Rave Restaurant Group, Inc.
2017 Annual Report
to Shareholders
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended
June 25, 2017.
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FORM 10-K
[ ] For the transition period from _____ to _____.
Commission File Number 0-12919
RAVE RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
Missouri
(State or jurisdiction of
incorporation or organization)
3551 Plano Parkway
The Colony, Texas
(Address of principal executive offices)
45-3189287
(I.R.S. Employer
Identification No.)
75056
(Zip Code)
Registrant’s telephone number, including area code:
(469) 384-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Common stock, par value $.01 each
Name of each exchange on which registered
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ___
Indicate by check mark whether the registrant has submitted electronically 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_ _ No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. □
Large accelerated filer__ Accelerated filer__ Non-accelerated filer__ Smaller reporting company
Emerging growth company ____
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ___ No
As of December 25, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the
aggregate market value of the voting and non-voting common equity held by non-affiliates was approximately $16.9 million computed
by reference to the price at which the common equity was last sold on the NASDAQ Capital Market.
As of September 20, 2017, there were 14,282,558 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, to be filed pursuant to Section 14(a) of the Securities Exchange Act in
connection with the registrant’s annual meeting of shareholders scheduled for November 16, 2017, have been incorporated by
reference in Part III of this report.
2
Forward-Looking Statements
This Form 10-K contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform
Act of 1995, which are intended to be covered by the safe harbors created thereby. Forward-looking statements include statements
which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expect,”
“anticipate,” “intend,” “plan,” “believe,” “estimate” or similar expressions. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to future growth of our business activities and availability of
funds. Statements that address business and growth strategies, performance goals, projected financial condition and operating results,
our understanding of our competition, industry and market trends, and any other statements or assumptions that are not historical facts
are forward-looking statements.
The forward-looking statements included in this Form 10-K are based on current expectations that involve numerous
risks and uncertainties. Assumptions relating to these forward-looking statements involve judgments with respect to, among
other things, future economic, competitive and market conditions, regulatory framework and future business decisions, all of
which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the
assumptions underlying these forward-looking statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate.
In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of such information should
not be regarded as a representation that our objectives and plans will be achieved.
PART I
ITEM 1. BUSINESS.
General
Rave Restaurant Group, Inc. and its subsidiaries (collectively referred to as the “Company” or in the first person notations of
“we”, “us” and “our”) franchise pizza buffet, delivery/carry-out and express restaurants under the trademark “Pizza Inn” and operate
and franchise fast casual restaurants under the trademarks “Pie Five Pizza Company” or “Pie Five”. We provide or facilitate the
procurement and distribution of food, equipment and supplies to our domestic and international system of restaurants through our
Norco Restaurant Services Company (“Norco”) division and through agreements with third party distributors.
As of June 25, 2017, we owned and operated 13 Pie Five restaurants (“Pie Five Units”). As of that date, we also had 71
franchised Pie Five Units and 221 franchised Pizza Inn restaurants. The 161 domestic franchised Pizza Inn restaurants were comprised
of 93 pizza buffet restaurants (“Buffet Units”), 11 delivery/carry-out restaurants (“Delco Units”) and 57 express restaurants (“Express
Units”). The 60 international franchised Pizza Inn restaurants were comprised of 12 Buffet Units, 40 Delco Units and eight Express
Units. Domestic Pizza Inn restaurants were located predominantly in the southern half of the United States, with Texas, Arkansas,
North Carolina and Mississippi accounting for approximately 23%, 17%, 17% and 9%, respectively, of the total number of domestic
restaurants.
Our History
The Company has offered consumers affordable, high quality pizza since 1958, when the first Pizza Inn restaurant opened in
Dallas, Texas. We awarded our first franchise in 1963 and opened our first buffet restaurant in 1969. We began franchising the Pizza
Inn brand internationally in the late 1970s. In 1993, our stock began trading on the NASDAQ Stock Market, and presently trades on
the NASDAQ Capital Market under the ticker symbol “RAVE.” In June 2011, we opened the first Pie Five restaurant in Ft. Worth,
Texas. In November 2012, we signed our first franchise development agreement for Pie Five.
3
Our Concepts
We operate and franchise restaurant concepts under two distinct brands: Pie Five and Pizza Inn.
Pie Five
Pie Five is a fast-casual pizza concept that creates individualized pizzas which are baked in 140 seconds in our specially
designed oven. Pizzas are created at the direction of our customers who choose from a variety of freshly prepared and displayed
toppings, cheeses, sauces and doughs and complete their purchase process in less than five minutes. Customers can also get freshly
prepared side salads, also made to order from our recipes or at the customer's direction. They can also choose from several baked daily
desserts like brownies, cookie pies, and cakes. A variety of soft beverages are available, as well as beer and wine in some locations.
Pie Five restaurants offer items at prices from $5.99 to $12.99, and the average ticket price per meal, including a drink, was
approximately $8.45 per person for fiscal year 2017. The average per person ticket is slightly higher in restaurants offering beer and
wine.
Pie Five restaurants typically occupy leased, in-line or end-cap space of between 1,800 and 2,400 square feet in retail strip or
multi-unit retail space. The restaurants typically are located in high traffic, high visibility urban or suburban sites in mid- to large-size
metropolitan areas. With seating for 65 to 85 customers in most units, and patio seating where available, Pie Five restaurants primarily
serve lunch and dinner to families, adults and kids of all ages. Sales are predominantly on-premise though carry out and delivery is
offered as well. Future sales growth initiatives may include expanded text ordering, catering services, and offerings of wings,
sandwiches, and large pizzas. Due to the relatively compact footprint of the restaurants, and other operating advantages, we believe Pie
Five is also well suited for non-traditional locations such as airports.
Pizza Inn
We franchise Buffet Units, Delco Units and Express Units under the Pizza Inn brand. Buffet Units and Delco Units feature
crusts that are hand-made from dough made fresh in the restaurant each day. Our pizzas are made with a proprietary all-in-one flour
mixture, real mozzarella cheese and a proprietary mix of classic pizza spices. In international markets, the menu mix of toppings and
side items is occasionally adapted to local tastes.
Buffet Units offer dine-in, carryout and catering service and, in many cases, also offer delivery service. Buffet Units offer a
variety of pizza crusts with standard toppings and special combinations of toppings in addition to pasta, salad, sandwiches, appetizers,
desserts and beverages, including beer and wine in some locations, in an informal, family-oriented atmosphere. We occasionally offer
other items on a limited promotional basis. Buffet Units are generally located in free standing buildings or strip center locations in
retail developments in close proximity to offices, shopping centers and residential areas. The current standard Buffet Units are between
2,100 and 4,500 square feet in size and seat 120 to 185 customers. The interior decor is designed to promote a casual, lively,
contemporary, family-style atmosphere. Some Buffet Units feature game rooms that offer a range of electronic game entertainment for
the entire family. The buffet is typically offered at prices from $6.99 to $9.99, and the average ticket price, including a drink, was
approximately $10.00 per person for fiscal year 2017. The average per person ticket is slightly higher in restaurants offering beer and
wine.
Delco Units offer delivery and carryout service only and are typically located in shopping centers or other in-line retail
developments. Delco Units typically offer a variety of crusts and some combination of side items. Delco Units occupy approximately
1,200 square feet, are primarily production facilities and, in most instances, do not offer seating. The decor of the Delco Unit is
designed to be bright and highly visible and feature neon lighted displays and awnings. We have attempted to locate Delco Units
strategically to facilitate timely delivery service and to provide easy access for carryout service.
Express Units serve our customers through a variety of non-traditional points of sale. Express Units are typically located in a
convenience store, food court, college campus, airport terminal, travel plaza, athletic facility or other commercial facility. They have
limited or no seating and solely offer quick carryout service of a limited menu of pizza and other foods and beverages. An Express
Unit typically occupies approximately 200 to 400 square feet and is commonly operated by the operator or food service licensee of the
commercial host facility. We have developed a high-quality pre-prepared crust that is topped and cooked on-site, allowing this concept
to offer a lower initial investment and reduced labor and operating costs while maintaining product quality and consistency. Like Delco
Units, Express Units are primarily production-oriented facilities and, therefore, do not require all of the equipment, labor or square
footage of the Buffet Unit.
4
Site Selection
We consider the restaurant site selection process critical to a restaurant’s long-term success and devote significant resources
to the investigation and evaluation of potential sites. The site selection process includes a review of trade area demographics through
the use of a third party customer and site selection tool, as well as a proprietary evaluation process. We may also rely on a franchisee’s
knowledge of the trade area and market characteristics when selecting a location for a franchised restaurant. A member of our
development team visits each potential domestic restaurant location.
Development and Operations
New Unit Development
We intend to expand the Pizza Inn system domestically and internationally in markets with significant long-term growth
potential and where we believe we can use our competitive strengths to establish brand recognition and gain local market share. We
plan to expand our Pizza Inn branded domestic restaurant base primarily through opening new franchised restaurants with new and
existing franchisees. We expect to evaluate the expanded development of new Pizza Inn Buffet and Delco Units in international
markets in fiscal 2018, particularly in the Middle East.
In appropriate circumstances, we grant area developer rights for Pizza Inn restaurants in new and existing domestic markets.
A Pizza Inn area developer typically pays a negotiated fee to purchase the right to operate or develop restaurants within a defined
territory and, typically, agrees to a multi-restaurant development schedule. The area developer assists us in local franchise service and
quality control in exchange for half of the franchise fees and royalties from all restaurants within the territory during the term of the
agreement.
In fiscal 2018, we intend to continue developing franchised Pie Five Units domestically and internationally. As of June 25,
2017, we had 71 franchised units open and had executed multi-year development agreements with 22 franchisees for up to an
additional 174 domestic Pie Five Units.. The number of Pie Five Units subject to a development agreement is scaled relative to the
estimated development potential of the specified geographic area and requires the franchisee to achieve specified unit development
milestones over a period of time, typically five years, to maintain their development rights in the area. The rate at which we will be
able to continue to expand the Pie Five concept through franchise development is determined in part by our success at selecting
qualified franchisees, by our ability to identify satisfactory sites in appropriate markets and by our ability to continue training and
monitoring our franchisees. We intend to continue to focus on franchise development opportunities with experienced, well-capitalized,
multi-restaurant operators. In addition we intend to take the brand into international markets, starting with Pakistan.
Domestic Franchise Operations
Franchise and development agreements. We discontinued offering new Delco Unit franchises during fiscal 2014. Our current
standard forms of franchise agreements provide for the following basic terms:
Development fee per unit
Franchise fee per unit
Initial franchise term
Renewal period
Royalty rate % of sales
National Ad fund % of sales
Require total ad spending % of sales
Pizza Inn
Buffet Unit
Express Unit
Pie Five Unit
-
25,000
20 years
10 years
4%
1%
5%
-
5,000
5 years
5 years
5%
2%
2%
5,000
20,000
10 years
5 years
6%
2%
5%
Since the Pizza Inn concept was first franchised in 1963, industry franchising concepts and development strategies have
evolved, and our present franchise relationships are evidenced by a variety of contractual forms. Common to those forms are
provisions that: (i) require the franchisee to follow the Pizza Inn system of restaurant operation and management, (ii) require the
franchisee to pay a franchise fee and continuing royalties, and (iii) except for Express Units, prohibit the development of one restaurant
within a specified distance from another.
