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EX-32 - RAVE RESTAURANT GROUP, INC.ex322.htm
EX-32 - RAVE RESTAURANT GROUP, INC.ex321.htm
EX-31 - RAVE RESTAURANT GROUP, INC.ex312.htm
EX-31 - RAVE RESTAURANT GROUP, INC.ex311.htm
EX-4 - RAVE RESTAURANT GROUP, INC.ex41.htm

 

  

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 26, 2017

 

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

 

Commission File Number: 0-12919

 

RAVE RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter) 

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

  3551 Plano Parkway

The Colony, Texas 75056

(Address of principal executive offices)

 

(469) 384-5000

(Registrant's telephone number,
including area code)

 

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 þ No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 þ 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. (Check One)

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

 Emerging growth company o

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 o No þ

 

As of May 5, 2017, 10,656,551 shares of the issuer’s common stock were outstanding.

 

 

 2 

 

 

RAVE RESTAURANT GROUP, INC. 

Index 

PART I. FINANCIAL INFORMATION

     
Item 1. Financial Statements Page
     
 

Condensed Consolidated Statements of Operations for the three months and

nine months ended March 26, 2017 and March 27, 2016 (unaudited)


4
     
 

Condensed Consolidated Balance Sheets at March 26, 2017 (unaudited)

and June 26, 2016

 

5

     
 

Condensed Consolidated Statements of Cash Flows for the nine months ended

March 26, 2017 and March 27, 2016 (unaudited)


6
     

 

 

Supplemental Disclosure of Cash Flow Information for the nine months ended

March 26, 2017 and March 27, 2016 (unaudited)

 

6

     
  Notes to Unaudited Condensed Consolidated Financial Statements 7
     
Item 2.

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

11
Item 3.

Quantitative and Qualitative Disclosures About Market Risk 

19
Item 4. Controls and Procedures 19

 

PART II. OTHER INFORMATION 

Item 1. Legal Proceedings 19
Item 1A.

Risk Factors 

20

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

20
Item 3. Defaults Upon Senior Securities 20
Item 4.

Mine Safety Disclosures 

20
Item 5. Other Information 20
Item 6. Exhibits 21
Signatures 22
 3 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)
(Unaudited)
                           
                           
                           
              Three Months Ended   Nine Months Ended
              March 26,   March 27,   March 26,   March 27,
              2017   2016   2017   2016
                           
                           
REVENUES:        $           14,081    $          15,262    $           44,329    $          45,109
                           
COSTS AND EXPENSES:                    
  Cost of sales                     12,644                13,770                 39,898                39,259
  General and administrative expenses                       2,141                  1,885                   6,219                  5,148
  Franchise expenses                          893                     924                   2,729                  2,732
  Pre-opening expenses                            29                     115                        95                     851
  Loss on sale of assets                          345                          -                   1,044                          -
  Impairment of long-lived assets and other lease charges                         (123)                    (165)                   5,243                     845
  Bad debt                            72                      (80)                      423                     151
  Interest expense                            37                         1                        39                         4
    Total costs and expenses                     16,038                16,450                 55,690                48,990
                           
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES                  (1,957)                 (1,188)                (11,361)                 (3,881)
  Income tax expense                              5                         3                        24                  2,637
LOSS FROM CONTINUING OPERATIONS                      (1,962)                 (1,191)                (11,385)                 (6,518)
                           
  Income (loss) from discontinued operations, net of taxes                             -                         (39)                          2                      (99)
NET LOSS        $            (1,962)    $           (1,230)    $          (11,383)    $           (6,617)
                           
LOSS PER SHARE OF COMMON STOCK - BASIC:                    
  Loss from continuing operations        $              (0.18)    $             (0.12)    $              (1.07)    $             (0.63)
  Income (loss) from discontinued operations                             -                           -                            -                      (0.01)
  Net loss        $              (0.18)    $             (0.12)    $              (1.07)    $             (0.64)
                           
LOSS PER SHARE OF COMMON STOCK - DILUTED:                    
                           
  Loss from continuing operations        $              (0.18)    $             (0.12)    $              (1.07)    $             (0.63)
  Income (loss) from discontinued operations                             -                           -                            -                      (0.01)
  Net loss        $              (0.18)    $             (0.12)    $              (1.07)    $             (0.64)
                           
Weighted average common shares outstanding - basic       10,657   10,315   10,602   10,312
                           
Weighted average common and                    
  potential dilutive common shares outstanding       10,657   10,315   10,602   10,312
                           
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


 4 

 

RAVE RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
                   
              March 26,   June 26,
ASSETS     2017 (unaudited)   2016
                   
CURRENT ASSETS          
  Cash and cash equivalents   $                       2,373                          873
  Accounts receivable, less allowance for bad debts          
    accounts of $471 and $198, respectively                           2,576                       2,780
  Notes receivable                                85                          167
  Inventories                              132                          197
  Income tax receivable                              194                          194
  Property held for sale                              811                               -
  Prepaid expenses and other                              727                          430
      Total current assets                           6,898                       4,641
                   
LONG-TERM ASSETS          
  Property, plant and equipment, net                           4,427                     12,979
  Long-term notes receivable                              206                          382
  Deposits and other                              463                          503
      Total assets   $                     11,994 $                   18,505
                   
LIABILITIES AND SHAREHOLDERS' EQUITY          
CURRENT LIABILITIES          
  Accounts payable - trade   $                       4,327                       3,815
  Short-term debt                           1,000                               -
  Accrued expenses                           1,331                       1,220
  Deferred rent                              192                          160
  Deferred revenues                              386                          304
      Total current liabilities                           7,236                       5,499
                   
LONG-TERM LIABILITIES          
  Convertible notes                           2,758                               -
  Deferred rent, net of current portion                           1,511                       1,710
  Deferred revenues, net of current portion                           1,375                       1,440
  Other long-term liabilities                                21                          453
      Total liabilities                         12,901                       9,102
                   
COMMITMENTS AND CONTINGENCIES  (See Note 3)          
                   
SHAREHOLDERS' EQUITY          
  Common stock, $.01 par value; authorized 26,000,000          
    shares; issued 17,775,951 and 17,460,951 shares, respectively;        
    outstanding 10,656,551 and 10,341,551 shares, respectively                              178                          175
  Additional paid-in capital                         26,848                     25,778
  Retained earnings (accumulated deficit)                          (3,297)                       8,086
  Treasury stock at cost          
    Shares in treasury: 7,119,400                         (24,636)                   (24,636)
      Total shareholders' equity                              (907)                       9,403
            $                     11,994 $                   18,505
           
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 5 

 

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

   Nine Months Ended
   March 26,  March 27,
   2017  2016
       
CASH FLOWS FROM OPERATING ACTIVITIES:          
           
Net loss  $(11,383)  $(6,617)
Adjustments to reconcile net loss to          
cash provided by (used in) operating activities:          
Depreciation and amortization   2,117    1,955 
Impairment of long-lived assets   4,773    845 
Stock compensation expense   143    135 
Deferred income taxes   —      2,593 
Loss on sale/disposal of assets   1,044    1 
Provision for bad debt   423    151 
Changes in operating assets and liabilities:          
Notes and accounts receivable   39    842 
Inventories   65    (60)
Accounts payable - trade   512    1,241 
Accrued expenses   (321)   794 
Deferred rent   (167)   (97)
Deferred revenue   17    —   
Prepaid expenses and other   (294)   360 
Cash (used in) provided by operating activities   (3,032)   2,143 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from sale of assets   102    14 
Capital expenditures   (258)   (7,624)
Cash used in investing activities   (156)   (7,610)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from sale of stock   —      768 
Proceeds from stock options   806    7 
Proceeds from issuance of convertible notes   2,882    —   
Net change in short-term debt   1,000    —   
Cash provided by financing activities   4,688    775 
           
Net increase (decrease) in cash and cash equivalents   1,500    (4,692)
Cash and cash equivalents, beginning of period   873    5,727 
Cash and cash equivalents, end of period  $2,373   $1,035 
           
           
<TABLE><CAPTION>          
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 
           
           
CASH PAYMENTS FOR:          
           
Interest  $25   $1 
Income taxes - net  $29   $—   

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.  

