RAVE Restaurant (RAVE) 10-Q 2022 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 26, 2021 or

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

For the transition period from ________ to ________.

Commission File Number: 0-12919

RAVE RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

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

3551 Plano Parkway

The Colony, Texas 75056

(Address of principal executive offices)
(Zip Code)

(469) 384-5000

(Registrant’s telephone number,

including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of October 26, 2021, 18,004,904 shares of the issuer’s common stock were outstanding.

RAVE RESTAURANT GROUP, INC.

Index

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	Page
	Condensed Consolidated Statements of Income (unaudited) for the three months ended September 26, 2021 and September 27, 2020	3
	Condensed Consolidated Balance Sheets at September 26, 2021 (unaudited) and June 27, 2021	4
	Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the three months ended September 26, 2021 and September 27, 2020	5
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended September 26, 2021 and September 27, 2020	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
Signatures		26

2

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended
	September 26, 2021		September 27, 2020
REVENUES:	$	2,553	$	1,903
COSTS AND EXPENSES:
Cost of sales		0		78
General and administrative expenses		1,206		1,089
Franchise expenses		986		547
Impairment of long-lived assets and other lease charges		0		17
Bad debt expense		5		27
Interest expense		24		23
Depreciation and amortization expense		44		44
Total costs and expenses		2,265		1,825
INCOME BEFORE TAXES		288		78
Income tax expense		3		2
NET INCOME		285		76
INCOME PER SHARE OF COMMON STOCK - BASIC:	$	0.02	$	0.00
INCOME PER SHARE OF COMMON STOCK - DILUTED:	$	0.02	$	0.00
Weighted average common shares outstanding - basic		18,005		15,451
Weighted average common and potential dilutive common shares outstanding		18,803		16,249

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

Index

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

	September 26, 2021			June 27, 2021
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	7,876		$	8,330
Accounts receivable, less allowance for bad debts of $25 and $47, respectively		832			911
Notes receivable, current		568			901
Deferred contract charges, current		33			35
Prepaid expenses and other		150			196
Total current assets		9,459			10,373
LONG-TERM ASSETS
Property, plant and equipment, net		420			445
Operating lease right of use asset, net		1,981			2,085
Intangible assets definite-lived, net		202			183
Notes receivable, net of current portion		302			52
Deferred contract charges, net of current portion		212			207
Total assets	$	12,576		$	13,345
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable - trade	$	521		$	644
Accrued expenses		500			924
Other current liabilities		46			46
Operating lease liability, current		470			465
Short term loan, current		120			250
Convertible notes short term, net of unamortized debt issuance costs and discounts		1,583			1,576
Deferred revenues, current		648			626
Total current liabilities		3,888			4,531
LONG-TERM LIABILITIES
Operating lease liability, net of current portion		1,792			1,911
Deferred revenues, net of current portion		836			1,170
Total liabilities		6,516			7,612
COMMITMENTS AND CONTINGENCIES (SEE NOTE D)
		0			0
SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value; authorized 26,000,000 shares; issued 25,090,058 and 25,090,058 shares, respectively; outstanding 18,004,904 and 18,004,904 shares, respectively		251			251
Additional paid-in capital		37,257			37,215
Accumulated deficit		(6,911	)		(7,196	)
Treasury stock at cost
Shares in treasury: 7,085,154 and 7,085,154, respectively		(24,537	)		(24,537	)
Total shareholders’ equity		6,060			5,733
Total liabilities and shareholders’ equity	$	12,576		$	13,345

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

Index

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Common Stock										Treasury Stock
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Shares			Amount			Total
Balance, June 28, 2020		22,550	$	225	$	33,531		$	(8,716	)		(7,085	)	$	(24,537	)	$	503
Equity issue costs - ATM offering		—		0		(3	)		0			—			0			(3	)
Net income		—		0		0			76			—			0			76
Balance, September 27, 2020		22,550	$	225	$	33,528		$	(8,640	)		(7,085	)	$	(24,537	)	$	576

	Common Stock									Treasury Stock
	Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Shares			Amount			Total
Balance, June 27, 2021		25,090	$	251	$	37,215	$	(7,196	)		(7,085	)	$	(24,537	)	$	5,733
Stock compensation expense		—		0		42		0			—			0			42
Net income		—		0		0		285			—			0			285
Balance, September 26, 2021		25,090	$	251	$	37,257	$	(6,911	)		(7,085	)	$	(24,537	)	$	6,060