5
We launched the franchise program for Pie Five in fiscal 2013. Based on the Pie Five development agreements currently in
effect, we anticipate allocating significant internal resources to the growth of our Pie Five franchise and development operation in
fiscal 2018. Our Pie Five franchise agreement requires that the franchisees: (i) follow the Pie Five system of restaurant operation and
management, (ii) pay a franchise fee and continuing royalties, (iii) contribute a specified percentage of sales to a marketing fund
managed by the Company, and (iv) only open restaurants that comply with site and design standards determined by the Company.
Training. We offer numerous training programs for the benefit of franchisees and their restaurant crew managers. The training
programs, taught by experienced Company employees, focus on food preparation, service, cost control, sanitation, safety, local store
marketing, personnel management and other aspects of restaurant operation. The training programs include group classes, supervised
work in Company-owned restaurants and special field seminars. Initial and certain supplemental training programs are offered free of
charge to franchisees, who pay their own travel and lodging expenses. New franchisees also receive on-site training from Company
employees to assist with their first two restaurant openings under their development agreements. Restaurant managers train their staff
through on-the-job training, utilizing video and printed materials produced by us.
Standards. We require franchisee adherence to a variety of standards designed to ensure proper operations and to protect and
enhance the Pie Five and Pizza Inn brands. All franchisees are required to operate their restaurants in compliance with these written
policies, standards and specifications, which include matters such as menu items, ingredients, materials, supplies, services, furnishings,
decor and signs. Our efforts to maintain consistent operations may result, from time to time, in the closing of certain restaurants that
have not achieved and maintained a consistent standard of quality or operations. We also maintain adherence to our standards through
ongoing support and education of our franchisees by our franchise business consultants, who are deployed locally in markets where our
franchisees are located.
Company-Owned Restaurant Operations
As of June 25, 2017, we operated 13 Pie Five Units in the Dallas/Fort Worth metropolitan area. We do not currently intend to
operate any Buffet Units, Delco Units or Express Units. In addition to generating revenues and earnings, we use domestic
Company-owned restaurants as test sites for new products and promotions as well as restaurant operational improvements and as a
forum for training new managers and franchisees. Outside of the one Texas Pie Five Unit we opened in August 2017, we do not
presently anticipate opening additional Company-owned restaurants during fiscal 2018.
International Franchise Operations
We also offer master license rights to develop Pizza Inn restaurants in certain foreign countries, with negotiated fees,
development schedules and ongoing royalties. A master licensee for a foreign country pays a negotiated fee to purchase the right to
develop and operate Pizza Inn restaurants within a defined territory, typically for a term of 20 years, plus a ten-year renewal option.
The master licensee agrees to a multi-restaurant development schedule and we train the master licensee to monitor and assist
franchisees in their territory with local service and quality control, with support from us. In return, the master licensee typically retains
half the franchise fees and half the royalties on all restaurants within the territory during the term of the agreement. Master licensees
may open restaurants that they own and operate, or they may open sub-franchised restaurants owned and operated by third parties
through agreements with the master licensee, but subject to our approval.
Our first franchised restaurant outside of the United States opened in the late 1970s. As of June 25, 2017, there were 60 Pizza
Inn restaurants operating internationally. With the exception of two restaurants in Honduras, all of the restaurants operated or
sub-licensed by our international master licensees are in the United Arab Emirates, Saudi Arabia and adjoining countries. Our ability
to continue to develop select international markets is affected by a number of factors, including our ability to locate experienced,
well-capitalized developers who can commit to an aggressive multi-restaurant development schedule and achieve maximum initial
market penetration with minimal supervision by us. In fiscal 2018, we plan to expand the Pie Five brand internationally beginning with
Pakistan.
6
Food and Supply Distribution
Our Norco division provides product sourcing, purchasing, quality assurance, research and development, franchisee order and
billing services, and logistics support functions for both the Pizza Inn and Pie Five restaurant systems. We outsource our warehousing
and distribution services to reputable and experienced restaurant distribution companies, including Performance Food Group, Inc. and
its affiliates. The distributors make deliveries to all domestic restaurants from several distribution centers, with delivery territories and
responsibilities for each determined according to geographical region. We believe this division of responsibilities for our purchasing,
franchisee support and distribution systems has resulted in lower operating costs and logistical efficiencies. Norco also arranges for the
distribution of certain products and equipment to some international franchisees.
Norco is able to leverage the advantages of direct vendor negotiations and volume purchasing of food, equipment and
supplies for the franchisees’ benefit in the form of a concentrated, one-truck delivery system, competitive pricing and product
consistency. Franchisees are able to purchase all products and ingredients from Norco and have them delivered by experienced and
efficient distributors. In order to assure product quality and consistency, our franchisees are required to purchase from Norco certain
food products that are proprietary to the Pizza Inn and Pie Five systems, including cheese, pizza sauce, flour mixture, certain meats
and spice blend. In addition, franchisees may purchase other non-proprietary food products and supplies from Norco. Alternatively,
franchisees may also purchase non-proprietary products and supplies from other suppliers who meet our requirements for quality and
reliability.
Non-proprietary food and ingredients, equipment and other supplies sold by Norco are generally available from several
qualified sources. With the exception of several proprietary food products, such as cheese and dough flour, we are not dependent upon
any one supplier or a limited group of suppliers. We contract with established food processors for the production of our proprietary
products according to our specifications.
We have not experienced any significant shortages of supplies or any delays in receiving our food or beverage inventories,
restaurant supplies or products, and do not anticipate any difficulty in obtaining inventories or supplies in the foreseeable future. Prices
charged to us by our suppliers are subject to fluctuation, and we typically pass increased costs or savings on to our franchisees through
changes in product pricing. We do not engage in commodity hedging but enter into pricing arrangements for up to a year in advance
for certain high volume products.
Marketing and Advertising
By communicating a common brand message at the regional, local market and restaurant levels, we believe we can create and
reinforce a strong, consistent marketing message to consumers and increase our market share. We offer or facilitate a number of ways
for the brand image and message to be promoted at the local and regional levels.
The Pizza Inn Advertising Plan Cooperative (“PIAP Cooperative”) is a Texas cooperative association that is responsible for
creating and producing various marketing programs and materials, which may include print and digital advertisements, direct mail
materials, social media and e-mail marketing, television and radio commercials, in-store promotional materials, and related marketing
and public relations services. Each operator of a domestic Buffet Unit or Delco Unit is entitled to membership in PIAP Cooperative.
Nearly all of our existing Pizza Inn franchise agreements for Buffet Units and Delco Units require the franchisees to become members
of PIAP Cooperative. Members contribute 1% of their sales to PIAP Cooperative. PIAP Cooperative is managed by a board of trustees
comprised of franchisee representatives who are elected by the members each year. We do not have any ownership interest in PIAP
Cooperative. We provide certain administrative, marketing and other services to PIAP Cooperative and are paid by PIAP Cooperative
for such services. As of June 25, 2017, substantially all of our domestic franchisees were members of PIAP Cooperative. Operators of
Express Units do not participate in PIAP Cooperative. However, they contribute directly to a Pizza Inn Express Fund (“PIEF”) to help
fund purchases of Express Unit marketing materials and similar expenditures. International franchisees do not participate in the PIAP
Cooperative or the PIEF.
7
In the past year we have allocated additional resources to the development and execution of marketing programs for the Pie
Five restaurant system to benefit Pie Five franchisees and Company-owned restaurants in different metropolitan areas. Pie Five
franchisees contribute a specified percentage of their sales to the Company to fund the creation and production of various marketing
and advertising programs and materials, which may include print and digital advertisements, direct mail materials, customer
satisfaction systems, social media and e-mail marketing, television and radio commercials, in-store promotional materials, and related
marketing and public relations services. We anticipate continuing to expand Pie Five marketing activities commensurate with the
growth of the Pie Five system.
Pizza Inn and Pie Five franchisees are required to conduct independent marketing efforts in addition to their participation in
the national marketing programs for each brand. We provide Company-owned and franchised restaurants with access to an assortment
of local store marketing materials, including pre-approved print, radio, and digital media marketing materials. We also provide local
store marketing materials and programs specifically to support new restaurant openings.
Trademarks and Quality Control
We own various trademarks, including the names “Pizza Inn” and “Pie Five,” that are used in connection with the restaurants
and have been registered with the United States Patent and Trademark Office. The duration of our trademarks is unlimited, subject to
periodic renewal and continued use. In addition, we have obtained trademark registrations for our marks in several foreign countries
and have periodically re-filed and applied for registration in others. We believe that we hold the necessary rights for protection of the
trademarks essential to our business.
Government Regulation
We and our franchisees are subject to various federal, state and local laws affecting the operation of our restaurants. Each
restaurant is subject to licensing and regulation by a number of governmental authorities, which include health, safety, sanitation, wage
and hour, alcoholic beverage, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in
obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the opening of a new restaurant or require the
temporary or permanent closing of existing restaurants in a particular area.
We are subject to Federal Trade Commission (“FTC”) regulation and to various state laws regulating the offer and sale of
franchises. The FTC requires us to furnish to prospective franchisees a franchise disclosure document containing prescribed
information. Substantive state laws that regulate the franchisor-franchisee relationship presently exist in a number of states, and bills
have been introduced in Congress from time to time that would provide for further federal regulation of the franchisor-franchisee
relationship in certain respects. Some foreign countries also have disclosure requirements and other laws regulating franchising and the
franchisor-franchisee relationship.
Employees
As of June 25, 2017, we had 353 employees, including 49 in our corporate office and 65 full-time and 239 part-time
employees at the Company-owned restaurants. None of our employees are currently covered by collective bargaining agreements.
Industry and Competition
The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many
well-established competitors with substantially greater brand recognition and financial and other resources than the Company.
Competitors include a large number of international, national and regional restaurant and pizza chains, as well as local restaurants and
pizza operators. Some of our competitors may be better established in the markets where our restaurants are or may be located. Within
the pizza segment of the restaurant industry, we believe that our primary competitors are national pizza chains and several regional
chains, including chains executing a “take and bake” concept. We also compete against the frozen pizza products available at grocery
stores and large superstore retailers. In recent years several competitors have developed fast-casual pizza concepts that compete with
Pie Five in certain metropolitan areas. A change in the pricing or other market strategies of one or more of our competitors could have
an adverse impact on our sales and earnings.