 6 

 


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 26, 2016.

 

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.

 

(1)Summary of Significant Accounting Policies

 

Principles of Consolidation

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

 

Cash and Cash Equivalents

       The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Fiscal Quarters

The three and nine month periods ended March 26, 2017 and March 27, 2016, each contained 13 weeks and 39 weeks, respectively.

 

Revenue Recognition

The Company recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. The Company's Norco division sells food and supplies to franchisees on trade accounts under terms common in the industry. Food and supply sales revenues, including shipping and handling costs, are recognized upon delivery of the product. Revenue from restaurant sales is recognized when food and beverage products are sold. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities.

 

Franchise revenue consists of income from license fees, royalties, and area development and foreign master license fees. License fees are recognized as income when there has been substantial performance under the agreement by the Company. Domestic license fees are generally recognized at the time the restaurant is opened. Foreign master license fees are generally recognized upon execution of the agreement as all material services relating to the sale have been substantially performed by the Company and the fee has been collected. Royalties are recognized as income when earned.

 

Impairment of Long-Lived Assets and Other Lease Charges

The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to their carrying values. If impairment is recognized, the carrying value of the impaired asset is reduced to its fair value, based on discounted estimated future cash flows.

 

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.

 

 7 

 

 

Restricted Stock Units

Compensation cost is measured as an amount equal to the fair value of the restricted stock units 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. 

 

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.

 

Reclassification

Certain items have been reclassified in the prior year financial statements to conform to current year presentation.

 

(2)Convertible Notes

 

On March 3, 2017, the Company approved a proposed rights offering to its existing shareholders and, in connection therewith, declared a dividend of subscription rights ("Rights") to holders of record of its common stock as of December 21, 2016, to purchase 4% Convertible Senior Notes due 2022, par $100 ("Notes"). Shareholders were issued 0.2817% of a Right per share of the common stock held on the record date (i.e., one Right for each 355 shares); provided, however, that the number of Rights was rounded to the nearest whole number and no fractional Rights were issued. Each whole Right entitled the holder to purchase one Note at the par value of $100 each. The Notes are convertible into shares of common stock at a conversion price of $2.00 per share (i.e., 50 shares of common stock per Note). The rights offering was completed on March 3, 2017. Shareholders exercised subscription rights to purchase all 30,000 of the Company’s Notes offered at the par value of $100 per convertible note, resulting in gross offering proceeds to the Company of $3.0 million.

 

The Notes have been issued in book-entry form represented by a permanent global certificate deposited with The Depository Trust Company (“DTC”). Beneficial interests in the convertible notes will be shown on, and transfers will be effected through, records maintained by DTC. The convertible notes are not listed for trading on any exchange but are DTC-eligible for over-the-counter trading.

 

The Notes bear interest at the rate of 4% per annum on the principal or par value of $100 per note, payable annually in arrears on February 15 of each year, commencing February 15, 2018. Interest is payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes mature on February 15, 2022, at which time all principal and unpaid interest will be payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes are secured by a pledge of all outstanding equity securities of our two primary direct operating subsidiaries.

 

Noteholders may convert their notes to common stock effective February 15, May 15, August 15 and November 15 of each year, unless the Company sooner elects to redeem the notes. The conversion price is $2.00 per common share of stock. Accrued interest will be paid through the effective date of the conversion in cash or, at the Company’s sole discretion, in shares of Company common stock.

The Company determined that the notes contained a beneficial conversion feature of $0.1 million since the market price of the Company’s common stock was higher than the effective conversion price of the notes when issued. The beneficial conversion feature and the issuance costs of the notes aggregated $0.2 million and are considered a debt discount and are accreted into interest expense using the effective interest method over the debt maturity period. As of March 27, 2016, the debt discount balance was $0.2 million. For the three months ended March 27, 2016, accreted interest expense was $3 thousand.

 8 

 

 

(3)Commitments and Contingencies

 

On April 22, 2009, the Company’s board of directors amended the stock purchase plan first adopted on May 23, 2007, and previously amended on June 2, 2008, to increase the number of shares of common stock the Company may repurchase to a total of 3,016,000 shares. As of March 26, 2017, up to an additional 848,425 shares could be purchased under the plan.

 

The Company is subject to various claims and legal actions in the ordinary course of its business. The Company believes that all such claims and actions currently pending against it are either adequately covered by insurance or would not have a material adverse effect on the Company’s annual results of operations, cash flows or financial condition if decided in a manner that is unfavorable to the Company.

 

(4)Impairment and other lease charges

  

The Company reviews on a quarterly basis its long-lived assets for impairment and the estimated lease obligations for closed stores or abandoned sites. The Company determined there were recoveries to prior lease termination charges of $0.1 million and $0.2 million for the fiscal quarters ended March 26, 2017 and March 27, 2016 as a result of negotiated settlements with landlords. For the nine months ended March 26, 2017, the Company recognized impairment charges of $4.7 million related to 14 underperforming Company-owned Pie Five locations, nine of which were closed during the third quarter. Additionally, the Company recognized lease termination expenses of $0.5 million attributable to previously executed leases for 16 locations no longer deemed desirable for future development of Company-owned Pie Five units. For the nine months ended March 27, 2016, the Company recognized impairment and lease termination charges of $0.8 million related to three underperforming Company-owned Pie Five units.

 

 

(5)       Stock-Based Compensation

 

Stock Options

For the three months ended March 26, 2017, and March 27, 2016, the Company recognized stock-based compensation expense related to stock options of $20,000 and $45,000, respectively. For the nine month periods ended March 26, 2017, and March 27, 2016, the Company recognized stock-based compensation expense related to stock options of $70,000 and $135,000, respectively. As of March 26, 2017, unamortized stock-based compensation expense was $0.1 million.

 

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

 

Nine Months Ended
< March 26, 2017   March 27, 2016
       
Outstanding at beginning of year                      847,556                        871,798
       
Granted                        50,000                          42,786
Exercised                    (315,000)                          (3,000)
Forfeited/Canceled/Expired                    (104,500)                        (39,111)
       
Outstanding at end of period                      478,056                        872,473
       
Exercisable at end of period                      358,056                        563,537

 

Restricted Stock Units

For the three months ended March 26, 2017 and March 27, 2016, the Company recognized stock-based compensation expense related to restricted stock units in the amount of $33,000 and $0, respectively. For the nine months ended March 26, 2017 and March 27, 2016, the Company recognized stock-based compensation expense related to restricted stock units in the amount of $73,000 and $0, respectively. As of March 26, 2017, unamortized stock-based compensation expense related to restricted stock units was $0.5 million.