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

Index

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	September 26, 2021			September 27, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	285		$	76
Adjustments to reconcile net income to cash used in operating activities:
Impairment of long-lived assets and other lease charges		0			17
Stock compensation expense		42			0
Depreciation and amortization		36			35
Amortization of operating right of use assets		104			146
Amortization of intangible assets definite-lived		8			9
Amortization of debt issue costs		7			7
Provision for bad debt		5			27
Changes in operating assets and liabilities:
Accounts receivable		74			(74	)
Notes receivable		26			62
Deferred contract charges		(3	)		(3	)
Prepaid expenses and other		46			(44	)
Deposits and other		0			5
Accounts payable - trade		(123	)		23
Accounts payable - lease termination impairments		0			(3	)
Accrued expenses		(424	)		(90	)
Operating lease liability		(114	)		(152	)
Deferred revenue		(312	)		(48	)
Cash used in operating activities		(343	)		(7	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on notes receivable		57			4
Purchase of intangible assets definite-lived		(27	)		0
Purchase of property, plant and equipment		(11	)		(27	)
Cash provided by/(used in) investing activities		19			(23	)
CASH FLOWS FROM FINANCING ACTIVITIES:				��
Equity issuance costs - ATM offering		0			(3	)
Short term loan, current		(130	)		0
Cash used in financing activities		(130	)		(3	)
Net decrease in cash, cash equivalents and restricted cash		(454	)		(33	)
Cash, cash equivalents and restricted cash, beginning of period		8,330			3,203
Cash, cash equivalents and restricted cash, end of period	$	7,876		$	3,170
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest	$	0		$	0
Income taxes	$	(2	)	$	7
Non-cash activities:
Conversion of notes to common shares	$	0		$	0
Operating lease right of use assets at adoption	$	0		$	0
Operating lease liability at adoption	$	0		$	0

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

6

Index

RAVE RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) operates and franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express, or PIE, kiosks (“PIE Units”) under the trademark “Pizza Inn”. The accompanying condensed consolidated financial statements of Rave Restaurant Group, Inc. have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2021.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments are of a normal recurring nature. Results of operations for the fiscal periods presented are not necessarily indicative of fiscal year-end results.

Note A - Summary of Significant Accounting Policies

Principles of Consolidation

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

Cash and Cash Equivalents

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

Fiscal Quarters

The three month periods ended September 26, 2021 and September 27, 2020 each contained 13 weeks.

Use of Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company’s management to make estimates and assumptions that affect its reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and other various assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically, and actual results could differ materially from estimates.

Revenue Recognition

Revenue is measured based on consideration specified in contracts with customers and excludes incentives and amounts collected on behalf of third parties, primarily sales tax. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

The following describes principal activities, separated by major product or service, from which the Company generates its revenues:

Franchise Revenues

Franchise revenues consist of 1) franchise royalties, 2) supplier and distributor incentive revenues, 3) franchise license fees, 4) area development exclusivity fees and foreign master license fees, 5) advertising funds, and 6) supplier convention funds.

Franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as sales occur.

Supplier and distributor incentive revenues are recognized when title to the underlying commodities transfer.

Franchise license fees are typically billed upon execution of the franchise agreement and amortized over the term of the franchise agreement which can range from five to twenty years. Fees received for renewal periods are amortized over the life of the renewal period.

7

Index

Area development exclusivity fees and foreign master license fees are typically billed upon execution of the area development and foreign master license agreements. Area development exclusivity fees are included in deferred revenue in the Condensed Consolidated Balance Sheets and allocated on a pro rata basis to all stores opened under that specific development agreement. Area development exclusivity fees that include rights to subfranchise are amortized as revenue over the term of the contract.

Advertising fund contributions for Pie Five and Pizza Inn franchised units represent contributions collected where we have control over the activities of the fund. Contributions are based on a percentage of net retail sales. The adoption of Topic 606 revised the determination of whether these arrangements are considered principal versus agent. For Pie Five and Pizza Inn, we have determined that we are the principal in these arrangements, and advertising fund contributions and expenditures are, therefore, reported on a gross basis in the Condensed Consolidated Statements of Income. In general, we expect such advertising fund contributions and expenditures to be largely offsetting and, therefore, do not expect a significant impact on our reported income before income taxes. Our obligation related to these funds is to develop and conduct advertising activities. Pie Five and Pizza Inn marketing fund contributions are billed and collected weekly.

Recognition of supplier convention funds is deferred until the obligations of the agreements are met and the event takes place.

Rental Income

The Company also subleases some of its restaurant space to third parties. The Company’s 2 subleases have terms that end in 2023 and 2025. The sublease agreements are noncancelable through the end of the term and both parties have substantive rights to terminate the lease when the term is complete. Sublease agreements are not capitalized and are recorded as rental income in the period that rent is received.

Total revenues consist of the following (in thousands):

	Three Months Ended
	September 26, 2021		September 27, 2020
Franchise royalties	$	1,082	$	858
Supplier and distributor incentive revenues		866		767
Franchise license fees		31		102
Area development fees and foreign master license fees		5		4
Advertising funds		375		125
Supplier convention funds		143		0
Rental income		47		48
Other		4		(1	)
	$	2,553	$	1,903

Stock-Based Compensation

The Company accounts for stock options using the fair value recognition provisions of the authoritative guidance on share-based payments. The Company uses the Black-Scholes formula to estimate the value of stock-based compensation for options granted to employees and directors and expects to continue to use this acceptable option valuation model in the future. The authoritative guidance also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow.