8
With respect to the sale of franchises, we compete with many franchisors of restaurants and other business concepts. We
believe that the principal competitive factors affecting the sale of franchises are product quality, price, value, consumer acceptance,
franchisor experience and support, and the quality of the relationship maintained between the franchisor and its franchisees. In general,
there is also active competition for management personnel and attractive commercial real estate sites suitable for our restaurants.
Our Norco division competes with both national and local distributors of food and other restaurant suppliers. The distribution
industry is very competitive. We believe that the principal competitive factors in the distribution industry are product quality, customer
service and price. Norco or its designees are the sole authorized suppliers of certain proprietary products that all Pizza Inn or Pie Five
restaurants are required to use.
ITEM 1A. RISK FACTORS.
Not required for a smaller reporting company.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
The company leases its 38,130 square foot corporate office facility with average annual lease payments of approximately
$9.00 per square foot. This lease began on January 2, 2017 and has a ten year term.
As of June 25, 2017, the Company also operated 13 Pie Five Units from leased locations. The operating leases cover
premises from 1,765 to 4,634 square feet and have initial terms of from five to ten years at base rental rates of $18.00 to $42.00 per
square foot and contain provisions permitting renewal for one or more specified terms.
As of June 25, 2017, the Company has lease obligations for eight non-operating locations. These leased properties range in
size from 2,011 to 4,000 square feet, have annual rental rates ranging from approximately $30.00 to $46.00 per square foot and expire
between 2019 and 2026. The Company is currently pursuing alternatives for subleasing or terminating the unexpired leases.
ITEM 3. 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 4. MINE SAFETY DISCLOSURES.
Not applicable.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
As of September 20, 2017, there were approximately 1,910 stockholders of record of the Company's common stock.
The Company had no sales of unregistered securities during fiscal 2017 or 2016.
The Company's common stock is listed on the Capital Market of the NASDAQ Stock Market, LLC (“NASDAQ”) under the
symbol “RAVE”. The following table shows the highest and lowest price per share of the common stock during each quarterly period
within the two most recent fiscal years, as reported by NASDAQ. Such prices reflect inter-dealer quotations, without adjustment for
any retail markup, markdown or commission.
Fiscal 2017:
Fourth Quarter Ended 6/25/2017
Third Quarter Ended 3/26/2017
Second Quarter Ended 12/25/2016
First Quarter Ended 9/25/2016
Fiscal 2016:
Fourth Quarter Ended 6/26/2016
Third Quarter Ended 3/27/2016
Second Quarter Ended 12/27/2015
First Quarter Ended 9/27/2015
High
Low
$ 2.29
3.01
3.28
4.75
$ 1.83
1.75
1.66
3.02
$ 5.57
7.74
9.70
14.47
$ 3.88
4.50
5.40
8.88
The Company did not pay any dividends on its common stock during the fiscal years ended June 25, 2017 or June 26, 2016.
Any determination to pay cash dividends in the future will be at the discretion of the Company’s board of directors and will be
dependent upon the Company’s results of operations, financial condition, capital requirements, contractual restrictions and other
factors deemed relevant. Currently, there is no intention to pay any dividends on our common stock.
2007 Stock Purchase Plan
On May 23, 2007, the Company’s board of directors approved a stock purchase plan (the “2007 Stock Purchase Plan”)
authorizing the purchase on our behalf of up to 1,016,000 shares of our common stock in the open market or in privately negotiated
transactions. On June 2, 2008, the Company’s board of directors amended the 2007 Stock Purchase Plan to increase the number of
shares of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. On April 22, 2009 the
Company’s board of directors amended the 2007 Stock Purchase Plan again to increase the number of shares of common stock the
Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares. The 2007 Stock Purchase Plan does not have an
expiration date. There were no stock purchases in the fiscal year ended June 25, 2017.
The Company’s ability to purchase shares of our common stock is subject to various laws, regulations and policies as well as
the rules and regulations of the Securities and Exchange Commission (the “SEC”). Subsequent to June 25, 2017, the Company has not
repurchased any outstanding shares but may make further purchases under the 2007 Stock Purchase Plan. The Company may also
purchase shares of our common stock other than pursuant to the 2007 Stock Purchase Plan or other publicly announced plans or
programs.
10
Equity Compensation Plan Information
The following table furnishes information with respect to the Company’s equity compensation plans as of June 25, 2017:
Plan
Category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants, and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
478,056
$ 4.16
949,600
-
-
-
478,056
$ 4.16
949,600
Additional information regarding equity compensation can be found in the notes to the consolidated financial statements.
ITEM 6. SELECTED FINANCIAL DATA
Not required for a smaller reporting company.
ITEM 7. 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 Annual Report on Form 10-K and may contain certain forward-looking statements. See
“Forward-Looking Statements.”
Results of Operations
Overview
The Company franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”)
restaurants under the trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the
trademarks “Pie Five Pizza Company” or “Pie Five”. 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. At June 25, 2017, Company-owned and franchised restaurants consisted of the following (in thousands,
except unit data):
Pizza Inn
Ending
Units
Retail
Sales
Pie Five
Ending
Units
Retail
Sales
All Concepts
Ending
Units
Retail
Sales
Company-Owned
Domestic Franchised
Total Domestic Units
$ 568
-
161 87,880
161 $ 88,448
13 $ 15,233
71 41,929
84 $ 57,162
13
232
245
$ 15,801
129,809
$ 145,610
International Franchised
60
-
60
11
The domestic restaurants were located in 25 states predominately situated in the southern half of the United States. The
international restaurants were located in five foreign countries.
Basic and diluted loss per common share increased $0.32, to a loss of $1.18 per share for fiscal 2017, compared to $0.86 per
share in the prior fiscal year. Net loss increased $3.6 million to a loss of $12.5 million for fiscal 2017 compared to a loss of $8.9
million for the prior fiscal year on revenues of $57.1 million for fiscal 2017 as compared to $60.0 million in fiscal 2016. The increased
net loss over the prior year was primarily due to loss on sale of assets, additional impairment and closed store expense totaling $7.0
million. The Company also experienced lower sales and financial performance by Company-owned Pie Five stores in newer markets.
Adjusted EBITDA for the fiscal year ended June 25, 2017, decreased to a loss of $2.7 million compared to a loss of $0.1
million for the comparable period of the prior fiscal year. The following table sets forth a reconciliation of net income to Adjusted
EBITDA for the periods shown (in thousands):
Net loss
Interest expense
Income taxes
Depreciation and amortization
EBITDA
Stock compensation expense
Pre-opening costs
Loss on sale/disposal of assets
Impairment charges, non-operating store costs and discontinued operations
Adjusted EBITDA
Results of operations for fiscal 2017 and 2016 both included 52 weeks.
12
Fiscal Year Ended
June 25,
2017
$ (12,491)
106
53
2,456
$ (9,876)
58
162
882
6,104
$ (2,670)
June 26,
2016
$ (8,886)
4
2,654
2,722
$ (3,506)
213
883
-
2,122
$ (102)
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.
Pie Five Retail Sales - Total Stores
Domestic - Franchised
Domestic - Company-owned
Total domestic retail sales
Pie Five Comparable Store Retail Sales - Total
Pie Five Average Units Open in Period
Domestic - Franchised
Domestic - Company-owned
Total domestic Units
Fiscal Year Ended
June 25,
2017
June 26,
2016
$ 41,929
15,233
$ 57,162
$ 33,681
19,629
$ 53,310
$ 25,237
$ 30,049
67
26
93
45
31
76
Pie Five system-wide retail sales increased $3.9 million, or 7.2%, for the fiscal year ended June 25, 2017 when compared
to the prior year. Compared to the fiscal year 2016, average units open in the period increased from 76 to 93. Comparable store retail
sales decreased by 16.0% during fiscal 2017 compared to fiscal 2016.
The following chart summarizes Pie Five restaurant activity for the fiscal year ended June 25, 2017:
Domestic - Franchised
Domestic - Company-owned
Total domestic Units
Beginning
Units
Fiscal Year Ended June 25, 2017
Opened
Closed
Transfer
Ending
Units
57
31
88
25
-
25
17
12
29
6
(6)
-
71
13
84
The net decrease of four Pie Five Units during fiscal 2017 was primarily the result of the closure of poor-performing units,
which we believe provides us a stronger foundation for future brand growth. We believe that the net increase of 14 franchised Pie Five
Units reflects a continuing but moderated growth as franchised stores opened primarily pursuant to previously executed domestic
franchise development agreements.
13
Pie Five - Company-Owned Restaurants
(in thousands, except store weeks and average data)
Three Months Ended
Sept 25,
2016
Dec 25, March 26, June 25,
2017
2017
2016
Fiscal Year Ended
June 25,
2017
Store weeks
Average weekly sales
Average number of units
400 386 368 215 1,369
11,764 10,517 10,535 12,018 11,122
31 30 28 17 26
Restaurant sales (excluding partial weeks)
Restaurant sales
4,705 4,060 3,877 2,584 15,226
4,707 4,060 3,877 2,589 15,233
Loss from continuing operations before taxes
Allocated marketing and advertising expenses
Depreciation/amortization expense
Pre-opening costs
Operations management and extraordinary expenses
Impairment and non-operating store costs
Restaurant operating cash flow
(1,505) (6,269) (1,013) (887) (9,674)
234 204 194 130 762
676 628 436 224 1,964
19 47 29 67 162
227 213 195 100 735
385 5,121 (26) 760 6,240
36 (56) (185) 394 189
Three Months Ended
Sept 27,
2015
Dec 27, March 27, June 26,
2016
2016
2015
Fiscal Year Ended
June 26,
2016
Store weeks
Average weekly sales
Average number of units
327 414 452 422 1,615
13,297 11,725 11,645 12,005 12,093
25 32 35 33 31
Restaurant sales (excluding partial weeks)
Restaurant sales
4,348 4,854 5,263 5,066 19,531
4,393 4,876 5,294 5,066 19,629
Loss from continuing operations before taxes
Allocated marketing and advertising expenses
Depreciation/amortization expense
Pre-opening costs
Operations management and extraordinary expenses
Impairment and non-operating store costs
Restaurant operating cash flow
(611) (2,016) (1,132) (2,218) (5,977)
220 243 264 406 1,133
430 568 749 669 2,416
424 264 115 80 883
164 172 162 150 648
- 1,010 (23) 964 1,951
627 241 135 51 1,054
As a result of decreased store count and lower weekly average unit sales, total retail sales of Company-owned Pie Five
restaurants decreased $4.4 million, or 22.4%, to $15.2 million for fiscal 2017 compared to $19.6 million for fiscal 2016. Average
weekly sales for Company-owned Pie Five restaurants decreased $971, or 8.0%, to $11,122 for the fiscal year ended June 25, 2017
compared to $12,093 for the same period of prior year. Company-owned Pie Five restaurant operating cash flow decreased $0.9
million, or 82.1%, during the fiscal year 2017 compared to the same period of prior year. The decline in average weekly sales and
operating cash flow for Company-owned Pie Five restaurants was primarily attributable to lower sales and weaker financial
performance by stores in newer markets. Loss from continuing operations before taxes for Company-owned Pie Five stores increased
$3.7 million for the fiscal year ended June 25, 2017 compared to the same period of the prior year. The higher loss from continuing
operations before taxes for Company-owned Pie Five restaurants was primarily the result of $6.2 million in impairment charges and
non-operating store costs and a decline in average weekly sales partially offset by lower pre-opening expenses.