 

A summary of the staus of restricted stock units as of March 26, 2017, and changes during the nine months then ended is presented below:

 9 

 

 

 

 Number of Restricted Stock Units 
   
 Unvested at June 26, 2016           79,620
 Granted         536,310
 Vested                    -
 Forfeited       (123,030)
 Unvested at March 26, 2017         492,900

 

(6)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,   March 27,   March 26,   March 27,
  2017   2016   2017   2016
Loss from continuing operations  $            (1,962)    $            (1,191)    $          (11,385)    $            (6,518)
Income (loss) from discontinued operations                         -                       (39)                          2                       (99)
Net loss available to common stockholders  $            (1,962)    $            (1,230)    $          (11,383)    $            (6,617)
               
BASIC:              
Weighted average common shares 10,657   10,315   10,602   10,312
               
Loss from continuing operations per common share  $              (0.18)    $              (0.12)    $              (1.07)    $              (0.63)
Income (loss) from discontinued operations per common share                       -                            -                            -                       (0.01)
Net loss per common share  $              (0.18)    $              (0.12)    $              (1.07)    $              (0.64)
               
DILUTED:              
Weighted average common shares               10,657                 10,315                 10,602                 10,312
Stock options                         -                           -                           -                           -
Weighted average common shares outstanding               10,657                 10,315                 10,602                 10,312
               
               
Loss from continuing operations per common share  $              (0.18)    $              (0.12)    $              (1.07)    $              (0.63)
Income (loss) from discontinued operations per common share                       -                            -                            -                       (0.01)
Net loss per common share  $              (0.18)    $              (0.12)    $              (1.07)    $              (0.64)

 

For the three and nine months ended March 26, 2017, options to purchase 358,056 shares of common stock were excluded from the computation of diluted EPS because they would have an anti-dilutive effect due to the net losses incurred. For the three and nine months ended March 25, 2016, options to purchase 563,537 were excluded for the same reason.

 

(7)       Closed restaurants and discontinued operations

 

In April, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which modifies the definition of discontinued operations to include only disposals of an entity that represent strategic shifts that have or will have a major effect on an entity’s operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. The standard was effective prospectively for annual and interim periods beginning after December 15, 2014, with early adoption permitted. This pronouncement did not have a material impact on our condensed consolidated financial statements.

 

The authoritative guidance on “Accounting for Costs Associated with Exit or Disposal Activities,” requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This authoritative guidance also establishes that fair value is the objective for initial measurement of the liability.

 

Discontinued operations included income/loss from a leased building associated with a Company-owned restaurant closed in a prior year.

 

 10 

 

 

(8)       Income Taxes

 

The Company accounts for income taxes under the provisions of ASC 740, Accounting for Income Taxes. Under ASC 740, deferred tax assets and liabilities for the expected future tax consequences of transactions and events are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company has open tax years for the U.S. federal return from fiscal year 2012 forward and fiscal year 2011 for various state purposes.

 

Accounting Standards Update No. 2105-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, issued on November 20, 2015, eliminates the requirement for entities that present a classified statement of financial position to classify deferred tax assets and liabilities as current and noncurrent, and instead required that they classify all deferred tax assets and liabilities as noncurrent. The Company is making an early adoption of this accounting standard on a prospective basis.

 

For the three months ended March 26, 2017, income tax expense of $5 thousand represents an income tax benefit of $0.5 million calculated at a rate consistent with the 34% statutory U.S. federal rate offset by an income tax expense of $0.5 million related to a valuation allowance for deferred tax assets and state taxes of $5 thousand.  For the three months ended March 27, 2016, income tax expense was $3 thousand. 

 

For the nine months ended March 26, 2017, income tax expense represents an income tax benefit of $3.9 million calculated at a rate consistent with the 34% statutory U.S. federal rate offset by an income tax expense of $3.9 million related to recording a valuation allowance for deferred tax assets of $3.9 million and state taxes of $24 thousand. For the nine months ended March 27, 2016, income tax expense was $2.6 million.

 

The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a “more likely than not” standard. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight is given to evidence that can be objectively verified, including recent cumulative losses. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. Based on the Company’s review of this evidence at March 26, 2017, management determined that a full valuation allowance against all of the Company’s deferred tax assets at March 26, 2017 was appropriate. There was approximately $8.7 million of deferred tax assets at March 26, 2017.

 

(9)       Related Party Transactions

 

On February 20, 2014, the Company entered into an Advisory Services Agreement (the “Agreement”) with NCM Services, Inc. (“NCMS”) pursuant to which NCMS will provide certain advisory and consulting services to the Company.  NCMS is indirectly owned and controlled by Mark E. Schwarz, the Chairman of the Company.  The term of the Agreement commenced December 30, 2013, and continues quarterly thereafter until terminated by either party.  Pursuant to the Agreement, NCMS was paid an initial fee of $150,000 and earns quarterly fees of $50,000 and an additional fee of up to $50,000 per quarter (not to exceed an aggregate of $100,000 in additional fees).  The quarterly and additional fees are waived if the Company is not in compliance with all financial covenants under its primary credit facility or to the extent that payment of those fees would result in non-compliance with such financial covenants.

 

On December 22, 2016, the Company obtained a $1.0 million loan from its largest shareholder, Newcastle Partners, LP ("Newcastle"), evidenced by a Promissory Note. The loan bears interest at 10% per annum and was originally due and payable on April 30, 2017. On May 8, 2017, the Company renewed and extended the Promissory Note on the same terms until the earlier of September 1, 2017, or the Company’s receipt of at least $2.0 million in additional debt or equity capital. Newcastle is an affiliate of the Company's Chairman, Mark E. Schwarz.

 

 11 

 

 

(10)Segment Reporting

 

Summarized in the following tables are net sales and operating revenues, operating income and geographic information (revenues) for the Company’s reportable segments for the three and nine month periods ended March 26, 2017 and March 27, 2016 (in thousands). Operating income reported below excludes income tax provision and discontinued operations.

 

 

      Three Months Ended   Nine Months Ended
  March 26,   March 27,   March 26,   March 27,
      2017   2016   2017   2016
 Net sales and operating revenues:               
 Franchising and food and supply  distribution   $           10,042    $             9,756    $           31,164    $           29,895
 Company-owned restaurants                  4,039                   5,506                 13,165                 15,214
   Consolidated revenues   $           14,081    $           15,262    $           44,329    $           45,109
                   
 Depreciation and amortization:               
 Franchising and food and supply  distribution   $                    2    $                    6    $                  11    $                  18
 Company-owned restaurants                     436                      760                   1,762                   1,778
   Combined                     438                      766                   1,773                   1,796
 Corporate administration and other                     140                        71                      344                      159
   Depreciation and amortization   $                578    $                837    $             2,117    $             1,955
                   
 Income (loss) from continuing  operations before taxes:               
 Franchising and food and supply  distribution (1)   $                484    $                550    $             1,944    $             2,061
 Company-owned restaurants (1)                 (1,039)                  (1,192)                  (9,074)                  (3,905)
   Combined                    (555)                     (642)                  (7,130)                  (1,844)
 Corporate administration and other (1)                 (1,402)                     (546)                  (4,231)                  (2,037)
   Loss from continuing operations before taxes   $            (1,957)    $            (1,188)    $          (11,361)    $            (3,881)
                   
 Geographic information  (revenues):               
 United States   $           13,955    $           15,228    $           43,902    $           44,685
 Foreign countries                     126                        34                      427                      424
   Consolidated total   $           14,081    $           15,262    $           44,329    $           45,109
 <                