Compensation cost for restricted stock units (“RSUs”) is measured as an amount equal to the fair value of the RSUs on the date of grant and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the best estimate of the ultimate achievement level.

8

Note B - Leases

The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that it can be determined that an arrangement represents a lease, it is classified as either an operating lease or a finance lease. The Company does not currently have any finance leases. The Company capitalizes operating leases on the Condensed Consolidated Balance Sheets through a right of use asset and a corresponding operating lease liability. Right of use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Short-term leases that have an initial term of one year or less are not capitalized but are disclosed below.

Operating lease right of use assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. In addition to the present value of lease payments, the operating lease right of use asset also includes any lease payments made to the lessor prior to lease commencement less any lease incentives and initial direct costs incurred. Lease expense is recognized on a straight-line basis over the lease term.

Nature of Leases

The Company leases certain office space, restaurant space, and information technology equipment under non-cancelable leases to support its operations. A more detailed description of significant lease types is included below.

Office Agreements

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

Restaurant Space Agreements

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

The Company also subleases some of its restaurant space to third parties. The Company’s 2 subleases have terms that end in 2023 and 2025. The sublease agreements are noncancelable through the end of the term and both parties have substantive rights to terminate the lease when the term is complete. Sublease agreements are not capitalized and are recorded as rental income in the period that rent is received.

As of September 26, 2021, the Company had 0 Company-owned restaurants.

Information Technology Equipment

The Company rents information technology equipment, primarily printers and copiers, from a third party for its corporate office location. Information technology equipment agreements are typically structured with non-cancelable terms of one to five years. The Company has concluded that its information technology equipment commitments are operating leases.

Discount Rate

Leases typically do not provide an implicit rate. Accordingly, the Company is required to use its incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. The Company’s incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company uses the implicit rate in the limited circumstances in which that rate is readily determinable.

9

Lease Guarantees

The Company has guaranteed the financial responsibilities of certain franchised store leases. These guaranteed leases are not considered operating leases because the Company does not have the right to control the underlying asset. If the franchisee abandons the lease and fails to meet the lease’s financial obligations, the lessor may assign the lease to the Company for the remainder of the term. If the Company does not expect to assign the abandoned lease to a new franchisee within 12 months, the lease will be considered an operating lease and a right-of-use asset and liability will be recognized.

Practical Expedients and Accounting Policy Elections

Certain lease agreements include lease and non-lease components. For all existing asset classes with multiple component types, the Company has utilized the practical expedient that exempts it from separating lease components from non-lease components. Accordingly, the Company accounts for the lease and non-lease components in an arrangement as a single lease component.

In addition, for all existing asset classes, the Company has made an accounting policy election not to apply the lease recognition requirements to short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, we recognize lease payments related to our short-term leases in our condensed consolidated statement of income on a straight-line basis over the lease term which has not changed from our prior recognition. To the extent that there are variable lease payments, we recognize those payments in our condensed consolidated statement of income in the period in which the obligation for those payments is incurred.

The components of total lease expense for the three months ended September 26, 2021, the majority of which is included in general and administrative expense, are as follows (in thousands):

	Three Months Ended
	September 26, 2021
Operating lease cost	$	125
Rental income		(47	)
Total lease expense, net of sublease income	$	78

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

	Three Months Ended
	September 26, 2021
Cash paid for amounts included in the measurement of lease liabilities	$	138

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

	September 26, 2021
Weighted average remaining lease term	4.0 Years
Weighted average discount rate		4.0	%

Operating lease liabilities with enforceable contract terms that are greater than one year mature as follows (in thousands):

	Operating Leases
Remainder of fiscal year 2022	$	414
2023		558
2024		511
2025		433
2026		382
Thereafter		191
Total operating lease payments	$	2,489
Less: imputed interest		(227	)
Total operating lease liability	$	2,262

Note C - Stock Purchase Plan

On May 23, 2007, the Company’s board of directors approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase of up to 1,016,000 shares of its common stock in the open market or in privately negotiated transactions. On June 2, 2008, the Company’s board of directors amended the 2007 Stock Purchase Plan to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. On April 22, 2009, the Company’s board of directors amended the 2007 Stock Purchase Plan again to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. There were 0 stock purchases in the fiscal quarters ended September 26, 2021 or September 27, 2020.

10

Index

Note D - 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 the Company.

Note E - Stock-Based Compensation

Stock Options:

For the fiscal quarters ended September 26, 2021 and September 27, 2020, the Company did 0t recognize any stock-based compensation expense related to stock options. As of September 26, 2021, there was 0 unamortized stock-based compensation expense related to stock options.