14
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.
Pizza Inn Retail Sales - Total Domestic Stores
Domestic Units
Buffet - Franchised
Delco/Express - Franchised
Buffet - Company-owned
Total domestic retail sales
Pizza Inn Comparable Store Retail Sales - Total Domestic
Pizza Inn Average Units Open in Period
Domestic Units
Buffet - Franchised
Delco/Express - Franchised
Buffet - Company-owned
Total domestic units
Fiscal Year Ended
June 25,
2017
$ 81,283
$ 6,597
568
$ 88,448
June 26,
2016
$ 80,592
7,212
858
$ 88,662
$ 81,799
$ 81,691
94
63
1
158
95
68
1
164
Total domestic Pizza Inn total retail sales decreased $0.2 million, or 0.2% compared to the prior year. The decrease in
domestic retail sales was primarily due to a net decrease in number of Buffet Units, partially offset by a net increase in Delco/Express
Units opened during the year. Comparable Pizza Inn retail sales increased by 0.1%.
The following chart summarizes Pizza Inn restaurant activity for the fiscal year ended June 25, 2017:
Domestic Units
Buffet - Franchised
Delco/Express - Franchised
Buffet - Company-owned
Total domestic Units
Fiscal Year Ended June 25, 2017
Beginning
Units
Opened
Closed
Concept
Change
Ending
Units
95
66
1
162
3
5
-
8
4
4
1
9
(1)
1
-
-
93
68
-
161
International Units (all types)
60
-
-
-
60
Total Units
222
8
9
-
221
There was a net decrease of one domestic Pizza Inn unit during the fiscal year ending June 25, 2017. We believe this is
consistent with the recent trend of modest domestic store closures. The number of international Pizza Inn units remained the same.
15
Non-GAAP Financial Measures and Other Terms
The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles
(“GAAP”). However, the Company also presents and discusses certain non-GAAP financial measures that it believes are useful to
investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the
effectiveness of business strategies and for planning and budgeting purposes. 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.
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, costs related to impairment, gain/loss on scrap and sale of assets, non-operating store costs and
discontinued operations.
“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 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) accrued rent, and (3) manager salaries, employee payroll and related
training costs.
16
Financial Results
REVENUES:
Food and supply sales
Franchise revenues
Restaurant sales
Total revenues
COSTS AND EXPENSES:
Cost of sales
General and administrative expenses
Franchise expenses
Pre-opening expenses
Loss on sale of assets
Impairment of long-lived assets and other
lease charges
Bad debt
Interest expense
Total costs and expenses
INCOME (LOSS) FROM CONTINUING
OPERATIONS
BEFORE TAXES
Revenues:
Franchising and
Food & Supply
Distribution
Fiscal Year
Company-Owned
Restaurants
Fiscal Year
Corporate
Fiscal Year
Total
Fiscal Year
June 25,
2017
June 26,
2016
June 25,
2017
June 26,
2016
June 25,
2017
June 26,
2016
June 25,
2017
June 26,
2016
36,282 34,879 - - - - 36,282
5,598 5,445 - - - - 5,598
- - 15,233 19,629 - - 15,233
41,880 40,324 15,233 19,629 - - 57,113
34,879
5,445
19,629
59,953
52,355
34,319 32,486 15,933 19,869 - - 50,252
7,109
1,371 1,275 2,935 3,170 3,404 2,664 7,710
3,636
3,896 3,636 - - - - 3,896
- - 162 883 - - 162
883
- - - - 882 - 882 -
- - 5,877 1,698 - - 5,877
- - - - 342 101 342
- - - - 106 4 106
39,586 37,397 24,907 25,620 4,734 2,769 69,227
1,698
101
4
65,786
2,294 2,927 (9,674)
(5,991)
(4,734)
(2,769)
(12,114)
(5,833)
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
mix of products sold to franchisees through Norco rather than through third-party food distributors. Total revenues for fiscal 2017 and
for the same period in the prior fiscal year were $57.1 million and $60.0 million, respectively.
Food and Supply Sales
Food and supply sales by Norco include food and paper products and other distribution revenues. For fiscal 2017, food and
supply sales increased 4.0% to $36.3 million compared to $34.9 million for the prior fiscal year due to an increase in sales to
franchisees. This increase was driven by an $8.3 million, or 6.9%, increase in domestic franchisee retail sales attributable to an
increase in the average number of stores open in the current year when compared to prior year.
Franchise Revenue
Franchise revenue, which includes income from domestic and international royalties and license fees, increased to $5.6
million for fiscal 2017 compared to $5.4 million for the prior fiscal year as the result of higher domestic and international royalties
resulting from increased franchisee retail sales and an increase in franchise and development fees due to Pie Five store openings.
Restaurant Sales
Restaurant sales, which consist of revenue generated by Company-owned restaurants, decreased 22.4%, or $4.4 million, to
$15.2 million for fiscal 2017 compared to $19.6 million for the prior fiscal year. This decrease was primarily due to the transfer or
closings of 18 Company-owned stores in fiscal 2017, as well as lower average weekly sales.
17
Costs and Expenses:
Cost of Sales Total
Cost of sales primarily includes food and supply costs, distribution fees, labor and general and administrative expenses
directly related to restaurant sales. These costs decreased 4.0%, or $2.1 million, to $50.3 million for fiscal 2017 compared to $52.4
million for the prior fiscal year. The decrease in cost of sales was primarily due to the decreased number of Company-owned Pie Five
restaurants compared to the prior year.
Cost of Sales – Franchising and Food and Supply Distribution
Franchising and Food and Supply Distribution cost of sales increased 5.6%, or $1.8 million, to $34.3 million for fiscal
2017 compared to $32.5 million for the prior fiscal year. The increase in cost of sales was primarily due to increased Norco sales
to franchisees compared to the prior year.
Cost of Sales – Company-Owned Stores
Company-owned Stores cost of sales decreased 19.8% or $4.0 million, to $15.9 million for fiscal 2017 compared to $19.9
million for the prior year. The decrease in cost of sales was primarily the result of lower store count.
General and Administrative Expenses Total
General and administrative expenses increased $0.6 million to $7.7 million for fiscal 2017 compared to $7.1 million for the
prior fiscal year primarily due to increased payroll, legal and professional fees.
General and Administrative Expenses – Franchising and Food and Supply Distribution
Franchising and Food and Supply Distribution general and administrative expenses increased only slightly to $1.4 million
compared to $1.3 million for the prior fiscal year.
General and Administrative Expenses – Company-Owned Stores
Company-owned Stores general and administrative expenses decreased $0.3 million to $2.9 million for fiscal 2017 compared
to $3.2 million for the prior fiscal year primarily as a result of lower store count.
General and Administrative Expenses – Corporate
General and administrative expenses for corporate increased to $3.4 million for fiscal 2017 compared to $2.7 million for the
prior year. Increases included payroll, legal and professional fees.
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 increased to $3.9 million in fiscal 2017 from $3.6 million in the prior fiscal year
primarily due to higher payroll, travel and professional outside services during fiscal 2017.
18
Pre-Opening Expense
The Company's pre-opening costs are expensed as incurred and generally include payroll and other direct costs associated
with training new managers and employees prior to opening a new restaurant, rent and other unit operating expenses incurred prior to
opening, and promotional costs associated with the opening of Company-owned restaurants. Pre-opening expenses decreased to $0.2
million in fiscal 2017 from $0.9 million in the prior year primarily due to fewer Pie Five store openings.
Impairment Expenses
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 an asset 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. During fiscal year 2017, the Company tested its long-lived
assets for impairment and recognized pre-tax, non-cash impairment charges of $5.9 million compared to $1.7 million in the prior year.
The fiscal 2017 impairment charges related to $4.7 million in carrying value of Company-owned restaurants and $1.2 million in other
lease termination expenses for undeveloped, closed and transferred restaurant sites. These impairment charges arose as a result of the
decision to close 12 underperforming Pie Five restaurants and one underperforming Pizza Inn restaurant and to abandon previously
executed leases for seven locations no longer deemed desirable for future restaurant development.
Provision for Bad Debt
Bad debt provision related to accounts receivable from franchisees increased to $0.3 million in fiscal 2017 compared to $0.1
million in the prior year. The Company believes that this provision and related allowance for doubtful accounts adequately reserves for
outstanding receivables due from franchisees whose restaurants closed and for outstanding receivables due from continuing
franchisees. For restaurants that are anticipated to close or are exhibiting signs of financial distress, credit terms are typically restricted,
weekly food orders are required to be paid prior to delivery and royalty and advertising fees are collected as add-ons to the delivered
price of weekly food orders.
Interest Expense
Interest expense increased for the fiscal year ended June 25, 2017 to $0.1 million, compared to a negligible amount in the
prior 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 in the third quarter of fiscal 2017.
Provision for Income Tax
The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future
taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In fiscal year 2017, the Company had a
full valuation allowance against its net deferred tax assets. The valuation allowance was increased by $4.1 million in fiscal year 2017,
increasing from $4.9 million at June 26, 2016 to $9.0 million at June 25, 2017. The Company assessed 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 considered both positive and negative evidence related to the
likelihood of realization of deferred tax assets. In making such assessment, more weight was given to evidence that could be
objectively verified, including recent cumulative losses. Future sources of taxable income were also considered in determining the
amount of the recorded valuation allowance. Based on the Company’s review of this evidence, management determined that it was
appropriate to maintain a full valuation allowance against all of the Company’s deferred tax assets.
Income tax expense of $0.1 million for fiscal 2017 represents state taxes. At the end of tax year ended June 25, 2017, the
Company had net operating loss carryforwards totaling $13.6 million that are available to reduce future taxable income and will begin
to expire in 2032.
19
Discontinued Operations
Discontinued operations includes income/loss from a Pizza Inn Company-owned restaurant that closed in fiscal 2017 and a
leased building associated with a Company-owned Pizza Inn restaurant closed in a prior year.
Sources and Uses of Funds
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operating activities and proceeds from the sale of securities.
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 operations
was $5.5 million in fiscal 2017 compared to cash provided of $1.9 million in fiscal year 2016.
Cash flows from investing activities reflect net proceeds from sale of assets and capital expenditures for the purchase of
Company assets. Cash provided by investing activities during fiscal 2017 of $0.4 million was primarily attributable to sales of assets of
closed Company-owned Pie Five restaurants partially offset by capital expenditures for a new Pie Five Unit, computers and other
miscellaneous assets. This compares to cash used by investing activities of $7.7 million during the fiscal year ended June 26, 2016
primarily 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 $0.9 million for the fiscal years ended June 25, 2017 and June
26, 2016, respectively, which reflected proceeds from issuance of convertible senior notes, stock options and short-term borrowings in
the current year versus proceeds from the sale of stock in the prior year.