 

         (1) Portions of corporate administration and other have been allocated to segments

 

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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, 2016, 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, 2016. 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 domestically and internationally under the trademark “Pizza Inn” and operates and franchises domestic fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. We provide or facilitate food, equipment and supply distribution to our domestic and international system of restaurants through our Norco Restaurant Services Company (“Norco”) division and through agreements with third party distributors. The following chart presents information concerning Company-owned and franchised restaurants as of and for the three and nine month periods ended March 26, 2017:

 

 Three Months Ended March 26, 2017                 
(in thousands, except unit data)                
   Pizza Inn     Pie Five     All Concepts 
   Ending   Retail     Ending   Retail     Ending   Retail 
   Units   Sales     Units   Sales     Units   Sales 
                 
 Company-Owned               1  $         162              20  $      3,877              21  $      4,039
 Domestic Franchised           158        21,954              66        10,456            224        32,410
 Total Domestic Units           159  $    22,116              86  $    14,333            245  $    36,449
                 
 International Franchised             60                  -                60  
                 
                 
 Nine Months Ended March 26, 2017                 
(in thousands, except unit data)                
   Pizza Inn     Pie Five     All Concepts 
   Ending   Retail     Ending   Retail     Ending   Retail 
   Units   Sales     Units   Sales     Units   Sales 
                 
 Company-Owned               1  $         521              20  $    12,644              21  $    13,165
 Domestic Franchised           158        65,325              66        30,957            224        96,282
 Total Domestic Units           159  $    65,846              86  $    43,601            245  $  109,447
                 
 International Franchised             60                  -                60  

 

 13 

 

Domestic restaurants are located in 29 states predominantly situated in the southern half of the United States. International restaurants are located in seven foreign countries.

 

Basic and diluted loss per common share decreased $0.06 per share, to a loss of $0.18 per share for the three month period ended March 26, 2017, compared to a loss of $0.12 per share, in the comparable period in the prior fiscal year. The Company had a net loss of $2.0 million for the three month period ended March 26, 2017, and net loss of $1.2 million in the comparable period in the prior fiscal year, on revenues of $14.1 million for the three month period ended March 26, 2017 compared to $15.3 million in the comparable period in the prior fiscal year. Basic and diluted loss per common share increased $0.43 per share, to a loss of $1.07 per share for the nine month period ended March 26, 2017, compared to a loss of $0.64 per share, in the comparable period in the prior fiscal year. The Company had a net loss of $11.4 million for the nine month period ended March 26, 2017, and net loss of $6.6 million in the comparable period in the prior fiscal year, on revenues of $44.3 million for the nine month period ended March 26, 2017 compared to $45.1 million in the comparable period in the prior fiscal year. The year to date increase in net loss from prior year was primarily due to increased impairments and other lease charges of $5.2 million and $1.0 million of losses from the sale of assets.

 

Adjusted EBITDA for the fiscal quarter ended March 26, 2017, decreased to a loss of $1.0 million compared to a loss of $0.2 million for the same period of the prior fiscal year. Year-to-date adjusted EBITDA decreased to a $2.3 million loss compared to a gain of $0.1 million the prior fiscal year. The following table sets forth a reconciliation of net income to Adjusted EBITDA for the periods shown (in thousands): 

 

  Three Months Ended   Nine Months Ended
  March 26,   March 27,   March 26,   March 27,
  2017   2016   2017   2016
 Net loss   $           (1,962)    $           (1,230)    $         (11,383)    $           (6,617)
 Interest expense                      37                         1                       39                         4
 Income taxes                        5                         3                       24                  2,637
 Income taxes--discontinued operations                         -                          -                        (9)                      (31)
 Depreciation and amortization                    578                     837                  2,117                  1,955
 EBITDA   $           (1,342)    $              (389)    $           (9,212)    $           (2,052)
 Stock compensation expense                      53                       45                     143                     135
 Pre-opening expenses                      29                     115                       95                     851
 Loss on sale/disposal of assets                    345                          -                  1,044                          -
 Impairment charges, non-operating store costs and discontinued operations                     (39)                       16                  5,613                  1,158
 Adjusted EBITDA   $              (954)    $              (213)    $           (2,317)    $                 92

 

Pie Five Brand Summary

 

The following tables summarize certain key indicators for the Pie Five franchised and Company-owned restaurants that management believes are useful in evaluating performance.

 

  Three Months Ended   Nine Months Ended
  March 26,   March 27,   March 26,   March 27,
  2017   2016   2017   2016
  (in thousands, except unit data)   (in thousands, except unit data)
Pie Five Retail Sales - Total Stores              
   Domestic - Franchised  $              10,456    $                8,958    $              30,957    $              23,761
   Domestic - Company-owned                    3,877                      5,294                    12,644                    14,563
Total domestic retail sales  $              14,333    $              14,252    $              43,601    $              38,324
               
Pie Five Comparable Store Retail Sales - Total  $                6,931    $                8,227    $              17,671    $              21,041
               
Pie Five Average Units Open in Period              
   Domestic - Franchised                         68                           49                           64                           41
   Domestic - Company-owned                         28                           35                           30                           31
Total domestic Units                         96                           84                           94                           72

 

Pie Five system-wide retail sales increased $0.1 million, or 0.6%, for the three month period ended March 26, 2017 when compared to the same period of the prior year. Compared to the same fiscal quarter of the prior year, average units open in the period increased from 84 to 96. Comparable store retail sales decreased by $1.3 million, or 15.8%, during the third quarter of fiscal 2017 compared to the same period of the prior year.

 

Pie Five system-wide retail sales increased $5.3 million, or 13.8%, for the nine month period ended March 26, 2017 when compared to the same period of the prior year. Year-to-date fiscal 2017 compared to the year-to-date of the prior year, average units open in the period increased from 72 to 94. Comparable store retail sales decreased by $3.4 million, or 16.0%, during the first nine months fiscal 2017 compared to the same period of the prior year.

 

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The following chart summarizes Pie Five restaurant activity for the three and nine month periods ended March 26, 2017:

 

  Three Months Ended March 26, 2017   Nine Months Ended March 26, 2017
  Beginning       Concept       Ending   Beginning       Concept       Ending
  Units   Opened   Change   Closed   Units   Units   Opened   Change   Closed   Units
                                       
Domestic - Franchised                70              5                -             9           66                  57            19                -           10           66
Domestic - Company-owned                29               -                -             9           20                  31               -                -           11           20
Total domestic Units                99              5                -           18           86                  88            19                -           21           86

  

Management made the decision to close seven Pie Five restaurants in Illinois and two Pie Five restaurants in Minnesota during the third quarter of fiscal 2017. In addition, nine franchised Pie Five restaurants closed due to underperformance during the third quarter of fiscal 2017. Year-to-date, a total of 19 franchised Pie Five restaurants have opened, ten franchised Pie Five restaurants closed in Colorado, Florida, Tennessee and Illinois, and eleven Company-owned Pie Five restaurants closed in Illinois, Minnesota, Arizona and Texas. We believe that the recent decline in the number of franchised and Company-owned Pie Five stores is an aberration primarily attributable to overly aggressive expansion in certain isolated markets. We expect the overall trend of net increases in Pie Five stores to resume in future periods, although at a moderated pace with respect to Company-owned stores.