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

	Three Months Ended
	September 26, 2021		September 27, 2020
	Shares		Shares
Outstanding at beginning of year		166,750		206,750
Granted		0		0
Exercised		0		0
Forfeited/Canceled/Expired		0		0
Outstanding at end of period		166,750		206,750
Exercisable at end of period		166,750		206,750

Restricted Stock Units:

For the three months ended September 26, 2021 and September 27, 2020, the Company had stock-based compensation expense of $42 thousand and 0, respectively, related to RSUs. As of September 26, 2021, there was 0 unamortized stock-based compensation expense related to RSUs.

A summary of the status of restricted stock units as of September 26, 2021, and changes during the three months then ended is presented below:

Unvested at June 27, 2021	545,600
Granted	0
Issued	0
Forfeited	(22,412	)
Unvested at September 26, 2021	523,188

11

Index

Note F - Earnings per Share (EPS)

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

	Three Months Ended
	September 26, 2021		September 27, 2020
Net income available to common shareholders	$	285	$	76
BASIC:
Weighted average common shares		18,005		15,451
Net income per common share	$	0.02	$	0.00
DILUTED:
Weighted average common shares		18,005		15,451
Convertible notes		798		798
Dilutive stock options		0		0
Weighted average common shares outstanding		18,803		16,249
Net income per common share	$	0.02	$	0.00

For the three months ended September 26, 2021, options to purchase 166,750 shares of common stock at exercise prices from $3.11 to $13.11 were excluded from the computation of diluted EPS because they had an intrinsic value of 0. For the three months ended September 27, 2020, options to purchase 206,750 shares of common stock at exercise prices ranging from $2.71 to $13.11 were excluded from the computation of diluted EPS because they had an intrinsic value of 0.

Note G - Income Taxes

For the three months ended September 26, 2021, the Company recorded an income tax expense of $3 thousand, all of which is attributable to current state taxes. The Company utilized net operating losses to offset federal taxes.

The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. As of September 26, 2021, the Company had established a full valuation allowance of $6.3 million against its deferred tax assets. The Company will continue to review the need for an adjustment to the valuation allowance.

Note H - Segment Reporting

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

The Pizza Inn and Pie Five Franchising segments establish franchisees, licensees and territorial rights. Revenue for this segment is primarily derived from franchise royalties, franchise license fees, sale of area development and foreign master license rights, incentive payments from third party suppliers and distributors, advertising funds, and supplier convention funds. Assets for these segments include equipment, furniture and fixtures.

The Company-Owned Restaurant segment includes sales and operating results for all Company-owned restaurants. Assets for this segment include equipment, furniture and fixtures for the Company-owned restaurants.

Revenue for corporate administration and other consists of rental income and interest income.  Assets primarily include cash and short-term investments, as well as furniture and fixtures located at the corporate office and trademarks and other intangible assets. All assets are located within the United States.

12

Index

Summarized in the following table are net sales and operating revenues, depreciation and amortization expense, and income before taxes, for the Company’s reportable segments as of the three months ended September 26, 2021 and September 27, 2020 (in thousands):

	Three Months Ended
	September 26, 2021			September 27, 2020
Net sales and operating revenues:
Pizza Inn Franchising	$	2,034		$	1,380
Pie Five Franchising		472			476
Corporate administration and other		47			47
Consolidated revenues	$	2,553		$	1,903
Depreciation and amortization:
Pizza Inn Franchising	$	0		$	0
Pie Five Franchising		0			0
Company-Owned Restaurants		0			0
Corporate administration and other		44			44
Depreciation and amortization	$	44		$	44
Income before taxes:
Pizza Inn Franchising	$	1,275		$	1,100
Pie Five Franchising		245			209
Company-Owned Restaurants		(1	)		(100	)
Combined		1,519			1,209
Corporate administration and other		(1,231	)		(1,131	)
Income before taxes	$	288		$	78
Revenues by geography:
United States	$	2,477		$	1,859
Foreign countries		76			44
Consolidated revenues	$	2,553		$	1,903

Note I - Subsequent Events

On November 1, 2021, the U.S. District Court for the Eastern District of Texas entered judgment against the Company in the amount of $924,000 plus pre- and post-judgment interest and court costs on breach of contract claims asserted by the Company’s former Chief Executive Officer, Scott Crane.  The Company intends to appeal the judgment to the Fifth Circuit Court of Appeals.