ATM Offerings
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 June 25, 2017, the
Company had sold an aggregate of 825,763 shares in the 2014 ATM Offering, realizing aggregate gross proceeds of $8.1 million. No
sales were made under the 2014 ATM Offering during fiscal 2017.
20
Short Term Loan
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 executed an Extended and Restated Promissory Note in favor of Newcastle extending
the due date of the 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. Newcastle is an affiliate of the Company’s Chairman, Mark E. Schwarz.
Convertible Notes
On March 3, 2017, the Company completed a registered shareholder rights offering of its 4% Convertible Senior Notes due
2022 (“Notes”). Shareholders exercised subscription rights to purchase all 30,000 of the Notes at the par value of $100 per Note,
resulting in gross offering proceeds to the Company of $3.0 million.
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 share of common 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 were considered a debt discount and accreted into interest
expense using the effective interest method over the debt maturity period.
Fiscal 2018 Equity Rights Offering
On September 13, 2017, the Company completed a registered shareholder rights offering of 3,571,429 shares of its common
stock at a subscription price of $1.40 per share. The equity shareholder rights offering was fully subscribed resulting in gross offering
proceeds to the Company of $5.0 million.
Liquidity
We expect to fund continuing operations and planned capital expenditures for the next fiscal year primarily from cash on
hand, operating cash flow and sales of securities. Based on budgeted and year-to-date cash flow information, we believe that we have
sufficient liquidity to satisfy our cash requirements for the 2018 fiscal year.
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.
21
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.
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 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 an asset 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. During fiscal year 2017, the Company tested its long-lived
assets for impairment and recognized pre-tax, non-cash impairment charges of $5.9 million primarily related to the carrying value of
20 Pie Five Units and lease termination expenses for seven undeveloped restaurant sites. During fiscal year 2016, the Company tested
its long-lived assets for impairment and recognized pre-tax, non-cash impairment charges of $1.7 million related to the carrying value
of five Pie Five Units.
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.
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 June 25, 2017 and June 26, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See information set forth on Index to Consolidated Financial Statements and Supplementary Data appearing on page F-1 of
this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
22
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s principal executive officer and principal financial
officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the principal executive officer and principal financial officer concluded that the Company’s
disclosure controls and procedures, as of the end of the period covered by this report, were effective in assuring that the information
required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is (i) accumulated and
communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms.
Management Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate “internal control over financial
reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Under the supervision and with the participation
of management, including our principal executive officer and principal financial officer, the Company has conducted an evaluation of
the effectiveness of its internal control over financial reporting. The Company’s management based it’s evaluation on criteria set forth
in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based upon that evaluation, management has concluded that our internal control over financial reporting was effective as
of June 25, 2017. 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, its internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
There is no information required to be disclosed under this Item.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed
with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed
with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed
with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed
with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed
with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
(a)1. The financial statements filed as part of this report are listed in the Index to Consolidated Financial Statements and
Supplementary Data appearing on page F-1 of this report on Form 10-K.
2. Any financial statement schedule filed as part of this report is listed in the Index to Consolidated Financial Statements and
Supplementary Data appearing on page F-1 of this report on Form 10-K.
3. Exhibits:
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
Amended and Restated Articles of Incorporation of Rave Restaurant Group, Inc. (filed as Exhibit 3.1 to Form 8-K
filed January 8, 2015 and incorporated herein by reference).
Amended and Restated Bylaws of Rave Restaurant Group, Inc. (filed as Exhibit 3.2 to Form 8-K filed January 8, 2015
and incorporated herein by reference).
Indenture for 4% Convertible Senior Notes due 2022 (filed as Exhibit 4.1 to Form S-3/A filed January 6, 2017 and
incorporated herein by reference).
Pledge Agreement (filed as Exhibit 4.2 to Form S-3/A filed January 6, 2017 and incorporated herein by reference).
Extended and Restated Promissory Note dated May 8, 2017, payable by Rave Restaurant Group, Inc. to Newcastle
Partners, LP. (filed as Exhibit 4.1 to form 10-Q for fiscal quarter ended March 26, 2017 and incorporated herein by
reference).
2005 Non-Employee Directors Stock Award Plan of the Company and form of Stock Option Award Agreement (filed
as Exhibit 10.25 to Form 10-K for the fiscal year ended June 26, 2005 and incorporated herein by reference).*
2005 Employee Incentive Stock Option Award Plan of the Company and form of Stock Option Award Agreement
(filed as Exhibit 10.26 to Form 10-K for the fiscal year ended June 26, 2005 and incorporated herein by reference).*
2015 Long Term Incentive Plan of the Company (filed as Exhibit 10.1 to Form 8-K filed November 20, 2014 and
incorporated herein by reference).*
Form of Stock Option Grant Agreement under the Company’s 2015 Long Term Incentive Plan (filed as Exhibit 10.2 to
Form 8-K filed November 20, 2014 and incorporated herein by reference).*
Form of Restricted Stock Unit Award Agreement under the Company’s 2015 Long-Term Incentive Plan (filed as
Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 27, 2015, and incorporated herein by reference).*
24
10.6
10.7
10.8
10.9
21.1
23.1
31.1
31.2
32.1
32.2
101
Employment letter dated April 7, 2014, between the Company and Timothy E. Mullany (filed as Exhibit 10.1 to Form
8-K filed April 30, 2014, and incorporated herein by reference).*
Letter agreement dated January 6, 2017, between Rave Restaurant Group, Inc. and Scott Crane (filed as Exhibit 10.1
to Form 8-K filed January 12, 2017 and incorporated herein by reference).*
At Market Issuance Sales Agreement between the Company and MLV & Co. LLC dated October 1, 2014 (filed as
Exhibit 1.1 to Form 8-K filed October 1, 2014, and incorporated herein by reference).
Advisory Services Agreement between the Company and NCM Services, Inc. dated February 20, 2014 (filed as
Exhibit 10.1 to Form 8-K filed February 24, 2014, and incorporated herein by reference).*
List of Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Principal Executive Officer.
Section 1350 Certification of Principal Financial Officer.
Interactive data files pursuant to Rule 405 of Regulation S-T.
* Management contract or compensatory plan or arrangement.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 20, 2017
Rave Restaurant Group, Inc.
By: /s/ Scott Crane
Scott Crane
President and Chief Executive Officer
By: /s/ Timothy E. Mullany
Timothy E. Mullany
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Name and Position
/s/ Scott Crane
Scott Crane
President and Chief Executive Officer
(Principal Executive Officer)
/s/Timothy E. Mullany
Timothy E. Mullany
Chief Financial Officer
(Principal Financial and Accounting
Officer)
/s/Mark E. Schwarz
Mark E. Schwarz
Director and Chairman of the Board
Date
September 20, 2017
September 20, 2017
September 20, 2017
/s/Ramon D. Phillips
Ramon D. Phillips
Director and Vice Chairman of the Board
September 20, 2017
/s/ Steven M. Johnson
Steven M. Johnson
Director
/s/Robert B. Page
Robert B. Page
Director
/s/ William C. Hammett, Jr.
William C. Hammett, Jr.
Director
/s/ Clinton J. Coleman
Clinton J. Coleman
Director
September 20, 2017
September 20, 2017
September 20, 2017
September 20, 2017
26
RAVE RESTAURANT GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Description
Report of Independent Registered Public Accounting Firm – Montgomery Coscia Greilich LLP
Consolidated Statements of Operations for the years ended June 25, 2017 and June 26, 2016.
Consolidated Balance Sheets at June 25, 2017 and June 26, 2016.
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended June 25, 2017 and June 26,
2016.
Consolidated Statements of Cash Flows for the years ended June 25, 2017 and June 26, 2016.
Supplemental Disclosures of Cash Flow Information for the years ended June 25, 2017 and June 26, 2016.
Notes to Consolidated Financial Statements.
Page No.
F-2
F-3
F-4
F-5
F-6
F-6
F-7
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rave Restaurant Group, Inc.
The Colony, Texas
We have audited the accompanying consolidated balance sheets of Rave Restaurant Group, Inc. as of June 25, 2017 and June 26, 2016
and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for the fiscal years then ended.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Rave Restaurant Group, Inc. as of June 25, 2017 and June 26, 2016, and the results of its operations and cash flows for the fiscal years
then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Montgomery Coscia Greilich LLP
Plano, Texas
September 20, 2017
F-2
RAVE RESTAURANT GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
REVENUES:
COSTS AND EXPENSES:
Cost of sales
General and administrative expenses
Franchise expenses
Pre-opening expenses
Loss on sale of assets
Impairment of long-lived assets and other lease charges (See Note A)
Bad debt
Interest expense
LOSS FROM CONTINUING
OPERATIONS BEFORE TAXES
Income tax expense
LOSS FROM
CONTINUING OPERATIONS
Fiscal Year Ended
June 25,
2017
June 26,
2016
$ 57,113
$ 59,953
50,252
7,710
3,896
162
882
5,877
342
106
69,227
52,355
7,109
3,636
883
-
1,698
101
4
65,786
(12,114)
(5,833)
53
2,654
(12,167)
(8,487)
Loss from discontinued operations, net of taxes
(324)
(399)
NET LOSS
LOSS PER SHARE OF COMMON
STOCK - BASIC:
Loss from continuing operations
Loss from discontinued operations
Net loss
LOSS PER SHARE OF COMMON
STOCK - DILUTED:
Loss from continuing operations
Loss from discontinued operations
Net loss
Weighted average common
shares outstanding - basic
Weighted average common
shares outstanding - diluted
$ (12,491)
$ (8,886)
$ (1.15)
$ (0.03)
$ (1.18)
$ (0.82)
$ (0.04)
$ (0.86)
$ (1.15)
$ (0.03)
$ (1.18)
$ (0.82)
$ (0.04)
$ (0.86)
10,617
10,617
10,317
10,317
See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statements.
F-3
RAVE RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $249 and $198, respectively
Notes receivable
Inventories
Income tax receivable
Property held for sale
Prepaid expenses and other
Total current assets
LONG-TERM ASSETS
Property, plant and equipment, net
Long-term notes receivable
Deposits and other, net
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade
Short-term debt
Accrued expenses
Deferred rent
Deferred revenues
Total current liabilities
LONG-TERM LIABILITIES
Convertible notes
Deferred rent, net of current portion
Deferred revenues, net of current portion
Other long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (See Notes F and J)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; authorized 26,000,000
shares; issued 17,786,049 and 17,460,951 shares, respectively;
outstanding 10,666,649 and 10,341,551 shares, respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Treasury stock at cost
7,119,400 shares
Total shareholders' equity (deficit)
Total liabilities and shareholders' equity (deficit)
<
June 25,
2017
June 26,
2016
$
451
$
873
2,761
675
79
194
671
295
5,126
3,808
127
485
9,546
4,165
1,000
1,265
101
212
6,743
2,749
655
1,425
53
11,625
$
$
2,780
167
197
194
-
430
4,641
12,979
382
503
18,505
3,815
-
1,220
160
304
5,499
-
1,710
1,440
453
9,102
178
26,784
(4,405)
(24,636)
(2,079)
9,546
175
25,778
8,086
(24,636)
9,403
18,505
$
$
$
$
See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statements.