 

Pie Five - Company-Owned Restaurants Three Months Ended   Nine Months Ended
 (in thousands, except store weeks and average data)  March 26,   March 27,   March 26,   March 27,
  2017   2016   2017   2016
 Store weeks                     368                      452                   1,154                   1,193
 Average weekly sales                10,535                 11,645                 10,952                 12,125
 Average number of units                       28                        35                        30                        31
               
 Restaurant sales (excluding partial weeks)                  3,877                   5,263                 12,644                 14,465
 Restaurant sales                  3,877                   5,294                 12,644                 14,563
               
 Loss from continuing operations before taxes                   (1,013)                  (1,151)                  (8,787)                  (3,759)
 Allocated marketing and advertising expenses                     194                      264                      632                      727
 Depreciation/amortization expense                       436                      749                   1,740                   1,747
 Pre-opening expenses                         29                      115                        95                      851
 Operations management and extraordinary expenses                     195                      181                      635                      498
 Impairment, other lease charges and non-operating store costs                      (26)                       (23)                   5,480                   1,003
 Restaurant operating cash flow                    (185)                      135                     (205)                   1,067

 

Average weekly sales for Company-owned Pie Five restaurants decreased $1,110, or 9.5%, to $10,535 for the three month period ended March 26, 2017 compared to $11,645 for the same period of prior year. Loss from continuing operations before taxes for Company-owned Pie Five stores decreased $0.1 million to a loss of $1.0 million for the three months ended March 26, 2017 compared to a loss of $1.1 million the same period of the prior year. Company-owned Pie Five restaurant operating cash flow decreased by $0.3 million during the third quarter of fiscal 2017 compared to the same period of prior year.

 

Average weekly sales for Company-owned Pie Five restaurants decreased $1,173, or 9.7%, to $10,952 for the nine month period ended March 26, 2017 compared to $12,125 for the same period of prior year. Loss from continuing operations before taxes for Company-owned Pie Five stores increased $5.0 million to a loss of $8.9 million for the first nine months of fiscal 2017 compared to a loss of $3.8 million for the same period of the prior year. Company-owned Pie Five restaurant operating cash flow decreased $1.3 million for the first nine months of fiscal 2017.

  

Pizza Inn Brand Summary

 

The following tables summarize certain key indicators for the Pizza Inn franchised and Company-owned domestic restaurants that management believes are useful in evaluating performance.

 

 15 

 

 

  Three Months Ended   Nine Months Ended
  March 26,   March 27,   March 26,   March 27,
  2017   2016   2017   2016
Pizza Inn Retail Sales - Total Domestic Stores (in thousands, except unit data)   (in thousands, except unit data)
Domestic Units              
   Buffet - Franchised  $              20,390    $              19,523    $              60,399    $              59,278
   Delco/Express - Franchised                    1,564                      1,764                      4,926                      5,565
   Buffet - Company-owned                       162                         212                         521                         651
Total domestic retail sales  $              22,116    $              21,499    $              65,846    $              65,494
               
Pizza Inn Comparable Store Retail Sales - Total Domestic  $              20,589    $              20,570    $              61,247    $              61,338
               
Pizza Inn Average Units Open in Period              
Domestic Units              
   Buffet - Franchised                         94                           92                           95                           95
   Delco/Express - Franchised                         63                           68                           64                           69
   Buffet - Company-owned                           1                             1                             1                             1
Total domestic Units                       158                         161                         160                         165

 

Total Pizza Inn domestic retail sales increased $0.6 million, or 2.9%, for the three months ended March 26, 2017 when compared to the same period of the prior year. Pizza Inn domestic comparable store retail sales increased 0.1%, for the three months ended March 26, 2017 when compared to the same period of the prior year.

 

Total Pizza Inn domestic retail sales increased $0.4 million, or 0.5%, for the nine months ended March 26, 2017 when compared to the same period of the prior year. Pizza Inn domestic comparable store retail sales decreased 0.1%, for the nine months ended March 26, 2017 when compared to the same period of the prior year.

 

The following chart summarizes Pizza Inn restaurant activity for the three and nine month periods ended March 26, 2017:

 

  Three Months Ended March 26, 2017   Nine Months Ended March 26, 2017
  Beginning       Concept       Ending   Beginning       Concept       Ending
  Units   Opened   Change   Closed   Units   Units   Opened   Change   Closed   Units
Domestic Units                                      
Buffet - Franchised                94              1               1             3           93                  93              3               1             4           93
Delco/Express - Franchised                66              1             (1)             1           65                  68              2             (1)             4           65
Buffet - Company-owned                  1               -                -             -             1                    1               -                -             -             1
Total domestic Units              161              2                -             4         159                162              5                -             8         159
                                       
International Units (all types)                60               -                -             -           60                  60               -                -             -           60
                                       
Total Units              221              2                -             4         219                222              5                -             8         219

 

There was a net decrease of two domestic Pizza Inn units during the three months and three domestic Pizza Inn units during the nine months ended March 26, 2017. In addition there was a concept change from a Delco unit to a Buffet unit. We believe this represents a stabilizing of store count from the recent trend of modest domestic store closures. The number of international Pizza Inn units continues to remain steady.

  

Non-GAAP Financial Measures and Other Terms

 

The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). EBITDA, Adjusted EBITDA and restaurant operating cash flow are non-GAAP financial measures that the Company believes are useful to investors in understanding our operating performance. However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements.

 

We consider EBITDA and Adjusted EBITDA to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in our industry. We believe that EBITDA is helpful to investors in evaluating our results of operations without the impact of expenses affected by financing methods, accounting methods and the tax environment. We believe that Adjusted EBITDA provides additional useful information to investors by excluding non-operational or non-recurring expenses to provide a measure of operating performance that is more comparable from period to period. We believe that restaurant operating cash flow is a useful metric to investors in evaluating the ongoing operating performance of Company-owned Pie Five and Pizza Inn restaurants and comparing such store operating performance from period to period. Management also uses these non-GAAP financial measures for evaluating operating performance, assessing the effectiveness of business strategies, projecting future capital needs, budgeting and other planning purposes.

 

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The following key performance indicators presented herein, some of which represent non-GAAP financial measures, have the meaning and are calculated as follows:

 

·“EBITDA” represents earnings before interest, taxes, depreciation and amortization.
·“Adjusted EBITDA” represents earnings before interest, taxes, depreciation and amortization, stock compensation expense, pre-opening expense, gain/loss on sale of assets, costs related to closed restaurants and impairment charges.
·“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) pre-opening expenses, (4) operations management and extraordinary expenses, (5) impairment and other lease charges, and (6) 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.
·“Pre-opening expenses” consist primarily of certain costs incurred prior to the opening of a Company-owned restaurant, including: (1) marketing and promotional expenses, (2) rent, and (3) manager salaries, employee payroll and related training costs.