13

Index

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 27, 2021 and may contain certain forward-looking statements that are based on current management expectations. Generally, verbs in the future tense and the words “believe,” “expect,” “anticipate,” “estimate,” “intends,” “opinion,” “potential” and similar expressions identify forward-looking statements. Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and franchisees, our liquidity and capital resources, and the impact of our historical and potential business strategies on our business, financial condition, and operating results. Our actual results could differ materially from our expectations. Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year ended June 27, 2021. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Results of Operations

Overview

Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express, or PIE, kiosks (“PIE Units”) under the trademark “Pizza Inn”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third party distributors. At September 26, 2021, franchised and licensed units consisted of the following:

Three Months Ended September 26, 2021

(in thousands, except unit data)

	Pizza Inn				Pie Five				All Concepts
	Ending Units		Retail Sales		Ending Units		Retail Sales		Ending Units		Retail Sales
Domestic Franchised/Licensed		133	$	20,347		33	$	5,060		166	$	25,407
International Franchised		32				—				32

14

Index

Domestic units are located in 19 states predominantly situated in the southern half of the United States. International units are located in six foreign countries.

Basic net income per common share increased $0.02 per share to $0.02 per share for the three months ended September 26, 2021, compared to basic net income of $0.00 per share in the comparable period in the prior fiscal year. The Company had net income of $285 thousand for the three months ended September 26, 2021 compared to net income of $76 thousand in the comparable period in the prior fiscal year, on revenues of $2.6 million for the three months ended September 26, 2021 compared to $1.9 million in the comparable period in the prior fiscal year. The increase in revenue was primarily due to increases in franchise royalties, advertising funds contributions, and supplier convention funds.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, and the disease has spread rapidly throughout the United States and the world. Federal, state and local responses to the COVID-19 pandemic, as well as our internal efforts to protect customers, franchisees and employees, have severely disrupted our business operations. Most of the domestic Pizza Inn buffet restaurants and Pie Five restaurants are in areas that were for varying periods subject to “shelter-in-place” and social distancing restrictions prohibiting in-store sales and, therefore, were limited to carry-out and/or delivery orders. In some areas, these restrictions limited non-essential movement outside the home, which discouraged or even precluded carryout orders. In most cases, in-store dining has now resumed subject to seating capacity limitations, social distancing protocols, and enhanced cleaning and disinfecting practices.

Further, the COVID-19 pandemic has precipitated significant job losses, a labor shortage in restaurant service workers, and a national economic downturn that typically impacts the demand for restaurant food service. Although most of our domestic restaurants have continued to operate under these conditions, we have experienced temporary closures from time to time during the pandemic. We have not experienced any significant shortages of supplies or any significant delays in receiving our food or beverage inventories, restaurant supplies or products, but disruption of supply chains as a result of COVID-19 or other factors could cause difficulty in obtaining inventories or supplies in the foreseeable future.

The COVID-19 pandemic has resulted in dramatically reduced aggregate in-store retail sales at Buffet Units and Pie Five Units, modestly offset by increased aggregate carry-out and delivery sales. The decreased aggregate retail sales have correspondingly decreased supplier rebates and franchise royalties payable to the Company. During the fourth quarter of fiscal 2020, we participated in a government-sponsored loan program. (See, "Liquidity and Capital Resources--PPP Loan," below.) We also temporarily furloughed certain employees and reduced base salary by 20% for all remaining employees for the fourth quarter of fiscal 2020, as well as reducing other expenses. While the Company will remain focused on controlling expenses, future results of operations could be materially adversely impacted by the pandemic and its aftermath.

We expect that some Buffet Units and Pie Five Units could continue to be subject to capacity restrictions for some time as social distancing protocols remain in place. Additionally, an outbreak or perceived outbreak of COVID-19 connected to restaurant dining could cause negative publicity directed at any of our brands and cause customers to avoid our restaurants. We cannot predict how long the pandemic will last or whether it will reoccur, what additional restrictions may be enacted, to what extent off-premises dining will continue, to what extent the labor shortage will continue, if individuals will be comfortable returning to our Buffet Units and Pie Five Units following social distancing protocols, or if distributions of supply chains will cause difficulty in obtaining inventories or supplies in the foreseeable future. Any of these changes could materially adversely affect the Company’s future financial performance. However, the ultimate impact of COVID-19 on our future results of operations and liquidity cannot presently be predicted.

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.

15

Index

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 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, gain/loss on sale of assets, costs related to impairment and other lease charges, franchisee default and closed store revenue/expense, and closed and non-operating store costs.

● “Retail sales” represents the restaurant sales reported by our franchisees, 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) impairment and other lease charges, and (3) non-operating store costs.

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

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

Adjusted EBITDA

Adjusted EBITDA for the fiscal quarter ended September 26, 2021 increased $0.3 million compared to the same 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):

RAVE RESTAURANT GROUP, INC.