F-4
RAVE RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Treasury Stock
Shares
Amount
Total
BALANCE,
JUNE 28, 2015
Stock
compensation
expense
Stock options
exercised
Sale of stock
Net loss
BALANCE,
JUNE 26, 2016
Stock
compensation
expense
Stock options
exercised
Conversion of
senior notes, net
Net loss
BALANCE,
JUNE 25, 2017
10,255 $ 174 $ 24,700 $ 16,972 (7,119)
$ (24,636)
$ 17,210
- - 213 - - - 213
28 - 102 - - - 102
59 1 763 - - - 764
- - - (8,886) - - (8,886)
10,342 $ 175 $ 25,778 $ 8,086 (7,119)
$ (24,636)
$ 9,403
- - 58 - - - 58
315 3 803 - - - 806
10 - 145 - - - 145
- - - (12,491) - - (12,491)
10,667 $ 178 $ 26,784 $ (4,405) (7,119)
$ (24,636) $ (2,079)
See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statements.
F-5
RAVE RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Impairment of fixed assets and other assets
Stock compensation expense
Deferred income taxes
Depreciation and amortization
Loss on the sale of assets
Provision for bad debt
Changes in operating assets and liabilities:
Notes and accounts receivable
Inventories
Income tax receivable
Prepaid expenses, deposits and other, net
Deferred revenue
Accounts payable - trade
Accrued expenses, deferred rent and other
Cash provided (used) by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets
Capital expenditures
Cash provided (used) by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt
Proceeds from sale of stock
Proceeds from issuance of convertible notes
Proceeds from exercise of stock options
Cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest
Income taxes
See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statements.
F-6
Fiscal Year Ended
June 25,
2017
June 26,
2016
$ (12,491)
$ (8,886)
4,773
58
-
2,456
882
342
(576)
118
-
116
(107)
350
(1,469)
(5,548)
1,698
213
2,593
2,722
432
101
(44)
(17)
492
419
195
940
1,088
1,946
999
(573)
426
444
(8,110)
(7,666)
1,000
-
2,894
806
-
764
-
102
4,700
866
(422)
873
$ 451
(4,854)
5,727
$ 873
$ 25
$ 29
$ 4
$ -
RAVE RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business:
Rave Restaurant Group, Inc. and its subsidiaries (collectively referred to as the “Company”, or in the first person notations of
“we”, “us” and “our”) operate and franchise pizza buffet, delivery/carry-out and express restaurants domestically and internationally
under the trademark “Pizza Inn” and operate and franchise domestic fast casual restaurants under the trademarks “Pie Five Pizza
Company” or “Pie Five”. We provide or facilitate the procurement and distribution of food, equipment and supplies to our domestic
and international system of restaurants through our Norco Restaurant Services Company (“Norco”) division and through agreements
with third party distributors.
As of June 25, 2017, we owned and operated 13 Pie Five restaurants (“Pie Five Units”). As of that date, we also had 71
franchised Pie Five Units and 221 franchised Pizza Inn restaurants. The 161 domestic franchised Pizza Inn restaurants were comprised
of 93 pizza buffet restaurants (“Buffet Units”), 11 delivery/carry-out restaurants (“Delco Units”) and 57 express restaurants (“Express
Units”). The 60 international franchised Pizza Inn restaurants were comprised of 12 Buffet Units, 40 Delco Units and eight Express
Units. Domestic Pizza Inn restaurants were located predominantly in the southern half of the United States, with Texas, Arkansas,
North Carolina and Mississippi accounting for approximately 23%, 17%, 17% and 9%, respectively, of the total number of domestic
restaurants.
Principles of Consolidation:
The consolidated financial statements include the accounts of Rave Restaurant Group, Inc. and its subsidiaries, all of which
are wholly owned. All appropriate inter-company balances and transactions have been eliminated.
Reclassifications:
Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
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.
Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and
cash equivalents. At June 25, 2017 and June 26, 2016 and at various times during the fiscal years then ended, cash and cash
equivalents were in excess of Federal Depository Insurance Corporation insured limits. We do not believe we are exposed to any
significant credit risk on cash and cash equivalents.
Inventories:
Inventory consists primarily of food, paper products and supplies stored in and used by Company restaurants and was 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.
F-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 the Impairment or Disposal of Long-Lived Assets,” requires that discontinued
operations that meet certain criteria be reflected in the statement of operations after results of continuing operations as a net amount.
This guidance also requires that the operations of closed restaurants, including any impairment charges, be reclassified to discontinued
operations for all periods presented.
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 includes income/loss from a restaurant that closed in fiscal 2017 and a leased building associated
with a Company-owned restaurant closed in a prior year.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Repairs and maintenance are
charged to operations as incurred while major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset,
the asset and the related accumulated depreciation or amortization are removed from the accounts and the gain or loss is included in
operations. The Company capitalizes interest on borrowings during the active construction period of major capital projects.
Capitalized interest is added to the cost of the underlying asset and amortized over the estimated useful life of the asset.
Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets or, in the
case of leasehold improvements, over the term of the lease including any reasonably assured renewal periods, if shorter. The useful
lives of the assets range from three to ten years.
Impairment of Long-Lived Asset 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 an asset 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. During fiscal year 2017 and 2016, the Company tested its
long-lived assets for impairment and recognized pre-tax, non-cash impairment charges of $5.9 million and $1.7 million, respectively,
related to the carrying value of multiple Pie Five and Pizza Inn units.
Accounts Receivable:
Accounts receivable consist primarily of receivables from food and supply sales and franchise royalties. The Company
records a provision for doubtful receivables to allow for any amounts that may be unrecoverable based upon an analysis of the
Company's prior collection experience, customer creditworthiness and current economic trends. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance. Finance charges may be accrued at a rate of 18% per year, or
up to the maximum amount allowed by law, on past due receivables. The interest income recorded from finance charges is immaterial.
F-8
Notes Receivable:
Notes receivable primarily consist of promissory notes arising from franchisee agreements. The majority of amounts and
terms are contained under formal promissory and personal guarantee agreements. All notes allow for early payment without penalty.
Fixed principle and interest payments are due weekly or monthly. Interest income is recognized monthly. Notes receivable mature at
various dates through 2021 and bear interest at rates that range from 0.0% to 7.0% (3.9% weighted average rate at June 25, 2017).
Management evaluates the creditworthiness of franchisees by considering credit history and sales to evaluate credit risk.
Management determines interest rates based on credit risk of the underlining franchisee. The Company monitors payment history to
determine whether or not a loan should be placed on a nonaccrual status or impaired.
The Company charges off notes receivable based on an account-by-account analysis of the borrower’s current economic
conditions, monthly payments history and historical loss experience. The allowance for doubtful notes receivable is netted within notes
receivable. Notes receivable as of June 25, 2017 consisted of $0.7 million in current assets and $0.1 million in long-term assets. Notes
receivable as of June 26, 2016 consisted of $0.2 million in current assets and $0.4 million in long-term assets.
The principal balance outstanding on the notes receivable and expected principal collections for the next five years and
thereafter were as follows as of June 25, 2017 (in thousands):
2018
2019
2020
2021
Income Taxes:
Notes
Receivable,
Gross
752
66
69
54
941
Notes
Receivable,
Net of Allowance
675
4
69
54
802
Income taxes are accounted for using the asset and liability method pursuant to the authoritative guidance on Accounting for
Income Taxes. Deferred taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial statement and carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment
date. The Company recognizes future tax benefits to the extent that realization of such benefits is more likely than not.
The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future
taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In fiscal year 2017, the Company had a
full valuation allowance against its net deferred tax assets. The valuation allowance was increased by $4.1 million in fiscal year 2017,
increasing from $4.9 million at June 26, 2016 to $9.0 million at June 25, 2017. The Company assessed 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 considered both positive and negative evidence related to the
likelihood of realization of deferred tax assets. In making such assessment, more weight was given to evidence that could be
objectively verified, including recent cumulative losses. Future sources of taxable income were also considered in determining the
amount of the recorded valuation allowance. Based on the Company’s review of this evidence, management determined that it was
appropriate to maintain a full valuation allowance against all of the Company’s deferred tax assets.
Income tax expense of $0.1 million for fiscal 2017 represented state taxes. At the end of tax year ended June 25, 2017, the
Company had net operating loss carryforwards totaling $13.6 million that are available to reduce future taxable income and will begin
to expire in 2032.
F-9
Pre-Opening Expense:
The Company's pre-opening costs are expensed as incurred and generally include payroll and other direct costs associated
with training new managers and employees prior to opening a new restaurant, rent and other unit operating expenses incurred prior to
opening, and promotional costs associated with the opening.
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.
Revenue Recognition:
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. The Company's Norco division sells food and supplies to franchisees on trade accounts under terms common
in the industry. Shipping and handling costs billed to customers are recognized as revenue and the associated costs are included in cost
of sales.
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. For the fiscal years ended
June 25, 2017 and June 26, 2016, 87.8% and 82.8%, respectively, of franchise revenue was comprised of recurring royalties.
We recognize restaurant sales when food and beverage products are sold. The Company reports revenue net of sales and use
taxes collected from customers and remitted to governmental taxing authorities.
Stock Options:
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.
The Company’s stock-based compensation plans are described more fully in Note H. Stock options under these plans are
granted at exercise prices equal to the fair market value of the Company’s stock at the dates of grant.
Generally those options vest ratably over various vesting periods.
F-10
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.
Fair Value of Financial Instruments:
The carrying amounts of accounts receivable and accounts payable approximate fair value because of the short maturity of
these instruments.
Advertising and Marketing Costs:
Advertising and marketing costs are expensed as incurred and totaled $0.8 million for fiscal year ended June 25, 2017 and
$1.2 million for fiscal year ended June 26, 2016. Advertising and marketing costs are included in cost of sales and general and
administrative expenses in the consolidated statements of operations.
Contingencies:
Provisions for legal settlements are accrued when payment is considered probable and the amount of loss is reasonably
estimable in accordance with the authoritative guidance on Accounting for Contingencies. If the best estimate of cost can only be
identified within a range and no specific amount within that range can be determined more likely than any other amount within the
range, and the loss is considered probable, the minimum of the range is accrued. Legal and related professional services costs to
defend litigation are expensed as incurred.
Use of Management Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires the Company’s management to make estimates and assumptions that affect its reported amounts of assets, liabilities,
revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and other
various assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically.
Actual results could differ materially from estimates.
