			$	5,338			$	2,536			$	3,348			$	-			$	-			$	-			$	-			$	7,990			$	8,686
Restaurant sales			-				-				-				-				240				533				-				-				240				533
Rental Income			-				-				-				-				-				-				144				-				144				-
Interest income and other			-				-				3				-				-				-				34				37				37				37
Total revenues			5,454				5,338				2,539				3,348				240				533				178				37				8,411				9,256
COSTS AND EXPENSES:
Cost of sales			-				-				-				-				353				715				-				-				353				715
General and administrative expenses			-				-				-				-				99				125				4,484				4,498				4,583				4,623
Franchise expenses			1,151				1,257				1,413				1,584				-				-				-				-				2,564				2,841
Loss (gain) on sale of assets			-				-				-				-				-				-				7				(250	)			7				(250	)
Impairment of long-lived assets and other lease charges			-				-				-				-				673				277				163				112				836				389
Bad debt			-				-				-				-				-				-				39				211				39				211
Interest expense			-				-				-				-				-				-				75				77				75				77
Amortization and depreciation expense			-				-				-				-				-				93				141				292				141				385
Total costs and expenses			1,151				1,257				1,413				1,584				1,125				1,210				4,909				4,940				8,598				8,991
INCOME/(LOSS) BEFORE TAXES		$	4,303			$	4,081			$	1,126			$	1,764			$	(885	)		$	(677	)		$	(4,731	)		$	(4,903	)		$	(187	)		$	265

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).
10.1	Letter agreement dated December 16, 2019, between Rave Restaurant Group, Inc. and Clinton Fendley (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed January 7, 2020). *
10.2	Note, dated April 10, 2020, by and between Rave Restaurant Group, Inc. and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed April 16, 2020).
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.
*	Management contract or compensatory plan or agreement.

	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: June 29, 2020