 

Financial Results

 

The following is additional business segment information for the three months and nine month periods ended March 26, 2017 and March 27, 2016 (in thousands):

 

     Franchising and             
     Food & Supply Distribution   

Company-Owned 

  Restaurants 

   Corporate     Total 
     Fiscal Quarter Ended     Fiscal Quarter Ended     Fiscal Quarter Ended     Fiscal Quarter Ended 
     March 26,     March 27,     March 26,     March 27,     March 26,     March 27,     March 26,     March 27, 
     2017     2016     2017     2016     2017     2016     2017     2016 
                                 
Food and supply sales              8,696              8,482                     -                          -                     -                     -              8,696              8,482
Franchise revenues              1,346              1,274                     -                          -                     -                     -              1,346              1,274
Restaurant sales                     -                     -              4,039                  5,506                     -                     -              4,039              5,506
Total revenues            10,042              9,756              4,039                  5,506                     -                     -            14,081            15,262
                                 
                                 
Cost of sales              8,280              7,865              4,364                  5,905                     -                     -            12,644            13,770
General and administrative expenses                 385                 417                 808                     843                 948                 625              2,141              1,885
Franchise expenses                 893                 924                     -                          -                     -                     -                 893                 924
Pre-opening expenses                     -                     -                   29                     115                     -                     -                   29                 115
Loss on sale of assets                     -                     -                     -                          -                 345                     -                 345                     -
Impairment of long-lived assets and  other lease charges                   -                     -               (123)                    (165)                       (123)               (165)
Bad debt                     -                     -                     -                          -                   72                 (80)                   72                 (80)
Interest expense                     -                     -                     -                          -                   37                     1                   37                     1
     Total costs and expenses              9,558              9,206              5,078                  6,698              1,402                 546            16,038            16,450
                                 
                                 
                  484                 550            (1,039)                 (1,192)            (1,402)               (546)            (1,957)            (1,188)

 

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       Franchising and             
       Food & Supply Distribution   

Company-Owned 

  Restaurants 

   Corporate     Total 
       Fiscal Year-to-Date     Fiscal Year-to-Date     Fiscal Year-to-Date     Fiscal Year-to-Date 
       March 26,     March 27,     March 26,     March 27,     March 26,     March 27,     March 26,     March 27, 
       2017     2016     2017     2016     2017     2016     2017     2016 
REVENUES:                                
  Food and supply sales            26,960            25,906                     -                          -                     -                     -            26,960            25,906
  Franchise revenues              4,204              3,989                     -                          -                     -                     -              4,204              3,989
  Restaurant sales                     -                     -            13,165                15,214                     -                     -            13,165            15,214
  Total revenues            31,164            29,895            13,165                15,214                     -                     -            44,329            45,109
                                   
COSTS AND EXPENSES:                                
  Cost of sales            25,503            24,098            14,395                15,161                     -                     -            39,898            39,259
  General and administrative expenses                 988                 937              2,506                  2,329              2,725              1,882              6,219              5,148
  Franchise expenses              2,729              2,732                     -                          -                     -                     -              2,729              2,732
  Pre-opening expenses                     -                   67                   95                     784                     -                     -                   95                 851
  Loss on sale of assets                     -                     -                     -                          -              1,044                     -              1,044                     -
  Impairment of long-lived assets and  other lease charges                   -                     -              5,243                     845                     -                     -              5,243                 845
  Bad debt                     -                     -                     -                          -                 423                 151                 423                 151
  Interest expense                     -                     -                     -                          -                   39                     4                   39                     4
       Total costs and expenses            29,220            27,834            22,239                19,119              4,231              2,037            55,690            48,990
                                   
INCOME (LOSS) FROM CONTINUING OPERATIONS                              
BEFORE TAXES              1,944              2,061            (9,074)                 (3,905)            (4,231)            (2,037)          (11,361)            (3,881)

 

Revenues:

 

Revenues are derived from (1) sales of food, paper products and supplies from Norco to franchisees, (2) franchise royalties and franchise fees, and (3) Company-owned restaurant operations. Financial results are dependent in large part upon the volume, pricing and cost of the products and supplies sold to franchisees. The volume of products sold by Norco to franchisees is dependent on the level of franchisee chain-wide retail sales, which are impacted by changes in comparable store sales and restaurant count, and the products sold to franchisees through Norco rather than through third-party food distributors.

 

Total revenues for the three month period ended March 26, 2017 and for the same period in the prior fiscal year were $14.1 million and $15.3 million, respectively. Total revenues for the nine month period ended March 26, 2017 and for the same period in the prior fiscal year were $44.3 million and $45.1 million, respectively.

 

Food and Supply Sales

 

Food and supply sales by Norco include food and paper products and other distribution revenues. For the three month period ended March 26, 2017, food and supply sales increased to $8.7 million compared to $8.5 million the same period in the prior fiscal year due primarily to a $0.7 million, or 2.0%, increase in total domestic retail sales. For the nine month period ended March 26, 2017, food and supply sales increased to $27.0 million compared to $25.9 million the same period in the prior fiscal year due primarily to a $7.7 million, or 8.7%, increase in total domestic franchisee retail sales driven primarily by an increase in the number of Pie Five franchisee stores.

 

Franchise Revenue

 

Franchise revenue, which includes income from domestic and international royalties and license fees, increased by $0.1 million and $0.2 million for the three and nine month periods ended March 26, 2017, respectively, when compared to the same period in the prior fiscal year. These increases were the result of higher royalties resulting from increased Pie Five franchisee retail sales partially offset by a decrease in franchise development fees related to Pie Five.

 

Restaurant Sales

 

Restaurant sales, which consist of revenue generated by Company-owned restaurants, decreased 26.6%, or $1.5 million, to $4.0 million for the three month period ended March 26, 2017, compared to $5.5 million for the comparable period in the prior year. Restaurant sales decreased 13.5%, or $2.0 million, to $13.2 million for the nine month period ended March 26, 2017, compared to $15.2 million for the comparable period in the prior year. These decreases were primarily due to reduced store count and lower comparable store retail sales for Company-owned Pie Five units.

 

 

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Costs and Expenses:

 

Cost of Sales - Total

 

Total cost of sales, which primarily includes food and supply costs, distribution fees, and labor and general and administrative expenses directly related to restaurant sales, decreased to $12.6 million for the three month period ended March 26, 2017 compared to $13.8 million in the three month period ended March 27, 2016. Cost of sales increased to $39.9 million for the nine month period ended March 26, 2017 compared to $39.3 million in the comparable period in the prior year. The increases in costs were primarily the result of increases in Norco sales offset by lower Company-owned restaurants costs.

 

Cost of Sales - Franchising and Food and Supply Distribution

 

Franchising and food and supply distribution cost of sales increased to $8.3 million for the three month period ended March 26, 2017 compared to $7.9 million in the three month period ended March 27, 2016. Cost of sales increased to $25.5 million for the nine month period ended March 26, 2017 compared to $24.1 million in the comparable period in the prior year. The increases in cost of sales for the segment were primarily the result of higher Norco sales attributable to higher domestic franchisee retail sales.

 

Cost of Sales - Company-Owned Restaurants

 

Company-owned restaurants cost of sales decreased to $4.4 million for the three month period ended March 26, 2017 compared to $5.9 million in the three month period ended March 27, 2016. Cost of sales decreased to $14.4 million for the nine month period ended March 26, 2017 compared to $15.2 million in the comparable period in the prior year. The decreases in cost of sales for the segment were primarily the result of decreased Company-owned store retail sales.

  

General and Administrative Expenses - Total

 

General and administrative expenses increased to $2.1 million for the three month period ended March 26, 2017 compared to $1.9 million for the quarter ended March 27, 2016 primarily due to increased payroll, legal and professional fees. General and administrative expenses increased to $6.2 million for the nine month period ended March 26, 2017 compared to $5.1 million for the nine months ended March 27, 2016 for similar reasons.