Fiscal Year:
The Company's fiscal year ends on the last Sunday in June. The fiscal year ended June 25, 2017 and the fiscal year ended
June 26, 2016 both contained 52 weeks.
NOTE B – PROPERTY, PLANT AND EQUIPMENT:
Property, and plant and equipment consist of the following (in thousands):
Estimated Useful
Lives
June 25,
2017
June 26,
2016
Equipment, furniture and fixtures
Software
Leasehold improvements
3 - 7 yrs
5 yrs
10 yrs or lease term, if shorter
Less: accumulated depreciation/amortization
$ 4,791 $
1,143
3,949
9,883
(6,075)
3,808
$
$
9,697
872
13,290
23,859
(10,880)
12,979
Depreciation and amortization expense was approximately $2.5 million and $2.7 million for the fiscal years ended June 25,
2017 and June 26, 2016, respectively.
F-11
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
Compensation
Other
Professional fees
Insurance loss reserves
June 25,
2017
June 26,
2016
$
836 $
254
167
8
728
447
37
8
$
1,265
$
1,220
NOTE D - CONVERTIBLE NOTES:
On March 3, 2017, the Company completed a registered shareholder rights offering of its 4% Convertible Senior Notes due
2022 (“Notes”). Shareholders exercised subscription rights to purchase all 30,000 of the Notes at the par value of $100 per Note,
resulting in gross offering proceeds to the Company of $3.0 million.
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 share of common 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 were considered a debt discount and accreted into interest
expense using the effective interest method over the debt maturity period.
NOTE E - INCOME TAXES:
Provision for income taxes from continuing operations consists of the following (in thousands):
Current - Federal
Current - Foreign
Current - State
Deferred - Federal
Deferred - State
Provision for income taxes
Fiscal Year Ended
June 25,
2017
June 26,
2016
—
—
53
—
—
53
$
$
—
—
4
2,764
(114)
2,654
$
$
F-12
Discontinued operations had no material impact on provision for income taxes for fiscal years ended June 25, 2017 and June
26, 2016.
The effective income tax rate varied from the statutory rate for the fiscal years ended June 25, 2017 and June 26, 2016 as
reflected below (in thousands):
Federal income taxes based on 34%
of pre-tax loss
State income tax, net of federal effect
Permanent adjustments
Valuation allowance
Other
June 25,
2017
June 26,
2016
$ (4,119)
35
24
4,019
94
53
$
$ (1,983)
30
19
4,757
(169)
2,654
$
The tax effects of temporary differences that give rise to the net deferred tax assets consisted of the following (in thousands):
Current
Reserve for bad debt
Deferred fees
Other reserves and accruals
Non Current
Credit carryforwards
Net operating loss carryforwards
Depreciable assets
Total gross deferred tax asset
Valuation allowance
Net deferred tax asset
June 25,
2017
June 26,
2016
$
89 $
27
1,323
1,439
70
105
1,246
1,421
199
4,799
2,585
747
197
2,526
9,022
4,891
(9,022)
(4,891)
$
-
$
-
At the end of tax year ended June 25, 2017, the Company had net operating loss carryforwards totaling $13.6 million that are
available to reduce future taxable income and will begin to expire in 2032.
The Company continually reviews the reliability of its deferred tax assets, including an analysis of factors such as future
taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In fiscal 2016, the Company recorded a
$4.9 million valuation allowing against its net deferred tax assets. The valuation allowance was increased by $4.1 million in fiscal
2017 to $9.0 million as of June 25, 2017. The Company assessed 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.
F-13
In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the
likelihood of realization of deferred tax assets. In making such an assessment, more weight was given to the evidence that could be
objectively verified, including recent cumulative losses. Future sources of taxable income were also considered in determining the
amount of the recorded valuation allowance. Based on the Company’s review of this evidence, management determined that a full
valuation allowance against all of the Company’s deferred tax assets was appropriate.
NOTE F - LEASES:
Premises occupied by Company-owned restaurants are leased for initial terms of five to ten years, and each has multiple
renewal terms. Certain lease agreements contain either a provision requiring additional rent if sales exceed specified amounts or an
escalation clause based upon a predetermined multiple.
The Company leases its 38,130 square foot corporate office facility with average annual lease payments of approximately
$9.00 per square foot. This lease began on January 2, 2017 and has a ten year term.
Future minimum rental payments under active non-cancelable leases with initial or remaining terms of one year or more at
June 25, 2017 were as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Operating
Leases
2,485
2,246
2,272
2,347
2,258
6,381
17,989
$
$
Future minimum sublease rental income under active non-cancelable leases with initial or remaining terms of one year or
more at June 25, 2017 were as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Rental expense consisted of the following (in thousands):
Minimum rentals
Sublease rentals
F-14
Sublease Rental
Income
$
$
187
162
168
174
175
350
1,216
Fiscal Year Ended
June 25,
2017
June 26,
2016
$ 1,878
(129)
1,749
$
$ 3,090
(257)
2,833
$
NOTE G - EMPLOYEE BENEFITS:
The Company has a tax advantaged savings plan that is designed to meet the requirements of Section 401(k) of the Internal
Revenue Code (the “Code”). The current plan is a modified continuation of a similar savings plan established by the Company in 1985.
Employees who have completed six months of service and are at least 21 years of age are eligible to participate in the plan. The plan
provides that participating employees may elect to have between 1% and 15% of their compensation deferred and contributed to the
plan subject to certain IRS limitations. Effective June 27, 2005, the Company has a discretionary matching contribution. For calendar
years 2015 and 2016, the Company contributed on behalf of each participating employee an amount equal to 50% of the employee’s
contributions up to 4% of compensation. Separate accounts are maintained with respect to contributions made on behalf of each
participating employee. Employer matching contributions and earnings thereon are invested in the same investments as each
participant’s employee deferral. The plan is subject to the provisions of the Employee Retirement Income Security Act, as amended,
and is a profit sharing plan as defined in Section 401(k) of the Code.
For the fiscal years ended June 25, 2017 and June 26, 2016, total matching contributions to the tax advantaged savings plan
by the Company on behalf of participating employees were approximately $40,000 and $53,000, respectively.
NOTE H - STOCK BASED COMPENSATION PLANS:
In June 2005, the 2005 Employee Incentive Stock Option Award Plan (the “2005 Employee Plan”) was approved by the
Company’s shareholders with a plan effective date of June 23, 2005. Under the 2005 Employee Plan, officers and employees of the
Company were eligible to receive options to purchase shares of the Company’s common stock. Options were granted at market value
of the stock on the date of grant, were subject to various vesting and exercise periods as determined by the Compensation Committee
of the board of directors, and could be designated as non-qualified or incentive stock options. A total of 1,000,000 shares of common
stock were authorized for issuance under the 2005 Employee Plan. The 2005 Employee Plan expired by its terms on June 23, 2015.
The shareholders also approved the 2005 Non-Employee Directors Stock Award Plan (the “2005 Directors Plan”) in June
2005, to be effective as of June 23, 2005. Directors not employed by the Company were eligible to receive stock options under the
2005 Directors Plan. Options for common stock equal to twice the number of shares of common stock acquired during the previous
fiscal year, up to 40,000 shares per year, were automatically granted to each non-employee director on the first day of each fiscal year.
Options were granted at market value of the stock on the first day of each fiscal year, with vesting periods beginning at a minimum of
six months and with exercise periods up to ten years. A total of 650,000 shares of Company common stock were authorized for
issuance pursuant to the 2005 Directors Plan. The 2005 Directors Plan expired by its terms on June 23, 2015.
The 2015 Long Term Incentive Plan (the “2015 LTIP”) was approved by the Company’s shareholders on November 18,
2014, and became effective June 1, 2015. Officers, employees and non-employee directors of the Company are eligible to receive
awards under the 2015 LTIP. A total of 1,200,000 shares of common stock are authorized for issuance under the 2015 LTIP. Awards
authorized under the 2015 LTIP include incentive stock options, non-qualified stock options, restricted shares, restricted stock units
and rights (either with or without accompanying options). The 2015 LTIP provides for options to be granted at market value of the
stock on the date of grant and have exercise periods determined by the Compensation Committee of the board of directors. The
Compensation Committee may also determine the vesting periods, performance criteria and other terms and conditions of all awards
under the 2015 LTIP. The Compensation Committee has adopted resolutions under the 2015 LTIP automatically granting to each
non-employee director on the first day of each fiscal year options to purchase twice the number of shares of common stock acquired
during the previous fiscal year, up to a maximum of 40,000 shares. Such options are exercisable at the market value of the stock on the
first day of the fiscal year, vest six months from the date of grant and expire 10 years from the date of grant.
Share based compensation expense is included in general and administrative expense in the statement of operations.
F-15
Stock Options:
A summary of stock option transactions under all of the Company’s stock option plans and information about fixed-price
stock options is as follows:
Outstanding at beginning
of year
Granted
Exercised
Forfeited/Canceled/Expired
Outstanding at end of year
Exercisable at end of year
Weighted-average fair value of
options granted during the year
Total intrinsic value of
options exercised
Fiscal Year Ended
June 25, 2017
June 26, 2016
Weighted-
Average
Exercise
Price
Weighted-
Average
Exercise
Price
Shares
Shares
847,556
$ 3.77
871,798
$ 3.51
50,000
(315,000)
(104,500)
$ 3.95
$ 2.56
$ 5.67
42,786
(27,916)
(39,112)
$ 10.92
$ 3.65
$ 5.67
478,056
$ 4.16
847,556
$ 3.77
388,056
$ 3.54
558,620
$ 2.71
$ 1.11
$ 4.24
$ 806,400
$ 102,010
At June 25, 2017, there was no intrinsic value of options outstanding.
F-16
The following table provides information on options outstanding and options exercisable as of June 25, 2017:
Range of
Exercise Prices
$1.55 - 1.95
$1.96 - 2.35
$2.36 - 2.75
$2.76 - 3.30
$3.31 - 3.95
$5.51 - 5.74
$5.95 - 6.25
$6.26 - 13.11
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life (Years)
Options
Outstanding
at June 25, 2017
Options Exercisable
Weighted-
Average
Exercise Price
Options
Exercisable
at June 25, 2017
Weighted-
Average
Exercise Price
81,306
90,000
40,000
55,000
50,000
8,664
128,800
24,286
478,056
2.1
1.0
4.0
5.0
18.5
6.0
6.9
8.0
5.8
$1.90
$2.32
$2.71
$3.11
$3.95
$5.74
$6.07
$13.11
$4.16
81,306
90,000
40,000
55,000
-
8,664
88,800
24,286
388,056
$1.90
$2.32
$2.71
$3.11
$0.00
$5.74
$4.07
$13.11
$3.54
We determine fair value following the authoritative guidance as follows:
Valuation and Amortization Method. We estimate the fair value of share-based awards granted using the Black-Scholes
option valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are
generally the vesting periods.
Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding.