ADJUSTED EBITDA

(In thousands)

	Three Months Ended
	September 26, 2021			September 27, 2020
Net income	$	285		$	76
Interest expense		24			23
Income taxes		3			2
Depreciation and amortization		44			44
EBITDA	$	356		$	145
Stock compensation expense		42			—
Severance		33			—
Impairment of long-lived assets and other lease charges		—			17
Franchisee default and closed store revenue		(1	)		(67	)
Closed and non-operating store costs		1			82
Adjusted EBITDA	$	431		$	177

16

Index

Pizza Inn Brand Summary

The following tables summarize certain key indicators for the Pizza Inn franchised and licensed domestic units that management believes are useful in evaluating performance:

	Three Months Ended
	September 26, 2021		September 27, 2020
Pizza Inn Retail Sales - Total Domestic Units	(in thousands, except unit data)
Domestic Units
Buffet Units - Franchised	$	18,645	$	14,724
Delco/Express Units - Franchised		1,642		1,536
PIE Units - Licensed		60		59
Total Domestic Retail Sales	$	20,347	$	16,319
Pizza Inn Comparable Store Retail Sales - Total Domestic		19,768		15,812
Pizza Inn Average Units Open in Period
Domestic Units
Buffet Units - Franchised		71		79
Delco/Express Units - Franchised		52		55
PIE Units - Licensed		10		12
Total Domestic Units		133		146

Total Pizza Inn domestic retail sales increased $4.0 million, or 24.7%, for the three months ended September 26, 2021 when compared to the same period of the prior year. Pizza Inn domestic comparable store retail sales increased by $4.0 million, or 25.0%, for the three months ended September 26, 2021 when compared to the same period of the prior year.

The following chart summarizes Pizza Inn unit activity for the three months ended September 26, 2021:

	Three Months Ended September 26, 2021
	Beginning Units		Opened		Concept Change		Closed		Ending Units
Domestic Units
Buffet Units - Franchised		70		1		—		—		71
Delco/Express Units - Franchised		54		—		—		2		52
PIE Units - Licensed		11		—		—		1		10
Total Domestic Units		135		1		—		3		133
International Units (all types)		32		—		—		—		32
Total Units		167		1		—		3		165

There was a net decrease of two domestic Pizza Inn units during the three months ended September 26, 2021. We believe the net closure of Pizza Inn units will continue in the near term and eventually reverse in future periods. During the quarter, the number of international Pizza Inn units remained stable.  We expect international units to increase modestly in future periods.

17

Index

Pie Five Brand Summary

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

	Three Months Ended
	September 26, 2021		September 27, 2020
	(in thousands, except unit data)
Pie Five Retail Sales - Total Units
Domestic Units - Franchised	$	5,060	$	4,507
Domestic Units - Company-owned		—		—
Total Domestic Retail Sales	$	5,060	$	4,507
Pie Five Comparable Store Retail Sales - Total	$	4,745	$	4,039
Pie Five Average Units Open in Period
Domestic Units - Franchised		33		39
Domestic Units - Company-owned		—		—
Total Domestic Units		33		39

Pie Five system-wide retail sales increased $0.6 million, or 12.3%, for the three months ended September 26, 2021 when compared to the same period of the prior year. Pie-Five comparable store retail sales increased by $0.7 million, or 17.5%, for the three months ended September 26, 2021 when compared to the same period of the prior year. Compared to the same fiscal quarter of the prior year, average units open in the period decreased from 39 to 33.

The following chart summarizes Pie Five Unit activity for the three months ended September 26, 2021:

	Three Months Ended September 26, 2021
	Beginning Units		Opened		Transfer		Closed		Ending Units
Domestic - Franchised		33		—		—		—		33
Domestic - Company-owned		—		—		—		—		—
Total Domestic Units		33		—		—		—		33

Pie Five units remained stable during the three months ended September 26, 2021. We believe that Pie Five units will eventually increase in future periods.

Pie Five - Company-Owned Restaurants

We closed our single remaining Company-owned Pie Five restaurant during the third quarter of fiscal 2020. Loss from continuing operations before taxes for Company-owned Pie Five stores decreased $99 thousand for the three months ended September 26, 2021 to $1 thousand compared to $100 thousand during the same period of the prior year.  The decreased loss was the result of the closure of all remaining Company-owned restaurants.

18

Index

Financial Results

The Company defines its operating segments as Pizza Inn Franchising, Pie Five Franchising and Company-Owned Restaurants. The following is additional business segment information for the three months ended September 26, 2021 and September 27, 2020 (in thousands):