 

General and Administrative Expenses - Franchising and Food and Supply Distribution

 

General and administrative expenses for franchising and food and supply distribution remained consistent at $0.4 million for the three month period ended March 26, 2017 compared to the quarter ended March 27, 2016. General and administrative expenses for franchising and food and supply distribution increased slightly to $1.0 million for the nine month period ended March 26, 2017 compared to $0.9 million for the nine months ended March 27, 2016.

 

General and Administrative Expenses - Company-Owned Restaurants

 

General and administrative expenses for Company-owned restaurants remained consistent at $0.8 million for the three month period ended March 26, 2017 compared to the quarter ended March 27, 2016. General and administrative expenses for Company-owned restaurants increased slightly to $2.5 million for the nine month period ended March 26, 2017 compared to $2.3 million for the nine months ended March 27, 2016.

 

General and Administrative Expenses - Corporate

 

General and administrative expenses for corporate increased to $0.9 million for the three month period ended March 26, 2017 compared to $0.6 million for the quarter ended March 27, 2016. Increases included payroll, legal and professional fees. In addition, the prior year included credits for properties located in Utah. General and administrative expenses for corporate increased to $2.7 million for the nine month period ended March 26, 2017 compared to $1.9 million for the nine months ended March 27, 2016 for similar reasons.

 

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 Franchise Expenses

 

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. These expenses remained consistent at $0.9 million for the three month period ended March 26, 2017 compared to the same period of the prior year. These expenses also remained consistent at $2.7 million for the nine month period ended March 26, 2017 compared to the same period of the prior year.

 

Pre-Opening Expenses

 

Pre-opening expenses decreased $0.1 million and $0.8 million for the three and nine month periods ended March 26, 2017 compared to the same periods of fiscal 2016. These decreases were due primarily to a fewer number of Company-owned Pie Five stores under development.

 

Impairment of Long-Lived Assets and Other Lease Charges

 

The Company reviews on a quarterly basis its long-lived assets for impairment and the estimated lease obligations for closed stores or abandoned sites. The Company determined there were recoveries to prior lease termination charges of $0.1 million and $0.2 million for the fiscal quarters ended March 26, 2017 and March 27, 2016 as a result of negotiatied settlements with landlords. For the nine months ended March 26, 2017, the Company recognized impairment charges of $4.7 million related to 14 underperforming Company-owned Pie Five locations, nine of which were closed during the third quarter. Additionally, the Company recognized lease termination expenses of $0.5 million attributable to previously executed leases for 16 locations no longer deemed desirable for future development of Company-owned Pie Five units. For the nine months ended March 27, 2016, the Company recognized impairment and lease termination charges of $0.8 million related to three underperforming Company-Owned Pie Five units.

 

Bad Debt Expense

 

The Company monitors franchisee retail sales and receivable balances and adjusts credit terms when necessary to minimize the Company’s exposure to high risk accounts receivable. Bad debt expense increased to $0.1 million for the three month period ended March 26, 2017 as compared to a credit of $0.1 million in the comparable period in the prior fiscal year. Bad debt expense increased to $0.4 million for the nine month period ended March 26, 2017 as compared to $0.2 million in the comparable period in the prior fiscal year.

 

Interest Expense

 

Interest expense increased $36 thousand and $35 thousand for the three and nine month periods ended March 26, 2017 as compared to the comparable period in the prior fiscal year due to short-term borrowing of $1.0 million during the second quarter of fiscal 2017 and issuance of $3.0 million in senior convertible notes during the most recent fiscal quarter.

 

Provision for Income Tax

 

For the three months ended March 26, 2017, income tax expense of $5 thousand represents an income tax benefit of $0.5 million calculated at a rate consistent with the 34% statutory U.S. federal rate offset by an income tax expense of $0.5 million related to a valuation allowance for deferred tax assets and state taxes of $5 thousand.  For the three months ended March 27, 2016, income tax expense was $3 thousand. 

 

For the nine months ended March 26, 2017, income tax expense represents an income tax benefit of $3.9 million calculated at a rate consistent with the 34% statutory U.S. federal rate offset by an income tax expense of $3.9 million related to recording a valuation allowance for deferred tax assets and state taxes of $24 thousand. For the nine months ended March 27, 2016, income expense was $2.6 million.

 

The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a “more likely than not” standard. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight is given to evidence that can be objectively verified, including recent cumulative losses. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. Based on the Company’s review of this evidence at March 26, 2017, management determined that a full valuation allowance against all of the Company’s deferred tax assets at March 26, 2017 was appropriate. There was approximately $8.7 million of deferred tax assets at March 26, 2017.

 

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 Discontinued Operations 

Discontinued operations includes income/loss from a leased building associated with a Company-owned restaurant closed in a prior year.

 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash flow from operating activities and proceeds from the sale of common stock.

 

Cash flows from operating activities generally reflect net income adjusted for certain non-cash items including depreciation and amortization, changes in deferred tax assets, share based compensation, and changes in working capital.  Cash used by operating activities increased $5.2 million to cash used of $3.0 million for the nine months ended March 26, 2017 compared to cash provided of $2.1 million for the nine months ended March 27, 2016.

 

Cash flows from investing activities reflects capital expenditures for the purchase of Company assets net of the proceeds of sales of any Company assets. The Company used cash of $0.2 million for the nine month period ended March 26, 2017, primarily for a new Company-owned Pie Five restaurant partially offset by small sales of assets. This compares to cash used by investing activities of $7.6 million during the same period in the prior fiscal year attributable to Company-owned Pie Five restaurants that opened during the period.

Cash flows from financing activities generally reflect changes in the Company's borrowings and stock activity during the period. Net cash provided by financing activities was $4.7 million and $0.8 million for the nine month periods ended March 26, 2017 and March 27, 2016, respectively, which reflected proceeds from issuance of convertible senior notes, stock options and borrowings in the current year versus proceeds from the sale of stock in the prior year.

 

On May 20, 2013, the Company entered into an At-the-Market Issuance Sales Agreement with MLV & Co. LLC (“MLV”) pursuant to which the Company could offer and sell shares of its common stock having an aggregate offering price of up to $3,000,000 from time to time through MLV, acting as agent (the “2013 ATM Offering”). The 2013 ATM Offering was undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on May 13, 2013. On November 20, 2013, the Company and MLV amended the At-the-Market Issuance Sales Agreement and the SEC declared effective a new shelf Registration Statement on Form S-3 to increase the 2013 ATM Offering by $5,000,000. The Company ultimately sold an aggregate of 1,257,609 shares in the 2013 ATM Offering, realizing aggregate gross proceeds of $8.0 million.

 

On October 1, 2014, the Company entered into a new At Market Issuance Sales Agreement with MLV pursuant to which the Company could initially offer and sell shares of its common stock having an aggregate offering price of up to $5,000,000 from time to time through MLV, acting as agent (the “2014 ATM Offering”). On February 13, 2015, the aggregate offering amount of the 2014 ATM Offering was increased to $10,000,000. The 2014 ATM Offering is being undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on August 8, 2014. Through March 26, 2017, the Company had sold an aggregate of 825,763 shares in the 2014 ATM Offering, realizing aggregate gross proceeds of $8.1 million.

 

On December 22, 2016, the Company obtained a $1.0 million loan from its largest shareholder, Newcastle Partners, LP ("Newcastle"), evidenced by a Promissory Note. The loan bears interest at 10% per annum and was originally due and payable on April 30, 2017. On May 8, 2017, the Company renewed and extended the Promissory Note on the same terms until the earlier of September 1, 2017, or the Company’s receipt of at least $2.0 million in additional debt or equity capital. Newcastle is an affiliate of the Company's Chairman, Mark E. Schwarz.