Unless a life is specifically stated, we determine the expected life using the “simplified method” in accordance with Staff Accounting
Bulletin No. 110 since we do not have sufficient historical share option exercise experience.
Expected Volatility. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the
date of grant based on the historical volatility of our common stock.
Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied
yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the
award.
Expected Dividend Yield. We have not paid any cash dividends on our common stock in the last ten years and we do not
anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the
Black-Scholes option valuation model.
Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation
only for those awards that are expected to vest.
F-17
The following weighted average assumptions were used for options granted in the last two fiscal years:
Fiscal Year Ended
Expected life (in years)
Expected volatility
Risk-free interest rate
Expected forfeiture rate
June 25,
2017
June 26,
2016
5.5
34.6%
1.1%
61.8%
5.7
36.0%
1.6%
61.8%
At June 25, 2017, the Company had unvested options to purchase 90,000 shares with a weighted average grant date fair value
of $6.77. The total remaining unrecognized compensation cost related to unvested stock options amounted to approximately $0.2
million at June 25, 2017. The weighted average remaining requisite service period of the unvested awards was 4.6 months. Stock
compensation expense related to stock options of $58,000 and $213,000 was recognized in fiscal years 2017 and 2016, respectively.
Restricted Stock Units:
Restricted stock units awarded under the 2015 LTIP represent the right to receive shares of common stock upon the
satisfaction of vesting requirements, performance criteria and other terms and conditions. During fiscal 2017, an aggregate of 536,310
restricted stock units were granted to certain employees.
The restricted stock units granted to each recipient are allocated among performance criteria pertaining to various aspects of
the Company’s business, as well as its overall operations, measured based on its fiscal year ending June 24, 2019. Achievement of the
various performance criteria entitles the recipient to receive shares of common stock in amounts ranging from 50% to 150% of the
number of restricted stock units granted. Grantees of restricted stock units do not have any rights of a stockholder, and do not
participate in any distributions on our common stock, until the award fully vests upon satisfaction of the vesting schedule, performance
criteria and other conditions set forth in their award agreement. Therefore, unvested restricted stock units are not considered
participating securities under ASC 260, “Earnings Per Share,” and are not included in the calculation of basic or diluted earnings per
share.
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. The grant date fair value of the restricted stock units granted
in fiscal 2017 is $5.99 per unit. The Company benefited from a credit in compensation expense of $33 thousand which had no income
tax impact due to a full valuation allowance.
F-18
A summary of the status of restricted stock units as of June 25, 2017 and June 26, 2016, and changes during the fiscal years
then ended is presented below:
Number of Restricted Stock Units
Outstanding at beginning of year
Granted during the year
Forfeited during the year
Outstanding at end of year
Vested at beginning of year
Vested during the year
Vested at end of year
Unvested at end of year
NOTE I - SHAREHOLDERS’ EQUITY:
June 25,
2017
June 26,
2016
79,620
536,310
(127,980)
487,950
—
—
—
487,950
—
100,190
(20,570)
79,620
—
—
—
79,620
On April 22, 2009, the board of directors of the Company amended the stock repurchase plan first authorized on May 23,
2007, and previously amended on June 2, 2008, by increasing the aggregate number of shares of common stock the Company may
repurchase under the plan to a total of 3,016,000 shares. No shares were repurchased during fiscal 2017 and, as of June 25, 2017, there
were 848,425 shares available to repurchase under the plan.
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 June 25, 2017, the
Company had sold an aggregate of 825,763 shares in the 2014 ATM Offering, realizing aggregate gross proceeds of $8.1 million. No
sales were made under the 2014 ATM Offering during fiscal 2017.
The Company pays to MLV a fee equal to 3% of the gross sales price in addition to reimbursing certain costs. Expenses
associated with the 2013 ATM Offering and 2014 ATM Offering were $0 and $21,000 in fiscal 2017 and fiscal 2016, respectively,
which includes fees and expense reimbursement to MLV and legal and other offering expenses incurred by the Company.
F-19
NOTE J - COMMITMENTS AND CONTINGENCIES:
The Company is subject to various claims and contingencies related to employment agreements, franchise disputes, lawsuits,
taxes, food product purchase contracts and other matters arising out of the normal course of business. Management believes that any
such claims and actions currently pending are either covered by insurance or would not have a material adverse effect on the
Company's annual results of operations or financial condition if decided in a manner that is unfavorable to us.
NOTE K - EARNINGS PER SHARE:
The Company computes and presents earnings per share (“EPS”) in accordance with the authoritative guidance on Earnings
Per Share. Basic EPS excludes the effect of potentially dilutive securities while diluted EPS reflects the potential dilution that would
occur if securities or other contracts to issue common stock were exercised, converted or resulted in the issuance of common stock that
then shared in the earnings of the Company.
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).
Loss from continuing operations
Discontinued operations
Net loss available to common stockholders
BASIC:
Weighted average common shares
Loss from continuing operations per common share
Discontinued operations per common share
Net loss per common share
DILUTED:
Weighted average common shares
Stock options
Weighted average common shares outstanding
Loss from continuing operations per common share
Discontinued operations per common share
Net loss per common share
F-20
Fiscal Year Ended
June 25,
2017
$ (12,167)
(324)
$ (12,491)
June 26,
2016
$ (8,487)
(399)
$ (8,886)
10,617
10,317
$ (1.15)
(0.03)
$ (1.18)
$ (0.82)
(0.04)
$ (0.86)
10,617
-
10,617
10,317
-
10,317
$ (1.15)
(0.03)
$ (1.18)
$ (0.82)
(0.04)
$ (0.86)
NOTE L– SEGMENT REPORTING:
The Company has two reportable operating segments as determined by management using the “management approach” as
defined by the authoritative guidance on Disclosures about Segments of an Enterprise and Related Information: (1) Franchising and
Food and Supply Distribution, and (2) Company-owned Restaurants. These segments are a result of differences in the nature of the
products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources,
legal and credit and collections, are partially allocated to the two operating segments. Other revenue consists of nonrecurring items.
The Franchising and Food and Supply Distribution segment establishes franchisees and franchise territorial rights and sells
and distributes proprietary and non-proprietary food and other items to franchisees. Revenue for this segment is derived from the sale
of distributed products and franchise royalties, franchise fees and sale of area development and foreign master license rights. Assets for
this segment include equipment, furniture and fixtures.
The Company-owned Restaurant segment includes sales and operating results for all Company-owned restaurants. Assets for
this segment include equipment, furniture and fixtures for the Company-owned restaurants.
Corporate administration and other assets primarily include cash and short-term investments, as well as furniture and fixtures
located at the corporate office and trademarks and other intangible assets. All assets are located within the United States.
Summarized in the following tables are net sales and operating revenues, depreciation and amortization expense, income from
continuing operations before taxes, capital expenditures and assets for the Company's reportable segments as of and for the fiscal years
ended June 25, 2017 and June 26, 2016 (in thousands):
F-21
Net sales and operating revenues:
Franchising and food and supply distribution
Company-owned restaurants (1)
Consolidated revenues
Depreciation and amortization:
Franchising and food and supply distribution
Company-owned restaurants (1)
Combined
Corporate administration and other
Depreciation and amortization
Loss from continuing operations before taxes
Franchising and food and supply distribution (2)
Company-owned restaurants (1) (2)
Combined
Impairment of long-lived assets and other lease charges
Corporate administration and other (2)
Loss from continuing operations before taxes
Capital Expenditures:
Franchising and food and supply distribution
Company-owned restaurants
Corporate administration
Combined capital expenditures
Assets:
Franchising and food and supply distribution
Company-owned restaurants
Corporate administration
Combined assets
Fiscal Year Ended
June 25,
2017
June 26,
2016
$ 41,880
15,233
$ 57,113
$ 40,324
19,629
$ 59,953
$ 11
1,987
1,998
458
$ 2,456
$ 2,294
(3,797)
(1,503)
(5,877)
(4,734)
$ (12,114)
$ 23
2,458
2,481
241
$ 2,722
$ 2,927
(4,293)
(1,366)
(1,698)
(2,769)
$ (5,833)
$ -
337
236
$ 573
$ -
7,497
613
$ 8,110
$ 3,326
3,346
2,874
$ 9,546
$ 3,187
12,817
2,501
$ 18,505
(1) Company stores that were closed are included in discontinued operations in the accompanying Condensed
Consolidated Statement of Operations.
(2) Portions of corporate administration and other have been allocated to segments.
The following table provides information on our foreign and domestic revenues:
Geographic information (revenues):
United States
Foreign countries
Consolidated total
$ 56,509
604
$ 57,113
$ 59,402
551
$ 59,953
F-22
CORPORATE INFORMATION
OFFICERS
Scott Crane
President/Chief Executive Officer
Timothy E. Mullany
Chief Financial Officer/Secretary
DIRECTORS
Mark E. Schwarz
Chairman of the Board
Chairman and Chief Executive Officer
of Newcastle Capital Management, L.P.
Ramon D. Phillips
Former Chairman of the Board and
Chief Executive Officer of
Hallmark Financial Services, Inc.
Robert B. Page
Restaurant Consultant
Former Chief Executive Officer of
Backyard Burgers, Inc.
William C. Hammett, Jr.
Former Chief Executive Officer of
iH3, LLC
Clinton J. Coleman
Chairman and Chief Executive Officer
of Novo Labs, Inc.
Brian T. Bares
Chief Executive and Investment Officer of
Bares Capital Management, Inc.
CORPORATE OFFICE
RAVE Restaurant Group, Inc.
3551 Plano Parkway
The Colony, TX 75056
(469) 384-5000
Internet: http://www.raverg.com
STOCK EXCHANGE
AND TRADING SYMBOL
RAVE Restaurant Group, Inc.
common stock is traded on
the NASDAQ Market System under the
symbol “RAVE”.
STOCK TRANSFER AGENT
Securities Transfer Corporation
2591 Dallas Parkway, Suite 102
Frisco, TX 75034
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Montgomery, Coscia and Greilich, LLP
Plano, TX
OUTSIDE LEGAL COUNSEL
McGuire, Craddock & Strother, P.C.
Dallas, TX
LOCATIONS
Alabama
Arkansas
California
Delaware
Florida
Georgia
Iowa
Illinois
DOMESTIC
Indiana
Kansas
Kentucky
Louisiana
Maryland
Missouri
Mississippi
North Carolina
New Jersey
New Mexico
Oklahoma
South Carolina
Tennessee
Texas
Virginia
Washington DC
INTERNATIONAL
Bangladesh
Honduras
Kuwait
Oman
Saudi Arabia
United Arab Emirates
INVESTOR INFORMATION
For further information about the company’s common stock, please
write to the Investor Relations Department at the company’s corporate office.
ANNUAL MEETING
The Annual Meeting of Shareholders will take place on Thursday,
June 14, 2018 at 10:00 a.m. CDT at
Hampton Inn – The Colony
3650 Plano Parkway
The Colony, TX 75056