	Pizza Inn Franchising				Pie Five Franchising				Company-Owned Restaurants						Corporate						Total
	Fiscal Quarter Ended				Fiscal Quarter Ended				Fiscal Quarter Ended						Fiscal Quarter Ended						Fiscal Quarter Ended
	September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020		September 26, 2021			September 27, 2020			September 26, 2021			September 27, 2020			September 26, 2021		September 27, 2020
REVENUES:
Franchise and license revenues	$	2,034	$	1,380	$	468	$	476	$	—		$	—		$	—		$	—		$	2,502	$	1,856
Rental income		—		—		—		—		—			—			47			48			47		48
Interest income and other		—		—		4		—		—			—			—			(1	)		4		(1	)
Total revenues		2,034		1,380		472		476		—			—			47			47			2,553		1,903
COSTS AND EXPENSES:
Cost of sales		—		—		—		—		—			78			—			—			—		78
General and administrative expenses		—		—		—		—		1			5			1,205			1,084			1,206		1,089
Franchise expenses		759		280		227		267		—			—			—			—			986		547
Loss (gain) on sale of assets		—		—		—		—		—			—			—			—			—		—
Impairment of long-lived assets and other lease charges		—		—		—		—		—			17			—			—			—		17
Bad debt expense		—		—		—		—		—			—			5			27			5		27
Interest expense		—		—		—		—		—			—			24			23			24		23
Depreciation and amortization expense		—		—		—		—		—			—			44			44			44		44
Total costs and expenses		759		280		227		267		1			100			1,278			1,178			2,265		1,825
INCOME/(LOSS) BEFORE TAXES	$	1,275	$	1,100	$	245	$	209	$	(1	)	$	(100	)	$	(1,231	)	$	(1,131	)	$	288	$	78

19

Index

Revenues:

Revenues are derived from franchise royalties, franchise license fees, supplier and distributor incentives, advertising funds, area development exclusivity fees and foreign master license fees, and supplier convention funds. The volume of supplier incentive revenues is dependent on the level of chain-wide retail sales, which are impacted by changes in comparable store sales and restaurant count, and the products sold to franchisees through third-party food distributors.

Total revenues for the three month period ended September 26, 2021 and for the same period in the prior fiscal year were $2.6 million and $1.9 million, respectively. The increase in revenue was primarily due to increases in franchise royalties, advertising funds contributions, and supplier convention funds.

Pizza Inn Franchise Revenues

Pizza Inn franchise and license revenues increased by $0.7 million to $2.0 million for the three month period ended September 26, 2021 as compared to the same period in the prior fiscal year. The increase was driven by increases in supplier incentives, domestic royalties and advertising fund revenues.

Pie Five Franchise Revenues

Pie Five franchise and license revenues remained relatively stable at $0.5 million for the three month period ended September 26, 2021 as compared to the same period in the prior fiscal year.

Costs and Expenses:

Cost of Sales

Cost of sales, which primarily includes food and supply costs, labor, and general and administrative expenses directly related to Company-owned restaurant sales, decreased to zero for the three month period ended September 26, 2021 from the $78 thousand in the three month period ended September 27, 2020. The decrease in costs of sales in the three month period reflects the closure of the single remaining Company-owned restaurant and the end of associated general and administrative expenses (primarily rent and utilities) attributable to closed stores.

General and Administrative Expenses

Total general and administrative expenses increased $0.1 million to $1.2 million for the three month period ended September 26, 2021 compared to $1.1 million for the same period of the prior fiscal year. The increase was primarily the result of increased advertising spend.

Franchise Expenses

Franchise expenses include general and administrative expenses directly related to the continuing service of domestic and international franchises. Franchise expenses increased to $1.0 million for the three month period ended September 26, 2021 compared to $0.5 million for the same period in the prior fiscal year.

Loss (Gain) on Sale of Assets

We had no sale of assets in either the fiscal quarter ended September 26, 2021 or the comparable fiscal quarter ended September 27, 2020.

Impairment of Long-lived Assets and Other Lease Charges

Impairment of long-lived assets and other lease charges was zero for the three month period ended September 26, 2021 compared to $17 thousand for the same period in the prior fiscal year. The decline was due to the end of lease termination expenses in the second quarter of fiscal 2021.

Bad Debt Expense

The Company monitors franchisee receivable balances and adjusts credit terms when necessary to minimize the Company’s exposure to high risk accounts receivable. Bad debt expense for the three month period ended September 26, 2021 decreased $22 thousand as compared to the comparable period in the prior fiscal year.

20

Index

Interest Expense

Interest expense remained stable in the three month period ended September 26, 2021 compared to the same fiscal period of the prior year.

Depreciation and Amortization Expense

Depreciation and amortization remained stable in the three month period ended September 26, 2021 compared to the same fiscal period of the prior year.

Provision for Income Tax

For the three months ended September 26, 2021, the Company recorded an income tax expense of $3 thousand, all of which is attributable to current state taxes. The Company utilized net operating losses to offset federal taxes.

The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. As of September 26, 2021, the Company had established a full valuation allowance of $6.3 million against its deferred tax assets. The Company will continue to review the need for an adjustment to the valuation allowance.

Liquidity and Capital Resources

During the three month period ended September 26, 2021, our primary source of liquidity was cash flow from operating activities.

Cash flows from operating activities generally reflect net income or losses adjusted for certain non-cash items including depreciation and amortization, changes in deferred tax assets, share based compensation, and changes in working capital. Cash used by operating activities was $343 thousand for the three month period ended September 26, 2021 compared to cash used of $7 thousand for the three month period ended September 27, 2020. The primary driver of decreased cash flows during the three month period ended September 26, 2021 was liabilities related to accrued expenses.