 

On March 3, 2017, the Company approved a proposed rights offering to its existing shareholders and, in connection therewith, declared a dividend of subscription rights ("Rights") to holders of record of its common stock as of December 21, 2016, to purchase 4% Convertible Senior Notes due 2022, par $100 ("Notes"). Shareholders were issued 0.2817% of a Right per share of the common stock held on the record date (i.e., one Right for each 355 shares); provided, however, that the number of

 

 

 21 

 

 

Rights was rounded to the nearest whole number and no fractional Rights were issued. Each whole Right entitled the holder to purchase one Note at the par value of $100 each. The Notes are convertible into shares of common stock at a conversion price of $2.00 per share (i.e., 50 shares of common stock per Note). The rights offering was completed on March 3, 2017. Shareholders exercised subscription rights to purchase all 30,000 of the Company’s Notes offered at the par value of $100 per convertible note, resulting in gross offering proceeds to the Company of $3.0 million.

 

The Notes have been issued in book-entry form represented by a permanent global certificate deposited with The Depository Trust Company (“DTC”). Beneficial interests in the convertible notes will be shown on, and transfers will be effected through, records maintained by DTC. The convertible notes are not listed for trading on any exchange but are DTC-eligible for over-the-counter trading.

 

The Notes bear interest at the rate of 4% per annum on the principal or par value of $100 per note, payable annually in arrears on February 15 of each year, commencing February 15, 2018. Interest is payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes mature on February 15, 2022, at which time all principal and unpaid interest will be payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes are secured by a pledge of all outstanding equity securities of our two primary direct operating subsidiaries.

 

Noteholders may convert their notes to common stock effective February 15, May 15, August 15 and November 15 of each year, unless the Company sooner elects to redeem the notes. The conversion price is $2.00 per common share of stock. Accrued interest will be paid through the effective date of the conversion in cash or, at the Company’s sole discretion, in shares of Company common stock.

 

The net proceeds of the rights offering are intended to fund continued restaurant development activity and to provide working capital for general corporate purposes.

 

Management believes that funding the Company’s operations for the next 12 months will likely require obtaining additional capital, as well as utilizing cash on hand and cash from operations.  Although capital could be provided through the 2014 ATM Offering, management believes that other available funding sources may be preferable in the best interests of the Company and its shareholders.  The Company intends to proceed diligently to timely raise sufficient additional capital to adequately fund its operations.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically. Actual results could differ materially from estimates.

 

The Company believes the following critical accounting policies require estimates about the effect of matters that are inherently uncertain, are susceptible to change, and therefore require subjective judgments. Changes in the estimates and judgments could significantly impact the Company’s results of operations and financial condition in future periods.

 

Accounts receivable consist primarily of receivables generated from food and supply sales to franchisees and franchise royalties. The Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends. Actual realization of accounts receivable could differ materially from the Company’s estimates.

 

Under the Company’s distribution arrangements, third party distributors are responsible for maintaining system-wide distribution inventory. As a result, inventory consists primarily of food, paper products and supplies stored in and used by Company restaurants and is stated at lower of first-in, first-out (“FIFO”) or market. The valuation of such restaurant inventory requires us to estimate the amount of obsolete and excess inventory based on estimates of future retail sales by Company-owned restaurants. Overestimating retail sales by Company-owned restaurants could result in the write-down of inventory which would have a negative impact on the gross margin of such Company-owned restaurants.

 

The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to its carrying value. If impairment is recognized, the carrying value of the impaired asset is reduced to its fair value, based on discounted estimated future cash flows.

 

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The Company periodically evaluates the realizability of its deferred tax assets based upon the Company’s analysis of existing tax credits by jurisdiction and expectations of the Company’s ability to utilize these tax assets through a review of estimated future taxable income and establishment of tax strategies. These estimates could be materially impacted by changes in future taxable income, the results of tax strategies or changes in tax law.

 

The Company recognizes food and supply revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Franchise revenue consists of income from license fees, royalties, and area development and foreign master license sales. License fees are recognized as income when there has been substantial performance of the agreement by both the franchisee and the Company, generally at the time the restaurant is opened. Royalties are recognized as income when earned.

 

The Company accounts for uncertain tax positions in accordance with ASC 740-10, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. ASC 740-10 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of March 26, 2017 and March 27, 2016, the Company had no uncertain tax positions.

 

The Company assesses its exposures to loss contingencies from legal matters based upon factors such as the current status of the cases and consultations with external counsel and provides for the exposure by accruing an amount if it is judged to be probable and can be reasonably estimated. If the actual loss from a contingency differs from management’s estimate, operating results could be adversely impacted.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for a smaller reporting company.

 

Item 4. Controls and Procedures

 

The Company maintains disclosure controls and procedures designed to ensure that information it is required to disclose in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, or persons performing similar functions, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s principal executive officer and principal financial officer, or persons performing similar functions, have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. During the most recent fiscal quarter, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is subject to claims and legal actions in the ordinary course of its business. The Company believes that all such claims and actions currently pending against it are either adequately covered by insurance or would not have a material adverse effect on the Company’s annual results of operations, cash flows or financial condition if decided in a manner that is unfavorable to the Company.

 

Item 1A. Risk Factors

 

Not required for a smaller reporting company.

 

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

 

On May 23, 2007, the board of directors of the Company approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase of up to 1,016,000 shares of the Company’s 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 the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. On April 22, 2009, the board of directors further amended the 2007 Stock Purchase Plan by increasing the aggregate number of shares 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 three months ending March 26, 2017.

 

The Company’s ability to repurchase 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. Subsequent to March 26, 2017, the Company has not repurchased any outstanding shares but may make further repurchases under the 2007 Stock Purchase Plan.  The Company may also repurchase shares of our common stock other than pursuant to the 2007 Stock Purchase Plan or other publicly announced plans or programs.

 

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

On May 8, 2017, the Company executed an Extended and Restated Promissory Note in favor of Newcastle extending the due date of its $1.0 million short term loan until the earlier of September 1, 2017, or the Company’s receipt of at least $2.0 million in additional debt or equity capital. The foregoing description is qualified in its entirety by reference to the Extended and Restated Promissory Note filed as Exhibit 4.1 hereto and incorporated herein by this reference.

 

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Item 6. Exhibits

 

 

3.1Amended 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).

 

3.2Amended and Restated By-laws 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).

 

4.1Extended and Restated Promissory Note dated May 8, 2017, payable by Rave Restaurant Group, Inc. to Newcastle Partners, LP.

 

10.1Letter agreement dated January 6, 2017, between Rave Restaurant Group, Inc. and Scott Crane (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed January 12, 2017).

 

31.1Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

 

31.2Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

 

32.1Section 1350 Certification of Principal Executive Officer.

 

32.2Section 1350 Certification of Principal Financial Officer.

 

101Interactive data files pursuant to Rule 405 of Regulation S-T.

 

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SIGNATURES 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

RAVE RESTAURANT GROUP, INC.
(Registrant)
   
   
   
   
By: /s/ Scott Crane  
  Scott Crane
    President and Chief Executive Officer
    (Principal Executive Officer)
   
     
     
     
     
     
By: /s/ Timothy E. Mullany     
  Timothy E. Mullany
    Chief Financial Officer
  (Principal Financial Officer)

 Dated: May 10, 2017

 

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