Cash flows from investing activities reflect net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash provided by investing activities of $19 thousand during the three month period ended September 26, 2021 was primarily attributable to payments received on notes receivable of $57 thousand partially offset by $27 thousand used in the purchase of intangible assets definite-lived. Cash used in investing activities during the three month period ended September 27, 2020 of $23 thousand was primarily attributed to capital expenditures of $27 thousand partially offset by $4 thousand in payments received on notes receivable.

Cash flows from financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash flow used by financing activities was $130 thousand for the three month period ended September 26, 2021 compared to $3 thousand for the three month period ended September 27, 2020. Cash flows from financing activities for the three months ended  September 26, 2021 was attributable to the short term loan. Cash flows from financing activities for the three months ended September 27, 2020 was attributable to equity issuance costs.

As a result of the COVID-19 pandemic, we have taken aggressive measures to control expenses and expect modest cash flow from operations during the second quarter of fiscal 2022. Management believes the cash on hand combined with cash from operations will be sufficient to fund operations for the next 12 months.

2017 ATM Offering

On December 5, 2017, the Company entered into an At Market Issuance Sales Agreement with B. Riley FBR, Inc. (“B. Riley FBR”) pursuant to which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $5,000,000 from time to time through B. Riley FBR acting as agent (the “2017 ATM Offering”). The 2017 ATM Offering has been undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on November 6, 2017. Through September 26, 2021, the Company had sold an aggregate of 3,064,342 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of $4.4 million. The 2017 ATM Offering expired on November 6, 2020.

21

Index

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 as of the 15th day of any calendar month, 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.

During the three month period ended September 26, 2021, none of the Notes were converted to common shares. As of September 26, 2021, $1.6 million in par value of the Notes were outstanding, offset by $13 thousand of unamortized debt issue costs and unamortized debt discounts.

PPP Loan

On April 13, 2020, the Company received the proceeds from a loan in the amount of $0.7 million (the “PPP Loan”) from JPMorgan Chase Bank, N.A. (the “Lender”) pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). The PPP Loan was unsecured by the Company and was guaranteed by the SBA. We applied for and received a forgiveness decision in the fourth quarter of fiscal 2021, such that all of the PPP Loan was forgiven at that time.

Critical Accounting Policies and Estimates

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

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

Accounts receivable consist primarily of receivables generated from franchise royalties and supplier incentives. 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 reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to their carrying value. If impairment is recognized, the carrying value of an impaired asset is reduced to its fair value, based on discounted estimated future cash flows.

Franchise revenue consists of income from license fees, royalties, area development and foreign master license agreements, advertising fund revenues, supplier incentive and convention contribution revenues. Franchise fees, area development and foreign master license agreement fees are amortized into revenue on a straight-line basis over the term of the related contract agreement. Royalties and advertising fund revenues, which are based on a percentage of franchise retail sales, are recognized as income as retail sales occur. Supplier incentive revenues are recognized as earned, typically as the underlying commodities are shipped.

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 losses. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance.

22

Index

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 September 26, 2021 and September 27, 2020, the Company had no uncertain tax positions.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

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

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

23

Index

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On January 6, 2020, the Company’s former Chief Executive Officer, Scott Crane, filed suit in the U.S. District Court for the Eastern District of Texas alleging various claims in connection with the Company’s termination of his employment in July 2019.  In general, the suit asserted that the Company terminated Mr. Crane for the purpose of depriving him of certain equity compensation that would otherwise have become due to him on October 15, 2019.  The case proceeded to a jury trial, which resulted in a verdict in favor of Crane on his breach of contract claim.  On November 1, 2021, the Court entered judgment against the Company in the amount of $924,000 plus pre- and post-judgment interest and court costs.  The Company intends to appeal the judgment to the Fifth Circuit Court of Appeals.

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

Item 1A. Risk Factors

Not required for a smaller reporting company.

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

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 repurchases in the fiscal quarter ended September 26, 2021.

The Company’s ability to repurchase shares of our common stock is subject to various laws, regulations and policies as well as the rules and regulations of the SEC. Subsequent to September 26, 2021, the Company has not repurchased any outstanding shares but may make further repurchases under the 2007 Stock Purchase Plan. The Company may also repurchase shares of our common stock other than pursuant to the 2007 Stock Purchase Plan or other publicly announced plans or programs.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

24

Index

Item 6. Exhibits

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

25

Index

SIGNATURES

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

	RAVE RESTAURANT GROUP, INC.
	(Registrant)
	By:	/s/ Brandon L. Solano
		Brandon L. Solano
		Chief Executive Officer
		(principal executive officer)
	By:	/s/ Clinton D. Fendley
		Clinton D. Fendley
		Chief Financial Officer
		(principal financial officer)
Dated: November 4, 2021